Mr. Vincent Pereira, Chairman of the Energy Chamber of Trinidad & Tobago
Opening Address – Trinidad & Tobago Energy Conference 2017
Ladies and gentlemen, good morning and welcome to the Best Energy Conference in the Region…and that is my unbiased view!
It is indeed a pleasure to welcome you all this morning. Of course, a special welcome to all of our Regional and International visitors – and we are particularly pleased to have representatives with us from many neighbouring states. I know that many who are here are regular visitors but we also have some people here today who are visiting the country for the first time. So in addition to welcoming you to the Conference let me also welcome you to our beautiful twin-island country of Trinidad & Tobago.
To say it has been an extraordinary year would almost sound like an understatement – but what a year! If you weren’t familiar before, you certainly are now, with the rather quaint phraseology that crept in to our industry to describe the unprecedented times – Lower for longer – fit at forty – tired at thirty…I just made that up.
While all quite catchy, these phrases served a real purpose of creating a narrative to describe a period of massive change within the energy sector and I dare say within Trinidad and Tobago – and while we have seen some recent reduction in the volatility of the price swings and a welcomed upward creep in prices – the balance remains somewhat fragile and always a reminder that this is not a time to relax but stay focused – focused on maintaining competitiveness – managing productivity improvements and driving efficiency – weather any storm!
Over the past few weeks there has been a welcomed high level of public interest in the future of Trinidad and Tobago’s energy sector, sparked by the industrial action at Petrotrin and the associated discussions about the challenges facing the company – outlined in detail by the Prime Minister in his recent address to the nation. This increased public interest is welcomed…a little late, but welcomed.
However, this public interest needs to be broadened from just Petrotrin to a healthy public discourse discussing the challenges facing the entire energy sector in Trinidad & Tobago and to understand what is happening in a regional and global context.
The theme we have chosen for this year’s conference – Building Competitiveness in an Evolving Energy World – is as much local as it is global…as it speaks to the challenge of economic growth and sustainable development in a commodity-based economy, but also within the context of a world that is evolving – changing – at unprecedented speed. The most obvious signal of this new energy reality has been the low, volatile commodity price environment that has characterised our industry for the past two and a bit years.
With oil prices creeping back up there is a clear danger that some of us may mistakenly think that our challenges are over. I would caution against that. Sustainable solutions lie not in prediction but in preparation.
While prices are obviously very important, perhaps the bigger issue for Trinidad & Tobago is oil and gas production and gas production, in particular.
The shortfalls in gas production that have plagued Trinidad and Tobago since 2011 mean that our petrochemical plants and Atlantic are operating way below capacity. Average production of gas in 2016 was almost 24% below 2010’s production – our peak year.
This shortfall in production means that our exports of LNG, ammonia and methanol are all far below their capacity and we are foregoing billions of dollars in potential export earnings. And while there has been recent strength in some commodities, example Methanol, if we are not producing the product we cannot take advantage of these opportunities.
Locally, we have been very fortunate – major project builds have continued at a time when in many jurisdictions, massive amounts of capital has either been deferred or cancelled. Over the coming few months we have three major projects coming into production that will help stabilise gas production in the short-term, namely Sercan, Juniper and TROC. While these projects will bring welcomed new volumes into the system, existing fields will continue their natural decline. They will help but not solve the issue. This is a long dated problem requiring long dated solutions. Bearing in mind the average project development timeframe of 24-30months, without continued and focused action we will very shortly face further supply gaps unless additional new projects begin execution immediately.
The underlying cause of the shortfalls in gas delivery is quite simple – we have not managed to have sufficient new investments in upstream gas projects. Similarly, the problem facing the oil sector is a lack of capital investment in drilling new wells, in enhanced oil recovery and investment in improving asset integrity. The solutions can be a bit more complex.
The key challenge for Trinidad & Tobago’s energy sector is clear: how do we stimulate investment into upstream oil and gas production? Or perhaps more specifically, what are the changes that need to be made to ensure that Trinidad & Tobago can compete with all other oil and gas provinces and attract investment capital, in a very constrained capital investment energy world – Building Competitiveness in an Evolving Energy World.
Today if you will allow me, I will focus briefly on four key areas that with some improvement, we in the ECTT believe can significantly improve our competitiveness going forward: the 1) Fiscal Framework; 2) Gas Policy and Pricing; 3) Efficiency and 4) Institutional Effectiveness. I will use examples from other jurisdictions not because they are right or will work here, but more to demonstrate that with the right effort, change is possible…all seems impossible until its done….Einstein.
Fiscal reform has been and continues to be one of the most important areas where changes are required if we are going to compete and attract investment to Trinidad & Tobago. This is an area in which the Energy Chamber has done considerable work over many, many years. The good news is that we have made progress – good progress – there have seen some helpful reforms implemented in the past – however, in this rapidly evolving global environment change needs to be rapid and profound – flexibility must sit at the heart of our reforms.
Over the past couple of years, other countries have made significant amendments to their fiscal terms. We compete with these other countries for capital. In the UK, for example, tax rates for North Sea oil and gas have been significantly reduced and other measures introduced to encourage new investment – with positive impact as seen here.
Fiscal adjustments are always a balancing act – a careful balance between Short run benefit and Long run sustainability – two massively competing forces in the current environment. Our belief, is that the best way to get that balance right is through broad collaboration – public / private collaboration supported by effective decision making and implementation.
As an example, on the Oil side, we know that given current prices, the supplemental petroleum taxation – or SPT – disincentivises investment due to the threshold nature of how that tax works once prices average above US$ 50 per barrel (33%) and the fact that it is a top-line tax. Neither of those aspects encourage investment.
The Honourable Minister of Finance – who is also acting as the Minister of Energy – has made a commitment to change the system for SPT and to move to a profit-based system. We welcome this change Minister and look forward to its implementation.
However, it is not SPT alone where flexibility is needed – change is also needed to other aspects of the fiscal framework, to the Production Sharing Contracts – changes that enable and encourage investment and help make the industry more competitive and sustainable. These changes will require continued Government-industry dialogue and a commitment to addressing uncompetitive fiscal terms. We must get this right – soon.
Gas Policy and pricing
In an effort to reduce uncertainty and encourage investment we need clear and transparent gas policy that provides flexibility of terms and serves to enable continued investment. Additionally, an approach to pricing that recognises the value of market led pricing is desirable.
Transparency enables competitiveness, particularly so in gas markets where there is typically less direct market competition to set price and most gas is sold on long-term contracts. One of the dangers that countries can face by regulating prices is that they stimulate growing demand for natural gas and that this can then outstrip supply, as it is uneconomic to invest in new upstream gas developments.
India represents a good example of where a regulated price set by government can lead to underinvestment in upstream production and a shortfall in supply – as shown on this slide. Subsequent changes that recognised value in market led pricing, resulted in recovery of supply and growth.
Efficiency and cost control
In this new era of economic uncertainty, market volatility and geopolitical instability, it behoves us to maintain a relentless focus on driving efficiency and productivity in everything we do.
This will always be an effective way to in a sense storm-proof our industry and deliver competitive returns regardless of where the price goes.
An excellent example of this is the US shale gas and liquids industry. When prices first crashed in late 2014 there was a lot of speculation that US shale producers would be forced out of business, given their high operating costs. While the last few years have undoubtedly been tough on the US industry, what has been striking is how they have been able to respond and significantly increase efficiency and hence reduce their costs.
The good news is that locally, the industry is not standing still and collaboration to find innovative solutions is occurring at a rapid pace. We already have some good examples of industry collaboration through the Safe to Work programme, and there are other areas where the major operators can collaborate to increase efficiency. There is a panel on this issue later today and it is also significant that operator companies will this morning sign a Charter committing to find industry level solutions to enable local capability in Trinidad & Tobago. Done right and with a focus on competitiveness driving sustainability – increasing local content can help build a more robust local supply chain and help reduce overall industry costs.
It is also now relevant to place these discussions of costs and efficiency into a wider regional context. The very exciting development in the oil industry in Guyana opens up some wonderful opportunities for our CARICOM neighbour, Guyana. Now is the right time for us to be having a dialogue with our partners about also collaborating between the countries. Greater levels of collaboration, including around things like rig sharing and mobilisation and demobilisation of support vessels, could help reduce costs in both jurisdictions, to the benefit of the people of both countries and the companies involved. We are delighted to have a special panel on Guyana and Suriname tomorrow morning.
The 4th area is about Institutional change and strengthening. Our goal should be to have institutions that are underpinned by high standards but with a focus on enabling and facilitating continued investment. Institutions that are biased to speed and simplicity:
- 1) Speed – which is about effective and stream-lined regulatory processes and decision making that help underwrite timely project builds and
- 2) Simplicity – which is about the critical nature of creating policy frameworks that support improved productivity.
When institutions lack strength they create uncertainty and increase political risk.
In hydrocarbon-based economies, talent retention is a critical issue for central government Ministries given the usually much higher salary scales available within the industry. A lack of institutional capacity often means that Governments rely on the better- resourced state-owned oil or gas companies to play a regulatory or policy making role. The danger here is that this can often lead to conflicts in which the state-owned company is both a player and a referee.
This is not unique to Trinidad and Tobago by any means, however we should recognise that there are potential solutions and other jurisdictions have successfully managed to a more effective outcome.
Colombia is a very good example of how institutional changes led to a revitalisation of an oil industry. We have heard the story before here at the Energy Conference, when President Uribe spoke in 2013, but it is worth remembering that the changes involved both the creation of a new Hydrocarbon Agency, charged with managing the resources on behalf of the state and the reform of the state oil company. The results are clear to see – oil production doubled in the years following the reforms.
While different countries may for very specific reasons need to approach this matter differently, what is clear is that getting the institutional framework right can and will enable greater competitiveness and both short and long term benefits.
Our belief is that change in these four areas – fiscal reform, gas policy and pricing, Efficiency and Institutional effectiveness – is crucial, if we are to be competitive and attract investment into upstream gas in this evolving energy world. Failure to act destines our industry and our Country to a somewhat uncertain future. We need to embrace the possibility that change enables and act with courage to enable the next era of our energy sector development.
Ladies and gentlemen these are truly challenging times – times that require leadership – leadership to navigate uncertainty but also leadership to ensure we maintain a relentless focus on the thing that matters most – the safety of our people. Nothing must get in the way of ensuring we do always what is morally right, allows us to truly operate with distinction and earn public trust – we must do all we do without hurting people.
The energy industry in Trinidad & Tobago is not a sunset industry. Far from it. There are many exciting opportunities that lie ahead with enormous possibility – but we will have to earn them. The sustainable solution lies not in prediction but in preparation. If we do the hard yards now, in a sensible and focused manner, we will come out of this current challenging period stronger than we went in. We must all work collaboratively to make that possible.
Ladies and gentlemen thank you all for being here. Thanks to Dax and the remarkable ECTT Team for delivering all of this. Thanks to the Sponsors. Have a great Conference – Building Competitiveness in an Evolving Energy World – a most appropriate theme for these times.