Putting the brakes on

Industry watchers are warning the Manning government to ensure that it properly invests the gains from the LNG trains for the long term benefit of the country. Senior Economist, Dr Dhanayshar Mahabir said while revenues from the LNG to the government’s coffers could result in an improvement in the country’s social welfare, it will depend on how government manages it. “The greatest benefit is if government saves and invests the bulk of this revenue so that economic stability can be preserved in an environment of uncertainty and volatility in the world economy,” said Dr Mahabir, a senior lecturer at the St Augustine Campus of the University of the West Indies (UWI) . After a century of involvement in oil production, natural gas has now emerged as the premier export commodity and as a major cash-cow for Trinidad and Tobago. The radical shift in Trinidad and Tobago’s energy sector was triggered by the start up of LNG exports in 1999 by Atlantic LNG to its American and Spanish markets. From an established oil base, which saw an oil boom in the late 1970s and early 1980s, Trinidad and Tobago has now firmly planted itself on the global LNG map, becoming the single largest exporter to the United States as it continues to also service Spain and new markets in Puerto Rico and in the Dominican Republic. The export of LNG is expected to provide substantial long-term flow of both revenue and net foreign exchange earnings to aid the country’s economic and social development.

Government last week gave the green light to Atlantic’s shareholders, BP, BG, Repsol, Tractebel and the National Gas company to expand the plant into a US$1.2 billion fourth train which will see total LNG output close to 15 metric million tonnes per annum (mmtpa) when the latest train goes into production. Professor Anthony Bryan of the North South Centre, University of Miami believes that distributing the gains from the energy windfall equitably is probably the most complex and the most important problem facing Trinidad and Tobago. “The government and society together need to find a mechanism to spread the growing energy wealth and determine how these resources can best be invested to create a sustainable economic base for current and future generations. These are issues with road-maps but no easy solutions,” said Professor Bryan in the March edition of Latin Finance.

Government makes no bones about trying to squeeze everything it could during the year-long negotiations with Atlantic’s shareholders for Train 4. “This is an agreement which will bring maximum benefits to the people of Trinidad and Tobago. It is an agreement which will ensure the continuing prosperity of this country and provide a platform for a stronger social and economic development,” Prime Minister Patrick Manning said. Train 4, with a processing capacity of 800 million cubic feet per day and the largest LNG train in the world when it comes on stream will earn greater revenue for the country than all other previous agreements. According to Manning, starting in 2008, the country will receive annual direct revenue of TT $1.5 billion for the duration of the contract which is expected to be 20 years as the previous gas arrangements with Trains 1, 2 and 3. No tax holiday will be granted to Train 4 as was the case with the other three trains. Among the taxes government will collect are the Business levy, Green levy, land and building and Corporate taxes. Based on negotiations with BP Trinidad and Tobago, a substantial tranche of gas will be freely provided to the government for 15 years between 2003-2017 following which a ten per cent royalty on gas will kick in. The arrangement will ensure a stable price for electricity, already one of the lowest in the western hemisphere. It will also allow government the flexibility to provide competitive pricing for electricity for electricity intensive industries such as the proposed Aluminum Smelter Plant. The agreement for Train 4 also provides for the extraction of ethane from natural gas to support Government’s proposed 800,000 metric tonnes per year world class Ethylene Complex for new gas-based downstream industries. With the capital-intensive energy industry accounting for only 3 per cent of direct employment in the country, Government hopes the downstream industries will absorb a large part of the unemployed population. The new agreement also includes a detailed strategy to increase the input of local service contractors into the building of Train 4 over foreign contractors.

Atlantic LNG has also been getting a fillip as natural gas prices in the US market have been on the upswing, moving from a low of US$2.98 per mmbtu to peak at US$8.6 in March and settling to US$6.05 over the past two months. While demands for natural gas in the US will mean more revenues for Trinidad and Tobago, Dr Mahabir said government will have to be very prudent in its financial dealings. Dr Mahabir however said successive governments have been unable to control its recurrent expenses and that more money has gone into financing the rising public debt, increased transfers to ministries and paying out more money to senior citizens among others. “We are in a fortuitous position because revenues are flowing because of the buoyancy of the export prices but without a buffer of savings, we would have some problems,” Dr Mahabir said. The energy sector generates nearly three quarters of the country’s export earnings. Royalties and taxes on the oil and gas industry generate one-quarter of government revenues. It attracts over 40% of total investment.

The economy has been registering positive growth for the past nine years. In 2002, the economy grew almost three per cent last year but the energy sector registered an 8 per cent growth. In 2001, the energy sector contributed 24 per cent of total GDP and 70 per cent of export earnings. British Professor Richard Dawe, Head of the Petroleum Engineering Unit at UWI St Augustine said with the upstream sector being “big money but small employer” the question of job creation is a real factor for the government.” There are just not enough jobs around to give people satisfying, well-paid jobs to take it from what is called a third world to the first class world, such that the graduates have jobs (in the energy sector) where they are stretched intellectually and well as energy-wise,” he said in a recent interview with Newsday Business. “You need first rate minds with vision and good political and sales people who can deliver, who say they will, over a period of time.” Professor Bryan also believes that much remains to be done to improve the quality of life and alleviate poverty in the country and the best way to achieve this is by creating well-paying, economically sustainable jobs. “The government also has a duty to ensure good education, proper health care, modern telecommunication systems and adequate transportation networks. The government must also design policies to diversify the economy,” he said.