Riley’s reality check

“All those reports you read in the newspapers and listen to on televison about oil zooming past the US$100 dollar price have little relevance here,” he told business executive from diverse sectors.

In seeking to slay several dragons, Riley said the first was that TT’s petroleum resources may be depleted in just a few more years. The second, he said, was the ongoing belief that this country is enjoying a huge bonanza because of the current surge in oil prices in the global market.

In an interview later, Riley was asked why Prime Minister Patrick Manning continued to base the country’s budget on the oil price when gas ran things.

“You need to ask the Prime Minister that,” he said, noting that just about 120,000 barrels of oil was sold by TT last year. “That says a lot.”

Asked about the taxes paid by the company as a result of the energy shift, Riley said the taxes had not changed.

In an address titled, “Operating a gas business in a US$100 plus barrels of oil environment,” Riley insisted that he wanted to bring a reality check to the TT’s energy situation.

“Forget that $US120 price for oil . Trinidad and Tobago does not earn $US120 dollars for most of its oil,” he said, noting that just about 50% of TT’s oil, the proportion derived from offshore the east coast, could fetch anything close to those figures. Trinidad and Tobago’s land crude realises much lower prices, he said.

Stressing there was a huge gap between the income earned from a barrel of oil and its gas equivalent, Riley said the net returns from the latter were very modest when compared to a barrel of spot market oil.

At a total production of around 825,000 barrels of oil equivalent a day, gas is responsible for 705,000 barrels or 86 percent of the total, he said. The percentage, he said, is even higher in bpTT’s case – 96% of its production of 450,000 barrels of oil equivalent a day is gas.

He said while 825,000 barrels of oil equivalent may sound impressive and is actually more than the production of many other petroleum economies, such as Colombia, Australia, Argentina, Ecuador and Egypt, the hard fact is that one barrel of gas measured in terms of oil equivalency, earns much less money than a barrel of oil.

OIL VS GAS PROFITS

Using several charts to make his case, Riley said that the production of 705, 000 barrels of oil equivalent resulted in just over US$4 billion, while the production of 120,000 barrels netted revenues of just over US$3 billion. What that shows, he said was that a much higher volume of gas must be produced to reap comparable revenues generated from six times less oil.

“The fact is, only about 60% of Trinidad and Tobago’s gas is sold into the developed energy markets, which receive Henry Hub related prices,” he said, noting that at seven US dollars (approximately US$42 per barrel of oil), about four dollars per mmbtu is netted back to the gas producers in this country, which would be equivalent to an oil price of 24 US dollars per be. The other 40% of gas produced, Riley said, is sold locally to NGC for the domestic market at an average price of around two US dollars per mmbtu, which is equivalent to US$12 dollars per be.

“When you work it all out, the net returns from the gas equivalent of a barrel of oil are very modest when compared with a barrel of spot market oil,” he said.

In a wide-ranging address, Riley made it clear that TT petroleum industry was in a “good place” today “ but not so good that we can afford to be carefree about our planning and preparation for the future.”

Noting that gas was the real deal for the major petroleum companies operating in Trinidad and Tobago these days, he said the Ministry of Energy and Energy Industries would confirm that an average of only 120,000 barrels of oil a day were produced in Trinidad last year.

“By stark contrast, if you convert the amount of gas produced into what we call “barrels of oil equivalent”, you will probably be astonished to hear that it amounted to 705,000 barrels a day in 2007 – almost six times as much as oil,” he said.

How does in reality is to change the game ? he asked. “Trinidad and Tobago is no longer an oil economy but now clearly a gas economy,” he said.

In what he termed the good news, Riley said a long life was possible for TT gas industry. “I would say that we should all reject the doomsday scenario you have heard a lot about since the gas reserves audit by US consultants Ryder Scott was published last year,” he said.

He cited three factors that needed to be addressed for gas production to be sustained. : local gas pricing, a fiscal regime that encouragesed high recovery of reserves, continued exploration and success.

Gas discoveries will almost certainly be smaller in the future “but that does not mean we will not find gas,” he said, and pointed to the recent discoveries by both Petro-Canada and Canadian Superior.

What helps Trinidad and Tobago is the large amount of gas it produces as well as its cost efficiency. “You make up for price differences by producing and selling in large volumes,” he said.

GAS ANIMAL

To sustain 450,000 barrels a day of oil equivalent production, Riley said this production level will require significant annual capital investment - US $800 million for 2008 and continuing at that level over the next five years, at least.

“To meet our contractual demands, we will also need to pull through one trillion cubic feet of gas a year,” he said, noting that while the company remains committed to discovering new resources through an active exploration, it will also focus on the application of technology to maximise the recovery of reserves, exploration from existing infrastructure and continued major development projects.

BP INFLATION

Inflation must also be factored on the bpTT’s equation , he said, adding that the rigs that are drilling worldwide today are doing so on the basis of US$120 a barrel.

Rig prices have skyrocketed to about US$500,000 a day, thanks to the high oil price which has triggered a frenetic worldwide search and thus a great demand for rigs.

Prices for steel for platforms and pipelines have all risen, he said, stating that between 2007 and 2008, the price bpTT paid for pipeline coating increased by 76%; pipeline material costs by 64% and the cost of heavy lift vessels by 58%.

FISCAL INCENTIVES

Riley’s view is the Government could use fiscal incentives to make it more attractive for gas companies to produce, especially from the smaller gas pools.

He said the Minister of Energy has stated that a fiscal review of specific segments of the petroleum industry is underway and the industry was looking forward to this.

NGC, he said, might also wish to reconsider the price it pays for the 40 percent of gas that goes into the domestic market.

FUTURE PLANS

In the area of exploration and appraisal, he said a new area of focus for BATT will be accessing low pressure reserves within the next three to five years. This project would be aimed at pulling through gas from existing fields when the pressure in the reservoir has dropped below a level that sustains natural flow from the reservoir, he explained.

It has been the industry practice to abandon wells when the pressures in the reservoirs no longer support the natural flow of oil or gas but this is no longer acceptable, he said

bpTT, he said, was actively exploring its existing and new field developments. It also planned to drill an untested fault block in the East Manzanilla area in the third quarter of 2008 and its longer- term plans included exploration well in 2009 and a potential well in 2010.