Petrotrin Refinery

It has been two years and 17 days since the government shut down Petrotrin. The decision to close the company was often thought impossible to take, but to the credit of the then board led by Wilfred Espinet and supported by the Rowley administration the difficult and courageous decision to stop the bleeding by closing the loss making enterprise and was made.

This was for many a bitter pill to swallow. It meant thousands of high paying jobs gone, perhaps never to return. Large parts of south Trinidad have been hurt by the closure, some service companies that depended entirely on Petrotrin and, in particular, the Pointe-a-Pierre refinery for their sustenance went out of business and the country as a whole lost part of its gross domestic product. So there was pain!

Even in the face of all of that I have insisted that the board and the government took the right decision to shut down the company and to re-open the profitable exploration and production (E&P) aspect of the business.

The recent release of Heritage Petroleum’s financials in which the company declared a billion -dollar profit is reflective of its ability to significantly reduce unit cost by operating a leaner and more efficient company and shows that if state enterprises are run as a business, then they have a better chance of achieving what should be their objective, that of creating value for their shareholders, the people of T&T.

Where one can perhaps fault the Espinet Board is on whether it could not have created a similar model for the refinery business by closing it down and re-opening a refinery being manned and operated by a significantly smaller staff, free of debt and in partnership with a company that could have been a guaranteed supplier of crude and take the refinery products. But without running the NPV (net present value) numbers and looking at the levels of free cash flow it is difficult to say whether the refinery could have been viable if it continued in the operation of the state.

In any case, predicting free cash flows in a case of global commodity volatility and the impact of social and cultural change on energy demand is like shooting at a moving target.

It was in 1969 that the late Dr Trevor Farrell in his PHD dissertation pointed out that the Pointe-a -Pierre refinery was developed to meet the needs of its multi-national owners Texaco. In so doing its refined products were heavily skewed to produce the low value fuel-oil that was used for power generation.

Fast forward to 2000 and the refinery was now owned by the people of T&T who had “saved the refinery from closure” and was now trying to save the business. To do so required new refinery standards, removal of lead from fuels, higher end products and less, yes less of the very fuel-oil that Dr Farrell had written about 30 years before.

To again save Petrotrin and the refinery, the late Malcolm Jones and company embarked on a refinery modernisation programme, billions spent on a gasoline optimisation programme, many mistakes, allegations of corruption and incompetence and the E&P suffered as we were unable to chew gum and walk. Now that we are trying to focus on E&P we have given up on the refinery. It’s all the same.

Had there been the basic tenets of strategic planning there would have been environmental scanning and regular SWOT analyses would have shown the old Petrotrin that since 1975 the US state of California has led American adoption of environmental standards and when the Clean Air Act was originally enacted, Congress provided the State of California unique authority to set vehicle standard that are more stringent than the federal standards.

California enacted legislation in 2002 directing the development of global warming pollution standards for light-duty vehicles, which were finalised in 2004. Other states are able to adopt the California standards in lieu of the federal standards. This was that start of game-changers in fuel economy and fuel standards and it was either move quickly to change the production at Point a Pierre or produce fuels that could only be sold in limited markets. T&T was caught flat footed, was not anticipating a change in the model and in the end the entire refining business collapsed.

We are again at a point of inflection, this time with the National Gas Company. The model of attracting downstream investment because of an abundance of cheap natural gas, a politically stable government and easy access to an uncompetitive US market is no longer an option.

Natural gas finds are few and far between; they are much smaller than the several trillion cubic feet of the past; the unit cost per molecule has increased dramatically; the gas is now a valuable product on its own and not a by product of oil to be flared and the US market is now hotly contested with huge reserves that is a by product of oil. The tables have turned and the business model has changed.

The National Gas Company sits in the middle of all of this and it has moved from making major margins, paying regular dividend, to a company that has found itself recording its first loss, trying to make money in a market where the petrochemical sector simply cannot pay the prices it wants to charge for natural gas and have shown that they are prepared to stand down and shut their plants rather than sign agreements under terms that will not lead to free cash flows.

If ever the NGC and the Rowley administration should take pause should be after what happened with Titan methanol. The company spend quarter of a billion dollars to do a turnaround (TAR) in the hope that it would get gas at a price that would make business sense. They got no such offer from the NGC and had to swallow the consequences. The plant remains idle.

It is well known among industry sources that the NGC remains in negotiations with Methanex and other downstream companies and none is going well. There is real fear but almost resignation that more plants will be forced shut because the NGC’s prices are not sustainable.

To the NGC’s defence it is not a natural gas producer and its prices are impacted by the deals it can get from the upstream producers.

So what do we do?

Is the NGC to become another Petrotrin?

Should the NGC simply be a gas transportation company and an LNG trader?

Well the first thing is the NGC must be made lean and mean. Its monopoly status by definition means it is likely to be inefficient. There is a plan for the company to be restructured, but how do you do that in a situation where the government’s instruction is to ensure no one gets sent home?

How can the NGC ever explain for example that its communication department is five times that of Royal Dutch Shell in T&T and more than twice that of BPTT? That is the reality, and any talk about making the NGC more efficient must mean a loss of jobs.

Secondly, the government has to remove itself from the increasing over-reach in the running of the company. In order to save face this administration is prepared to force the NGC to spend hundreds of millions of an end of life TAR for Atlantic LNG Train 1 when it has no gas and when the major shareholders are saying this is not workable. Decisions must make economic sense. The role of management is to maximise shareholder value. The Rowley administration only votes for the shareholders by proxy and are not in and of themselves the sole shareholders in the NGC.

Do not forget that this is the same NGC that wasted a billion or our dollars on a waste water plant that has never been completed and the money not recovered.

This is the same NGC whose communication department purchased tens of thousands of dollars in fête tickets for management and friends and its the same NGC that found itself spending tens of millions building pavilion sand fixing grounds in UNC constituencies. Yes the NGC like Petrotrin has a history of wastage of shareholders money.

One hundred and twenty nine days since the government was returned to power and what we are seeing is an administration groping in the dark, hoping to find the light switch and bring an impending nightmare in the energy sector to an end.

The writing is on the wall, there maybe some reprieve from time to time but this thing call the energy sector that has provided so much of our sustenance has limited time left in its current form.

We must desperately find ways to transform this economy, to go downstream of petrochemicals and link energy to manufacturing. To stop sitting on the Heritage/Trinmar potential and produce the oil and gas and sell it while it still has value while wisely investing for the future.

We have to ensure the NGC does not become another Petrotrin. We have paid a heavy price and everything points to lessons not learnt.