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Natural Gas Master Plan considers future of NGC

Published: 
Thursday, August 10, 2017

Should the National Gas Company (NGC) be made to sell its upstream assets? Should the NGC stop being an aggregator for the upstream and downstream sectors?

Poten and Partners, the company hired by the government to produce the plan has identified five options to consider.

The consultants have said should the government continue with the status quo, the NGC will increasingly be caught up in conflicts of interest as gas allocation decisions occur more frequently, its margin will be subject to erosion, and the risks associated with demand from the downstream and supply by the upstream and its potential mismatch risk will remain with the company.

The report noted that, historically, the intermediary role NGC has taken on as merchant wholesaler and aggregator buyer has been critical to the development of the sector. It stated, however, that although various references mention that NGC has a mandate from government to function as the sole aggregator and, in some cases, as the transporter of natural gas, there is no clear authority either in legislation or the company’s charter for this proposition.

The report stated: “Rather than being a statutory monopoly—such a Petronas in Malaysia—NGC is a natural monopoly by virtue of its dominant position as aggregator and transporter, in effect operating as a national champion in the absence of a national oil company.“

The Natural Gas Master Plan also raises issues of potential conflicts of interest with the NGC playing multiple roles in the gas sector: supplier, buyer, aggregator, transporter, seller and product offtaker.

It added that the NGC was likely to have its margins squeezed and therefore make less money from its current operations because upstream costs have increased and the NGC will not be able to pass on the difference in costs to the downstream companies that are themselves facing challenging times for their commodities.

The Rowley administration has also been given the option of making the NGC the sole buyer for all gas in T&T. That would mean Atlantic LNG, for example, will have to buy its gas from the NGC and not directly from the upstream suppliers.

Poten and Partners say while this will extend the NGC’s monopolist powers over the sector, it will lead to push back from the large producers like BP and Shell which have made a lot of money by virtue of their LNG value chain arrangements.

The plan also provides government with the option to let the NGC refocus its operations on being a wholesaler of natural gas and to remain in the transportation of the commodity.

The report noted that there was no obvious reason as to why NGC is the best owner of upstream assets. It stated if the government chose this option, it will have to divest some of the NGC’s upstream assets like its shareholding in the Teak, Samaan and Poui oilfields.

Poten and Partners also suggest that large customers could be allowed to by-pass the NGC and therefore remove its role of aggregator and monopoly in the sector.

This proposal will ensure NGC continues to extract significant rent from the gas value chain for T&T and to ensure its sustainability may require something like a mid-stream tax. It noted that the move will ensure the available gas gets sold to the party willing to pay the most in a shortfall situation. It may also result in NGC stagnation: lower-priced contracts in its portfolio.

The government has also been offered the fully liberalised market with buyers and sellers engaging in the buying and selling of natural gas without the NGC as the middle man.

“By freeing up buyers and sellers to transact with each other, the objective would be in the long term to provide a basis for a more competitive market structure by putting in place the mechanisms to allow competition to develop by removing all barriers to entry. This option would facilitate greater transparency in pricing and remove some of the concerns regarding the potential for discriminatory treatment under the existing arrangements. The need for an intermediary, NGC, would be removed.”

It however noted the following:

1. In Poten’s view, it is unlikely that the T&T gas market is sufficiently deep or liquid to support this option.

 

2. Removal of NGC’s role may well lead to reduced economic rent which is currently captured by NGC in the midstream and (generally) distributed back to GORTT as a dividend.

 

3. bpTT, for example, has a dominant market position in regard to upstream supply and controls significant infrastructure capacity. Independent oversight would be essential to ensure that no anti-competitive behaviour takes place. However, it would be challenging for GORTT to ensure that all transactions would be truly arm’s length in order to avoid shifting value along the chain or offshore.

 

4. The issue as to how small consumers are dealt with would become particularly pertinent. No upstream supplier will want to sell gas to consumers that can only afford low prices.

The issue of subsidised gas would need to be dealt with directly and some sort of downstream marketing opportunities to ensure supply would likely be required.

 

5. In a shortfall, low-cost suppliers could potentially pick off high-value buyers leaving higher-cost supply with lower-value buyers, potentially making supply uneconomic and resulting in stranded gas.

 

A team led by former Finance Minister Wendell Mottley has been studying the options and whatever decision they make could have a profound impact on the NGC well into the future.