Double trouble for T&T energy sector

GregoryMcGuire-1PORT OF SPAIN, Trinidad (Trinidad Express) – Energy economist Gregory McGuire says the Trinidad and Tobago economy is facing a double jeopardy.

This, he said, is precipitated by the fall in oil prices from US$110 a barrel in June to US$65 on Friday.

“The imminent danger posed by a sustained decline in oil prices was compounded last week by the news that a leak in National Gas Company’s (NGC) 56-inch pipeline aggravating an already tight gas supply situation and interrupting electricity generation at TGU,” he observed.

“While these developments are completely unrelated, their joint impact on the economy could be devastating,” he noted.

McGuire said it is “obvious” that the fall in oil prices will have a negative impact on Government revenue.

“The Minister of Finance has indicated a loss of $1,879.4 million on an annualised basis. He further expects the reduction in fuel subsidy of $507 million thereby mitigating the overall increase in the deficit to $1,372 million. In seeking to calm our fear, Minister Howai reiterated that T&T is more of a gas economy, producing approximately 800,000 barrels of oil equivalent per day, only ten per cent of which is oil. One is left with the distinct impression that gas will supplant the loss in oil.

“This may be a dangerous oversimplification that is flawed on two counts. Firstly, the argument that we are a gas economy is based mainly on the relative volumes produced.

“However, we always need to be cognizant of the fact that, a barrel of oil is worth much more than a barrel of oil equivalent in gas. Let us use the budgeted prices to illustrate this point. The budgeted price of a barrel of oil is US $80 while gas is budgeted at $2.75/mmbtu. When converted, this is equivalent to just US$15.95 per barrel of oil equivalent. In other words, a barrel of oil is 500 per cent more valuable than a barrel of oil equivalent in gas.

“In addition, the overall tax rate on oil is in excess of 60 per cent of taxable income while the tax rate gas is only 35 per cent. In these circumstances, we cannot glibly talk about the “gas economy” as if it is roughly equivalent to an “oil economy”. One estimate suggests that the oil share remains above 40 per cent of total Government revenue, much higher than the ten per cent share of production. The Minister needs to appraise the nation about the relative contribution of oil and gas to Government revenue,” he explained.

McGuire criticised Howai’s hope for “better than projected gas prices are mitigating the fall in oil prices”.

“Minister Howai is aware of the prognosis that gas prices will fall in tandem with oil. This is because in major markets of Europe, South America and the Far East, LNG prices are indexed to oil. For example, LNG prices in Asia have already dropped from US$20/mmbtu in January 2014, to US$10/mmbtu in October.

“This downward slide is likely to continue if oil continues to slip. The impact on Government revenues could be greater than anticipated by the Finance Minister,” McGuire said.

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