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Should we move away from the NGC model?
Reporting on the signing of the Dragon Gas deal between Venezuela and T&T, American outfit, Bloomberg News described it as a lifeline being thrown to T&T as it struggles with natural gas curtailment.
While this may be a bit of an exaggeration, it reflects what the international community sees as this country’s challenge to meet its gas commitments.
As we discussed last week, the reasons for the gas shortages are myriad and both the PNM and UNC governments have to take the blame. So do the upstream producers who, despite having contracts were unable to fulfil them—and in the case of bpTT— while it has returned to contracted levels it is no longer prepared to have excess gas behind pipe to supply the National Gas Company on a needs basis.
This shortage has cost the government hundreds of millions of dollars and it has led to the NGC being taken to court by several downstream companies for a breach of contract due to its failure to deliver sufficient gas to their plants.
The question to ask is: why was the NGC being sued when it is not a gas producer? The answer: this is due to what we call the NGC model.
In this model, with few exceptions, the NGC buys all the gas from the upstream producers—it owns the pipeline infrastructure— the gas is then piped to customers and sold to the petrochemical plants at a profit.
There are three exceptions to this rule. In the case of Atlantic LNG, the upstream producers like bpTT and Shell sell directly to the Point Fortin plant and bpTT due to its interest in Atlas methanol sells directly to the plant as did EOG resource to CNC ammonia plant.
For a long time there has been the argument that the NGC model was not working because, according to companies like bpTT, the risk reward was out of sync, with the state-owned enterprise almost guaranteed profits without taking the risk of looking for and producing natural gas.
The NGC has argued differently, saying it takes risks by partnering with the petrochemical producers and profiting when prices are high and making little when commodity prices are low.
Gregory McGuire, who worked at the NGC and is a supporter of the company remaining sole aggregator, argues this offers the downstream tremendous flexibility in terms of its product-related pricing mechanism.
He said, “By this mechanism, which is not common place in the natural gas business, NGC shares some of the market risks with the petrochemical producers and reduces their most significant operating costs at a time when revenues are relatively lower. Contrary to the view that NGC uses its monopoly position for price gouging and profiteering, it is the big risk taken on product-related pricing that has in the past generated significant surpluses in period of high prices. This has allowed the entire industry to grow and prosper.”
Helena Innis, an energy consultant, said the NGC model is best for T&T because of the vertical integration of the dominant upstream suppliers.
Innis said the government allows the upstream producers to sell directly to the downstream petrochemical companies that could likely result in there being no downstream domestic market.
“The profit motive will win,” she added.
In an article in the T&T Guardian, former Finance Minister Mariano Browne argued that the NGC was doing a disservice to the country.
He said, “The market has now become more competitive contemporaneously with higher prices demanded by the upstreamers. And supply is still smaller than the demand. The balance of power has shifted to the upstreamers who control over 90 per cent of the production and therefore a strangle hold on capacity and utilisation. And the upstreamers priority is liquefied natural gas, not petrochemicals.”
Browne added, “The primary purpose of a firm in a competitive industry is to meet the needs of its customers. There is no business if there are no customers. To do so, a business must have a unique value proposition and compete either on cost or product differentiation. When looked at in this light, NGC is in a weak position and its crude tactics jeopardise the industry and the country’s economic future.
It is clear that the NGC has served the country’s interest well, but as McGuire notes it cannot remain static. There are also questions about transparency.
Why should the NGC negotiate in secret with petrochemical companies when renewing a contract?
Would it not make sense to ensure that everyone knows there is a Point Lisas price for gas and that is the price all businesses coming to the NGC for gas must be prepared to pay and run their models on?
To do otherwise is to open the company to allegations of favouritism.
The other reality is while it makes sense for vertical integration, the challenge of being a middleman in a period of gas shortage and then offering gas to a new plant in which you have a stake reeks of conflict of interest.
When this was put to the NGC, this was the company’s response, “NGC continues to work assiduously with all stakeholders to bring relief to the current gas situation in the best interest of the industry.”
Asked if the issue was raised in legal proceedings against it, the NGC answered, “All legal proceedings are bound by strict confidentiality agreements.”
n Next week we end by looking at the issue of contract transparency and the way forward.
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