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The NGC business model: what’s next?

Thursday, February 8, 2018

Time does not stand still; business models need to be refreshed or changed as appropriate to the circumstances. Organisations either adapt to a changed business climate or become dysfunctional. And the NGC business model is dysfunctional.

Since the Muscovy Commission in the 1950’s T&T has been looking for a way to monetise its gas reserves. The first tentative steps, converting flared gas to economic value by converting it to ammonia, came with the establishment of Fedchem in the late 1950’s and the gas line to TTEC in the 60’s. Then, in the early 70’s came the AMOCO (now BP) finds in the east coast marine fields, where drilling for oil, it found more gas than oil. Even though Amoco was prepared to sell the gas, there was no market for gas internationally and no petrochemical sector. Global warming was not a factor then.

Cometh the hour, cometh the man. The Energy Chamber’s version of events differs from mine. The South Chamber of Commerce had envisioned a new port at Pt Lisas on sugar cane lands leased from the state. We know that company as PLIDECO. But the project did not go far until the intervention of the then Deputy Chairman of the IDC and Lecturer in the Faculty of Engineering, Dr Kenneth Julien who suggested that the Pt Lisas estate be used as an industrial estate centred around the conversion of natural gas to exportable products, ammonia, urea and methanol and deployed his considerable talent and energy to make this vision a reality.

This was a greenfield, a completely new investment undertaking on a grand scale by the independence generation. But who would be the investors? How would the gas be transported? Who would pay for the infrastructure works?

The State undertook to complete the infrastructural works though enterprises or agencies formed for that purpose; dredging the turning basin and building the port (NEC), developing the electricity generating capacity (TTEC), and building the pipelines and undertaking to buy the gas (NGC). In addition, the state also invested, setting up ISCOTT for steel manufacture, a methanol plant and a 51 per cent joint venture with Amoco, Fertrin to produce urea and ammonia. The era of state enterprises was born.

Loosely put, the petrochemical sector was established with the state undertaking the infrastructure works; roads, pipelines, electricity, the port. The private sector plants were done on a project finance basis with long-term offtake agreements (the source of the argument over transfer pricing). In the process, NGC grew more profitable partly because of the growth in the sector and increasing throughput volume. And whilst NGC’s profitability grew, it did not deepen its participation in the industry significantly, remaining mainly a middle man, an aggregator a pipeline or transportation company; its share of upstream production is negligible. But land transportation, buying and selling gas is low tech, low risk, not too expensive, and GORTT has eminent domain. The irony ought not to be lost on the business community which Ministers have dismissed as middle men. This is its strategic business error. NGC is at the wrong end of the business model and has not achieved its vision “To be a recognised global leader in the development of sustainable energy-related businesses”.

Production costs are more expensive (existing wells are mature; maintenance more costly and new fields are in deeper waters) and the competitive landscape has changed. Feedstock is available in volume and at cheaper prices in the US markets and new and more efficient plants are being built there. Therefore, 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.

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; what of the other 10 contracts to be renegotiated?
NGC has attempted to justify its approach by invoking the national interest, presumably meaning that it contributes heavily to the national coffers. But the national interest is best served by a viable business strategy which will ensure the firm’s survival. From this perspective, the national interest is better served by NGC reinvesting and developing upstream productive capacity, rather than paying dividends to support the State’s unsustainable recurrent budget.

What matters now is how we negotiate our way through these difficult times and reposition the country for a different industrial thrust. In poker, a royal flush will ensure that one wins. The cards now in hand have an entirely different meaning.

Mariano Browne


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