Sep 06, 2021 News
By Kiana Wilburg
Kaieteur News -Following revelations two months ago by Trinidad and Tobago’s Energy Minister, Stuart Young that his predecessor, Kevin Ramnarine, along with other former government officials, left the country’s gas industry mere inches away from death’s door with a lopsided deal an accompanying policy, Ramnarine has come forward to set the record straight. The ex-Minister is of the firm conviction that the project, despite all criticisms, has resulted in jobs for the people of Trinidad and Tobago, and will soon lead to positive cash flow as it was executed with key Japanese firms.
The project in question relates to the building and operation of a US$900M petrochemical complex using natural gas. The deal was signed with Caribbean Gas Chemical Ltd (CGCL) and the National Gas Company (NGC) of Trinidad and Tobago.
It should be noted that CGCL is joint venture that includes Japanese companies: Mitsubishi Gas Chemical Company, Mitsubishi Corporation and Mitsubishi Heavy Industries.
Young during a post-Cabinet briefing in July was keen to note that the project was no ordinary one. He said it was so fraught with lopsided provisions that it decimated the country’s gas sector. He said too that it left NGC handling all of the debt related to the project even though it had only a 20 percent stake in the project. In other words, it was expected to stand the full cost of the project but not have ownership of it.
What also made matters worse, Young said, was that Ramnarine and his colleagues had pushed policies that gave the project first preference to the country’s gas reserves while longstanding companies had to get at the back of the line and “suck salt”. What alarmed Young even more was that such policies were put in place when there was not a surplus of gas, but actually, a shortage.
He also noted that NGC was entrapped in a document called “The Debt Tail Buy Down Agreement”. This bound NGC to guarantee the payment of the loan for US$900M project, even if it fails.
Young said that Ramnarine was advised against going ahead with the project. In fact, advice was given in “red ink” by the country’s top technical officers but there was still undue pressure from Ramnarine and his colleagues. The Minister said the country’s saving grace was the refusal of the Attorney General to give the final blessings for key documents related to the project. This he said allowed for the country to have some wiggle room to renegotiate some of the lopsided provisions and save the gas industry from complete ruin. In the interim, he said NGC will have to sustain millions of dollars in hits to its balance sheet due to certain liabilities for the project it cannot escape.
In response to questions from Kaieteur News on the foregoing, Ramnarine who has been advising Guyana on matters related to local content and its imminent gas-to-energy project, said what he and his colleagues did was above board. Below is his response in full.
The project in question (CGCL) is now a fully operational methanol plant located in La Brea in south Trinidad. Its construction started in 2015 and ended in 2020. It represented an investment of US$967 million into the Trinidad and Tobago economy which is $TT 6.6 billion. This money was raised from two of the largest banks in Japan namely the Japan Bank for International Corporation (JBIC) and BTMU. The project in question created work for hundreds of local contractors and at its peak construction employed 3000 citizens of Trinidad and Tobago. The companies involved in the project are among the largest in the world and in the Caribbean. This includes Mitsubishi Gas Chemicals, Mitsubishi Corporation, Mitsubishi Heavy Industries, Massy and the National Gas Company of Trinidad and Tobago. The project in question was the largest public private partnership ever undertaken in the history of Trinidad and Tobago and was the largest construction project in Trinidad and Tobago in the last five years. At its completion in 2020, it was the first new petrochemical plant to be completed in Trinidad and Tobago in ten years. It is also the first major petrochemical plant to be built in Trinidad and Tobago outside of the Point Lisas industrial estate.
I give this context because navigating an investment of this magnitude to final investment decision (FID) with multiple shareholders and international banks was a complex undertaking. The investment also took place at a time when Trinidad and Tobago started to experience natural gas shortages. Making such an investment a reality against the backdrop of a natural gas shortage was therefore no easy task. The bankers would have obviously wanted to mitigate the risk of the natural gas shortage. If Government’s want investment and job creation they must be prepared to work with investors – especially world class investors.
The reason the NGC’s contract with CGCL was impaired is related to the significant increase in the price NGC pays for natural gas since 2019 and low prices of methanol in 2020. The NGC buys natural gas from suppliers and sells to its customers like CGCL. When the NGC/ CGCL contract was finalized in 2015, the NGC would have based its pricing on a view of what they were paying their suppliers for natural gas, the methanol market, and future trends.
What was not foreseeable in 2015 was the significant increase in the prices the NGC pays for natural gas from its suppliers. These new contracts between NGC and two of its suppliers were negotiated in 2017 and became effective in 2019. They distorted the natural gas market in Trinidad and Tobago. The first manifestation of this distortion was the fallout between NGC and the Caribbean Nitrogen Company (CNC) which morphed into a public spat. At that time, the Ministry of Energy in a press release dated January 26, 2018, admitted that “the gas supply situation and in particular, the pricing of gas has changed significantly, and the Government has been, and will be, engaging upstream gas suppliers and downstream gas purchasers to address this”.
Therefore, there were two forces at play when the NGC/ CGCL contract became effective in 2020. The first is the much higher price the NGC had to pay for natural gas as of 2019 and the second was the lower price it would realize from its sales to CGCL on account of lower methanol prices in 2020.Note that the price that NGC realizes for the natural gas it sells to CGCL is partially fixed and partially indexed to methanol prices. This drove the impairment in keeping with IAS 37 rules.
Methanol price have now rebounded to around US$430 per tonne and at these prices the contract between the NGC and CGCL will be making money for the NGC. In such a situation with the contract now being cash positive, the value that was impaired could be written back. The 2020 impairment was therefore based on market conditions for methanol in 2020. As I mentioned, these conditions no longer apply, and the NGC ought to be cash positive with this contract.
With regard to the Minister’s criticism regarding approvals from the Solicitor General’s department, it should be noted that by memo dated August 26th, 2015, all the agreements that governed the project were positively vetted by the solicitor general. At the end of the day, despite all the odds, despite all the criticism, despite market conditions of 2020, there is an operational one million tonne per day methanol plant in La Brea.
What I have written here has been said to print and electronic media in Trinidad and Tobago. This is a project that involved some of the most reputable and established companies in the world and one of the Caribbean’s largest conglomerates (Massy) which is listed on the Trinidad and Tobago and Jamaican stock exchanges. In addition, the CGCL plant will provide the basis for the future industrialization of the southwestern peninsula of Trinidad.
As for the Debt Tail buy down, this was an agreement to mitigate the risk of natural gas supply to the plant. It provided that should the “reserve to production” ratio of Trinidad and Tobago fall to one (1), the NGC would buy the remaining debt of the project. The reserve to production is currently around 8.5 at the end of 2019. The chances of the debt tail buy down ever being trigger are remote.
Furthermore, all concerns raised by the NGC in a letter dated February 2015 to the Minister of Finance were mitigated and dealt with before the project agreement was signed in April 2015 and before the realization of Final Investment Decision (FID) in September 2015. The NGC was a signatory to the Project Agreement of April 2015.
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