When should Trinidad and Tobago worry about World Oil Prices?

Posted by Investt

 

Ever since the first successful oil well was drilled in Trinidad in 1857 by the American Merrimac Company the production of crude oil and as of the past twenty years natural gas, has been inextricably linked to the economic well-being of Trinidad and Tobago. National Budgets are formulated based on the prices for crude oil at the West Texas Intermediate (WTI) benchmark price and natural gas at the NYMEX contract market price.

In the last budget statement, which was read by the Honourable Minister of Finance and the Economy Larry Howai on September 8th 2014, there was a revenue prediction of TT$60.351billion for the fiscal year 2014-2015. This revenue was based on an expected oil price of US$80/bbl (WTI) and a natural gas price of US$2.75/MMBtu (NYMEX). 

However since the budget was read there have been significant declines in the price of oil. Within the past month the price of crude oil at the West Texas Intermediate benchmark has declined from US$92.05/bbl on September 29th to US$81.4/bbl on October 28th. Meanwhile the price of Brent Crude declined from US$100.86/bbl on September 29th to US$86.05 as at October 28th.

In this same period the price of natural gas has been more robust, with the NYMEX price (based on delivery at the Henry Hub, Louisiana) for the month of September being US$3.93/MMBtu. As at October 20th natural gas on the NYMEX closed trading at US$3.69/MMBtu.

The forecast for the rest of 2014 leading into 2015 does not trend favourably for crude oil prices. Goldman Sachs, one of the world’s leading investment banks has predicted that the price of crude oil up to the first quarter of 2015 will be approximately US$75/bbl at the West Texas Intermediate benchmark whilst Brent crude will trade at US$85/bbl.

They further hinted at even lower prices for the second quarter of 2015 with some strengthening of prices expected in the lead up to the summer period. There are a number of reasons for the tumble in oil prices however a key factor has been the glut in global oil production due to the expansion of exploration and drilling activities in the United States which has led to its current production rate of approximately 8.3m barrels per day.

Trinidad and Tobago as a net energy exporter has all rights to be concerned with the projected prices for crude oil. However given the fairly well diversified oil and gas sector present in the country a tool which would assist greatly in assessing the relative health of the country’s economy with regards to any changes in oil prices is the Energy Commodity Price Index (ECPI). This tool was developed jointly by the Central Bank of Trinidad and Tobago and the Energy Chamber.

The ECPI tracks the price movement of the country’s top ten energy-based commodity exports. The index is weighted by each commodity’s relative share of its value. The commodities and their weights are: US natural gas (40%); oil (16.6%); ammonia (11.8%); methanol (9.4%); Diesel (7%); motor gasoline (4.3%); natural gasoline (3.5%); jet fuel (2.7%); propane (2.4%); and urea (2.3%).

As at September 2014 the value of the index is 134.61, the lowest value since November 2013 and representing a fifth consecutive month of decline in the index’s value. The current value is also the second lowest value in the past two years.

What does this all mean for Trinidad and Tobago?

The Minister of Finance has recently made a statement to the Cabinet where he indicated that any shortfall in the price of oil will be made up for by the sale of natural gas and related derivative commodities (ammonia, methanol, urea and melamine).

Apart from the current higher than expected prices of natural gas on the NYMEX market the minister has advised that Trinidad and Tobago’s natural gas has been commanding even higher, often double digit prices by selling mostly to South America. The Minister further stated that Trinidad and Tobago has some measure of breathing space albeit small once crude prices at the West Texas Intermediate benchmark remains at or above US$75/bbl.

Notwithstanding the buffer of having natural gas and its derivatives to cushion against the declining crude oil price, the Government of Trinidad and Tobago through InvesTT has initiated an economic diversification programme whereby investments are sought in key select sectors. These sectors offer investors an opportunity to capitalize on the unique value proposition of the country. T&T offers one of the cheapest electricity rates in the world with industrial rates as low as US$0.023/kWh.  

Furthermore the country is located outside of the hurricane belt and has the advantage of having two international container ports located at Port of Spain and Point Lisas. Apart from its location and infrastructure T&T offers investors market access to over 1 billion persons through the various multilateral trade agreements in force as well as access to incentives through the incentives regime in place.

Investment Opportunities in Trinidad and Tobago include:

1.    The establishment of dry docking facilities within the Gulf of Paria
2.    The establishment of an animation studio to serve as a near shore service centre for North American animators
3.    Offshore Bulk Transhipment particularly of Brazilian agricultural and mineral products within the Gulf of Paria
4.    Hotel development projects in both Trinidad and Tobago

Where does Trinidad and Tobago go from here?

In the words of former Prime Minister Patrick Manning on the celebration of a century of commercial oil production in Trinidad and Tobago “We will continue to manage our petroleum resources with the wisdom and experience gathered over the past one hundred years.”

 

 

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