SPE 36155

GAS DEVELOPMENT IN TRINIDAD AND TOBAGO

V. Ramkd, SPE, Petrotrin and T. M. Boopsingh, SPE, University of the West Indies

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ABSTRACT I%enatural gas industry of Trinidad rind Tobago is separated into the upstream gas producers and the downstream which includes the direct gas based industries and the gas transmission company. Past financial data was collected for both the upstream and the downstream. A detailed computer model was cons~cted and by its use futartcial projections were extended for this paper to the year 2015, for both the upstream and downstream. The significance of the installation of a worid-scale liquefied natural gas plant on Government revenue is also discussed. The paper presents relationships found over the period between gas price, profit and taxes and attempts to analyze these relationships. Sensitivities are done to determine the effect of several factors on the gas producers profitability. 71se paper estimates the total revenue bersetits to the Government of Trinidad and Tobago, in particular those derived fkom the LNG plant and concludes that the timing and size of ail escalation factors on gas prices both upstream astd downstream, should be kept under constant review. INTRODUCTION Natural gas in Trinidad and Tobago occurs under three categories:- as dty gas reservoirs such as those off the North S Coasq as W@ #is ift gas cOrtdettasttf! e!t&VOkS such as thOW h

the Teak, Cassia and Kiskidee Fields in the East Cast marine area; and as dissolved gas in the crude oil and produced as associated gas during oil producing operations. The gas is of very high quality, containing over 92*A methane and negligible hydrogen sulphide and is therefore considered a sweet gas. h is estimated that the proven nonassociated natural gas reserves are in the order of 8.7 (TCF) trillion cubic feet of which 70% belong to the East Coast marine area. At the present rate of production, the expected life of the gas reserves are in the order of 45 years. The major gas fields of Trinidad and Tobago and main gas lines are shown in Figure 1. At present, the main supplier of high pressure natural gas is Amoco Trinidad Oil Company tlom its offshore wells in the Teak, Cassia, Immortelle and Flamboyant fields located off the East Coast of Trinidad. Other suppliers include Enron Gas and Oil Limited and Trintomar. The National Gas Company of Trinidad and Tobago Limited (NGC) owns and operates two (2) olTshore platform for compressing low pressure associated gas. This company purchases and sells natural gas, and transports and distributes it to several consumers throughout the country. NGCS responsibilities include ensuring security of natural gas supplies to downstream consumers, pricing of natural gas, investigating the f-ibility of gas related projects, and the implementation of such projects. Natural gas horn the fields offshore is transported via a 24 inch and a 30 inch line to the Phoenix Park Gas Processors Limited (PPGPL) plant at Point Lisas, where the heavier gases mainly propane and butane are extracted for exportation while the natural gasolines are utilized in Mrotrins refsning operations. The methane rich gas is then distributed to various consumers across the country where it is used as a feed stock m the petrochemical industry, as fiel fa power generation and in heavy and light manufacturing industries. Natural gas supply and utilization charts are shown in Figure 2. The

729

GASDEVELOPMENT INTRtNIOAO ANOTOSAGO

WE 3s155

brhging on stream of a liquid natural gas (I-BIG) plant in by 40%. New 1998 will increase the gas fm the ~ fields will be developed such as Amocos East Mayaro field and British Gas/Texacos Dolphin field to meet the additional requirement, The gas industry contributes to the economy through taxw dividends, foreign exchange earnings, attd .ernployment opportunities. By conservation and prudent managetnen~ natural gas resources will undoubtedly play a major role in the nations economy for many years to come.
OBJECTIVES Ik

Downstream Demand Projection The downstream is defined as those companies that receive gas from the gas producers. It was assumed that with the exception of gas for the iiquetied natural gas planL all gas for usc downstream wiil be purchased by the Nationai Gas Company and then sold under contractual atmtttgements to the consumers. The scope of this paper is iiiited to the direct gas-based industries, that is, those industries that use natumi gas as a feedstock. It therefore ittciudes the manufacturers of methanoi, ammonia naturai gas iiquids and Iiquefted natumi gas. The companies in operation at present are as foiiows :Nationai Gas Company, Hydro-Agri, Arcadian, Trinidad Nitrogen, Trinidad and Tobago Methanol Company, Caribbean Methanol Company and Phoenix Park Gas Processors Ltd. New plants projected to come on stream are:Trinidad LNG Project in 1998, Farmiand Ammonia Plant in i998 and two (2) methanol piants by 2000. The most important addition to the downstream wiii be a world-scaie LNG piant scheduied for completion in 1998. The plant wiii utiiize 400-500 miilion standard cubic feet of natural gas daiiy. The project is to be undertaken by a consortium consisting of Amoco, British Gas/Texaco, National Gas Company, Cabot LNG Corporation and Enagas. Enagas of Spain is contracted to buy 40?6 of the f~ train, while the other 60% wili be taken up by partner Cabot LNG Corp. of Boston. The capital cost of the project is estimated at US$ i biilion, which inciudes the cost of an onshore gas transmission iine horn the east coast to the piant site on the west coast. The liquefied naturai gas wiil be soid at a price of US $2.50-3.50 per miilion British Thermai Units (MMBtu). During the liquefaction process substantial voiumes of naturai gas iiquids will be separated from the gas stream, which will be expated as weil. Petroleum Tax Laws Taxes are calculated based on the Tax Laws of Trinidad and Tobago. The Petroicum Tax Laws were amended in i992. The amendments that afTect oil and gas producers are :- (a) Exploration aiiowance is now 100% of driiling cost (b) 50% of geological and geophysical cost can be deducted for SPT calculation. (c) National Recovery Impost is no longer applicable. (d) SPT mtes are on a siiding acaie iinked to the price of oil. The taxes applicable to the upstream am : - Royalties, Suppiementai Petroieum Tax (SPT), Petrokmn Profits Tax (WT) and Unetnpioyment Levy (UL). Government take for the upstream is the sum of the above taxes. For the downstream the taxation system is much simpier with fewer ailowattcea. llle taxable profit for a ctmtpany is the ditTerence between aii income and all expenses. Expenses comprise gas COSLopemting cos~ depreeiatiin and interest

1.

2.

3. 4.

objectives of the study arc as follows To analyze gas development in Trinidad attd Tobago to the year 2015 for both the upstream attd downstream with emphasis on gas pricing. To estimate profitability and taxes for the gas industry including the downstream companies to the year 2015. The impact of bringing on stream a 470 (MMSCFD) million standard cubic feet per day liquefied natural gas plant on gas development is to be investigated. To determine the effect of gas price on profit attd taxes for the upstream and downstream. To investigate the efft!ct of gas price escalation on the relationship found in (3) above.

BASIS OF ANALYSIS Upstream Gas Deliverability Projection The upstream is defined as the gas fields that wili suppiy gas to meet the anticipated demand In order to conduct the anaiysis a twenty (20) year projection for gas deliverability was prepared for the upstream. A summary of the projection (ii five year increments) is shown in Tabie 1. The fields producing at present are Amocos TX Cassiq Flamboyant Imntorteile; Enrons Kiskadee and Ibis and TMtomars Pelkan. The new fieids anticipated to come on stream are Amocos South SEG, f%st Mayaro, Kapok British Gas / Texacos Dolphin and Swordfish. Some of the conditions of the upstream projection are as followw - (a) A buffkr of &iiverabiiity in excess of demand of approximately 50-150 MMSCFD is considered desimbie. (b) The coming on stream of new fields are phased in as demanded (c) If a new fmld has a raiativeiy high condensate ratio, gas production flom it wili be given pref-ce to an atready ptuducing field with a smaller condensate yieid. (d) New long term contracts will be negotiated in anticipation of increases in demand projection. The producer may supply in excess of contract volume if the demand situation warrants it.

WE 361ss

V. RWIAL TM. ~

expanse with gas coat being the major cost. corporations is 42% oftaxabk profit. Product Price Project&p

Tax rate on

Gas prices to the amm~a and methanol companies are determined by negotiated gas pricing formulae. The main components of these f-the are base price of gas, a reference price for the produc~ fixed escalators and actual product price. The fit .thrcc components arc negotiated while actual product price varies according to global market situations. Hence it was necessary to formulate product price projections for ammonia and methanol to the year 2015. The basis of the predictions were to investigate actual trends in ammonia and methanol prices over the past tifleen years and assume that the cycles observed would continue into the titture. The results were as follows :- (a) Ammonia realizations will undergo three (3) year sinusoidal cycles with peaks of about US$I 10 per metric ton and troughs of about US$90 per metric ton. (b) Methanol price will undergo five (5) year sinusoidal cycles with peaks of about US$200 per metric ton and troughs of about $130 per metric ton. (c) LNG is assumed to price at USS3.00/MMBtu (1998) with no escalator. Computer Programme A detailed computer program me was constructed that can calculate profit and taxes for each gas tield or downstream plant considered in the model on an annual basis for the years 1995-2015. Using built-in equations based on past trends from the year 1985, the program calculates values for financial variables so that taxable profit could be computed for each gas field on downstream plant. The programme allows the user the option of calculating gas cost by either inputting a gas price and escalator, or by using actual gas pricing formulae. The gas price escalator can be turned off in any year desired. ASSUMPTIONS Assumptions for the upstream are as follows :- (1) A constant oil price of US $18.00 per barrel for the next twenty years. (2) The Petroleum Tax Laws will not change sigrtifwantly. Estimates were made in the following areas for the upstream:- (1) proven recoverable gas reserves which are based on seismic attd reservoir studies conducted by the lease owner and indcpendmt consultants, (2) Condensate ratio projections which are based on the results of drill stem testing for new fields or production trends fkom producing fields. (3) Capital expenditure for the development of each gas fiel~ which is based on a work pqranune of seismic and exploratory work, platform inatalktiq well drilling scheduk

aqd subsequent wttskoycr activity. (4) AMWd operathg cost interest expwe of + project. Assumptions, @r the &wwtmam m as follows- (1) A company paya ** if a profit is made for the year. Losses sp carried fortqard to the next fmsrncial year. (2) Corpomte tax concessions or tax holidays to existing and new plants are not considered in this study. (3) All gas istcomefkosnsakaof gas for electricity generation, refining iron and steel manufacturing and other industries are taken into account in the revenue stream of the gas seller. Gas for LNG is not purchased from the gas seller but rather, directly from the gas (4) Reduction in the gas volume during producer. transmission because of natural gas liquids condensing and dropping out of the gas stream is assumed to be negligible. (5) The caloritic heat value of the gas stream is reduced horn 1030 to 1010 Btu/scf on passing through the liquefied natural gas plant. Gas shrinkage is accounted for as an expense in the cash flow of this plant.
end

RESULTS Upstream The relative magnitude of each upstream tax (PPT, Royalty and SPT) to be collected on an annual basis from gas field development is shown in Figure 3. For the period 1995-2015, Petroleum Profits Tax will account for approximately 68V0of total Government take, Royalties for 21A and Supplemental Petroleum Tax for 1I%. This projection assumes a fixed escalator of 4% per annum to the year 2015. Cumulative Government take is defined as the sum total of all petro[eum taxes paid by the producers to the country for the period 1995-2015. Cumulative Government takes were computed for various gas prices each with a 4/0 escalator. Five (5) scenarios were investigated where the 4% escalator was terminated in various years : fntly in 1995, then 2000, then 2005, 2010 and finally in 2015. The results are shown graphically in Figure 4. From the graph the following could be deduced :- (i) The relationship between gas price and cumulative taxes for the upstream is almost a straight line. (ii) As the gas price escalator is terminated nearer in the fitture the line shifts downwards. The effect of oil price on the Gas Price versus Cumulative Government take relationship was also investigated. The results of the computer runs are shown in Figure 5. From the graph it could be deduced that the price of condensate does not seem to have a significant impact on profits and taxes fbr the upstream. For example if condensate price increases by 67% from US$l 8.00 per barrel to USS30.00 per barraL Cumulative Government take increases by just 1 lYo. Hence profits and taxes for the upstream are tkr more sensitive to gas price than to oil price. Varying the volume of codenaate produces the same effbct as varying the comhwtc price on eurnuktive Government take.

7s1

Y\ ,. GASDEVELO@MENTtN~W WTOBAGO Sk 3UW5

SadtMtieawere alaodone todetetmiitbe ef%etsof Fe@o&urn Protits Tax~Gaa Royaityrate and -Wee . Eaedatm rata on Cumulative Govemunent take. m results Fromthagrapha amahown in Figurea6,7 and8respedvely. it could deduced that Cumulative Government take is very be sensitive to Petroleum Profit Tax rate, moderately sensitive to Gas Price Escalation rate and least sensitive to Gas Royalties rate.
Downstream

The definition of Cumulative Taxes for the downstream similar to Cumulative Government take for the upstream. It is the total taxes to the country tkom the downstream direct gasbased industries for the period 1995-2015. An average gas price has to be determined for eaeh company m order to estimate an assumed actual gas price for the downstream for the twenty year period. The average gas price for each company was obtained by the following relationship:, . ~ Avg. gas price = ~~ cost over -199520 Volume of gas used over period X 0.001050 The units are : Gas Price : $US/million Btu Gas Cost : $US millions Volume : Million standard cubic feet (MMSCF) Caloritic value of gas is 1050 Btu/sc~ hence the conversion factor of 0.001050. The assumed actual gas price is a combination of the average gas prices of the individual companies as calculated above, excluding the transmission company. The gas prices of companies with formula pricing, such as ammonia and methanol manufwss, will be very sensitive to changes in their product price, but will also be affkcted by gas price eaealators that are built into their formula. For companies without formula pricing such as the liquefied natural gas and natural gas liquids plants, their gas prices will depend solely on the value of the annual gas price escalator as well as the year that the esealator is &ereased. Results of computer runs for the downstream indicate that gas cost haa a great impact on the profitability of the consumer. For example with the present gas pricing system, the ammonia and methanol manufacturers are at present marginally profitable, and will beeome unprofmble by the year 2002. However, their degree of profitability depends very much on international prices of ammonia and methanol. Also the eeonomies of the proposed LNG plant investment will be severely affeeted by gas price escalation. Hence it appears that a reduction m the gas pries esedator especially * the year 2000 is a critical ffti the continued smvival of most of the downstream eonsmem. A most likely ease was taken to be one where the 4% annual escalator will terminate intheyear 2000. Itisassumad thattbeupatreamgaa price escalator will terminate concumently in the year 2000, to

ensure thatthe gastransrnisaii mpany doq3 not subsidize & gas costs to its euatomm. In the most likely aeenario, all of the ~ companies were fmd to be profitable, with the gas transmission company Mmg the most profitable. With regard to tax= the gas transmission company will contribute v!tiInStGly 45% of the cumulative tax over the twen& year perml followed by methanol 19Y0, liquefied natural gas IS%% ammonia 12??and natural gas liquids 6%. If volunie of gas utilised is taken into account the per MMBTU, ratios for tax are 4396 for the nahsrd gas liquids phn~ 23~0 for methano~ 14% for the transmtilon company, 10% for ammonia and 10% for liquefied natural gas. A graph was plotted of Pereent Deviation from assumed actual gas price versus Cumulative Tax for the most likely case. A parabolic shaped curve was obtained (Figure 9) with the lowest point comesponding to a gas price that is 10% greater than the assumed actual gas price. The shape of the curve indicates that as the gas price decreases below the assumed actual, cumulative taxes from the downstream increases. The reason for this is as the gas price decreases, the industries all make greater profits and hence pay more taxes. On the other hand as the gas price increases above the *assumed actual, cumulative taxes ako increase, even though the plants now pay more for gas supplies. This is so because at the higher gas prices the transmission company make more profit and hence pay greater taxes, which more than compensate for the corresponding reduced cash flows realized by the downstream industries. Two (2) other cases were investigated, one where the escalator expires in 1995 and the other in 2005. As can be seen in Figure 9, a similar trend was observed but the parabola was found to shift both vertically and laterally. From this it could be inferred that :- (i) If the gas price escalator is terminated nearer in the thture, the country collects greater revenue from taxation of the downstream. (ii) The COunhy will collect the minimum taxes possible from the downstream with the present gas pricing system if the escalator is terminated in 2005. (iii) lhe profitability of the downstream industries are enhanced if the gas price eaealator in terminated nearer in the future. A hypothetical case was considered where for some reason the liquefied natural gas plant was not constructed. In such a situation, cumulative taxes from the downstream will be reduced by 18%. On the upstream, beeause of the redued demand, cumulative taxes will be reduced by 21%. LNG production on this basis will contribute in taxes and other levies USSI.6 billion upstnam, USSO.27 billion downstrem and US$O.36 bNion to the gas transmission company.

732

upstream Witk Downatraam

Fortheupatmam, itwaaabown that intmses in the oil price Orgaspfi cewillincremethe total Government tak~ while for the downstream the reverse applies up to the minimum pint on the parabola. The nett ethct of upstream and downstream is presented in Figure 10. flte negative sloping halves of the parabola have been exceeded by the positive slops of the upstream to produce positive sloping curves. lhe curves indicate that nets upstream and downstream taxes increase as the gas prices of the upstream and downstream increase, and as the escalator is terminated fusther in the future, However, there is a limit to the price at which gas can be made available. to the downstream consumers, since profitabilities of these companies are of prime concern. Results of computer mns show that if the gas price escalator is removed by the year 2002, the downstream companies will continue to be marginally profitable end if the escalator is not removed, only abnormally high product prices could bring about positive cash flows. Hence, the gas pricing system to the downstream must be reviewed with emphasis being placed on the timing pnd size of the annual escalators that are placed on gas base price, and gas floor price and product reference price for the ammonia and methanol manufacturers. For companies witbout formula pricing, the timing and size of the annual escalator on gas price must be kept under constant review. It is recommended that the escalators on the upstream be adjusted in harmony and concurrently with the downstream in order to prevent a situation where the transmission company may need to subsidise the price of gas to its consumers. CONCLUSION 1. The upstream is the greater contributor to the Government revenue, contributing three (3) to four (4) times that of the downstream in the most likely scenario. If the proposed liquefied natural gas plant is not cons(ructe~ cumulative taxes fmrn the downstream will be reduced by 20%, and tim the upstreamby21%. The 47Q MMSCFD LNG plant will contribute an estimated total of US$2.3 billion to the Government of Trinidad and Tobago over twenty years in taxes , royalties and dividends. Profits and taxes for the upstream are most sensitive to gas price and Petroleum Profit Tax rate, moderately

5.

Ses3sitivatogas prica acahtkm aedkaat asssaitivetooil priccandgasmyaltyrate. Oaspricccadatkm isacziticd kturfmtheeclmosnic survival of the domatmm Compaoiea. The timing d sizeofall edators should beadjustcd aamccsaryand the raktionship between gas purchase ~ intemat and otberoperating cos@and product priceabekept under review to promote the viability of tba diract gas baaed ccmsumers. Escahom should be adjusted m harmony and concurrently on the upameam prices.

ACKNOWLEDGEMENTS The authors are grateful to those persons who made this paper possible by providing much needed advice or information. REFERENCES 1. Aron, D. : Gas Contracting Following the Introduction of Competition Into the U.K. Gas Market, SPE Paper 24239, presented at SPE Oil and Gas Economics, Finance and Management Confercncq London, England, 28-29 April 1992, Boopsingh, T.M. : Oil, Gas and Development - A View tlom the South, Longman Trinidad L@ 1990. Brock, H.R., KlingstedL J.P. and JonD.M. : Petroleum Accounting - principles, Prcwedures and Issues, 3rd Edition, professional Development Institute, Denton, TX, 1990. Ramlal, V: A Report on the Development of East Coast Gas Fields, Ministry of Energy and Natural Resources November 1986. Ramlal, V. and Boopsingh T.M. : A Financial Analysis of the Natural Gas Industry of Trinklad and Tobago, SPE Paper NO 27039, p~h?d at 111LACPEC, Buenos Aires, Argentin% April 26-291994. Smcial Reuort: Trinklad and Tobago - Planners Switch i Naturai Gas, Petroleum lk&mm~ Pctrokum Economist Ltd, November [993.

2. 3.

4.

5.

6.

2.

3.

!LL METRIC CONVERSION FACTORS bbl X 1.589g73 Btu X 1.055056 ft X 3.048* t? x 2.831685 in x 2.54* q CaavelsiMhctclrisexut E-01=m3 E + 00 = KJ E- Ol=m E -02 =m3 E+ OO=CU3

4.

GAS DEVELOPMENTINlRINIOAOANO TOBAGO

SPE 3S155

TABLE 1 -GAS DELIVERABILITY AND UTILIZATION

YEAR
DELIVERABILITY Amoco

PROJECTION (MMSCFD) 2000

200s 2010 2015

1995

Trinidad

580 o
200

900 400
230

1015 400
220

1005 400
180 90 10

1085 400
I70 90 10

British Gas/Texaco Enron

Gas Compression

110 10 TOTAL 900

100
10

100
10

Pelican

1640

1745

1685

1755

UTILIZATON Electricity Ammonia Methanol

LNG

145 23 I 96 0 74 51 150 45 32 TOTAL 824 900 824 76

160 295 177 470 85 72 150 46 42 1497

1640

177 292 232 470 91 74 150 47 54 1587 1745 1587 158

195 298 236 470 92 76 150 49 58 1624 1685 1624 61

216 304 241 470 93 78 150 50 63 1665 1755 1665 90

Oil Company Steel Gas Lit? Utility/Process Gas Others

Deliverability Utiliion Buffer

1497 143

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2005

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2015

Year

Fig. 3- Natural Gas Fields of Trinidad and Tobago Projected Annual Taxes from Gas Fields

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Fig. 4- SensitMty for Gas Fithls of Trinidad q Tobago nd Gas Price, Cumulative Govt. Take (199S-201 S), Esc End

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Petroieum Prifit Tax Rate (%) Fig. 6- Sensidvity for Gas FieIds of Trinidad and Tobago P.P.T. Rate vs Cumulative Govt. Take (1995-2015)

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Fig. 7- Sensitivity for Gas Fields of Trinidad and Tobago Gas RoyaIty Rate vs Cum. Government Take (1995-2015)

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.................

..........................................

. . . . . . . - . -- . . . . . . . . . . . . . . . . . . . . . -. . . .- . . . . . . . . . . . . . . . . . . . . . - . . . . . . . . - . . . . . . . . -. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 d ii

, , o 1

, 2

, 3 Gas Price WcaIator

! 4 5 6

(%)

Fig. 8 = SedtMty for Gas FMds of Trinidad and Tobago Gas Price Escetator vs Cum. Government Take ( 1995-201 5)

DEVELOPMENTINTRINIMD ~

T06AG0

WE 361s5

3.6g a n m g m m la == 12 . II .6 3.2- .-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8- ... . . . . . . . . . \

E=K=l-. . . . . . . . . . . . . . . . . . .

-.4

...

24-

. . . . ... . . . . . . . . . . . . . . . .

L--

--

.-

.-

...

. . . . . . . . . . . . .~: . . . . . . . . . . . . . . ........ .......... .... ...... ~

....... / ...........

................

.............................

1.2 -50 -40 -20 0 20 40

-1 50

%Deviationfrom AssumedActual GasPrice

Cum. Taxes (1995-2015)

Fig. 9- PLOT FOR DOWNSTREAM vs Gas Pdce

14 g a m : gia. 2 0. ........

E!E31---- ...... ...... -------------------------..................................................

i . . . . ..-. . .. ..................................... .... ......... ...--.-- . . . . . . . . . . -----

m p i4
1 2 -60 -40 -20 0 20 40 7 60

-----------.... .. .............. ....... ............ .. ...... ....................... .....

Percentage Devhdoafrom Actual Fig.

10- UPSTREAM WITH DOWNSTREAM Cum. Taxes vs Gas Price DevMon

740