Latin Finance - September/October 2010 - 78

trinidad & tobago oil and gas

British thermal units] during its fiscal year, which runs from October to September. This is much lower than actual prices.” Considering that between October 2009 and July 2010 WTI oil averaged $75 per barrel and natural gas averaged $4.50 per mmbtu, Arora believes the deficit could turn out to be below 5.0% of GDP. T&T’s GDP is about $25 billion, according to S&P. The economy is expected to grow 3.0% in 2010, according to JPMorgan. Prices are expected to continue climbing. According to the EIA, in 2010 the average price per barrel of WTI should be around $79 and $83 in 2011. Natural gas should be around $4.70 per mmbtu in 2010 and $5.20 in 2011. “We expect a gradual increase in prices at least through the end of next year as a result of an increase in demand as the global economy recovers,” says Matthew Cline, an analyst for the EIA.

Covering the Deficit

Nevertheless, there will still be a deficit this year, and the government will need to cover it. “It is possible that the government may seek external financing by the end of the year,” Arora says. Bevan Rosenbloom, a fixed income analyst at RBS, agrees. “I would not be surprised if the government does issue a bond this year. It has the capacity to do so,” he adds. Local quasi-sovereign oil and gas companies Petrotrin and NGC are not expected to issue any debt this year. Petrotrin, for instance, had already issued $850 million in 2009, adds Rosenbloom. Janette Cupid St. Hilaire, director of public sector finance has said that the government is evaluating a $350 million 15-year dollar-denominated bond, but as of late July no decision had been made. A new government came to power in May after snap elections were held, so as of late July, it remained to be seen how much the government would try to raise and how. T&T is rated A/Baa1. The country posted a deficit for the first time in 15 years in 2009, directly as a result of the drop in oil and gas prices. However, a central bank source says the government expects to have balanced its budget by 2012. The central bank source explains that the new government is pushing to diversify the local economy, continuing to strengthen the oil and gas sector while developing other industries.

Challenges Remain

Confidence in T&T’s oil and gas sector is weak, according to an energy services sector survey conducted by the local Energy Chamber during the first quarter of 2010. According to the survey, optimism has faded since the previous quarter because of limited rig activity and delays in construction of several downstream projects. Between January 2007 and December 2008, there was intense rig activity in Trinidadian waters as commodities prices jumped and upstream companies embraced investment opportunities. That changed in 2009 as commodities plunged. In fact, according to information from the Energy Chamber, there was only one rig in operation between June and August 2010. It says there is no indication of more rigs being contracted by upstream companies for the remainder of the year.

The survey shows that some 75% of respondents expected the amount of business to drop in the first quarter. Some 80% said the value of business done would also decrease. The outlook looks just as negative, with 80% of respondents expecting both a drop in volume and value for the remainder of the year. Another issue hurting the Trinidadian oil and gas industry, say survey respondents, is the increase in labor costs. The survey highlights increases in labor costs for the past four years. In the first quarter of 2010, 80% of respondents indicated that labor costs had increased. Only 25% had said so in the fourth quarter of 2009. One explanation for the rising cost per employee, the survey indicates, is that companies are hiring more skilled workers to take on a variety of tasks instead of retaining those with specialized skill sets. As a result of this, many companies are not growing labor pools. In fact, the survey shows that 75% of respondents report no change in the size of their workforce, while 10% said they had hired more workers and 15% reported a decrease in number of people employed. Higher costs have meant that many projects are being cancelled or postponed. This could exacerbate the fall in oil and gas production. Cline of the EIA says that oil and gas production in T&T has been declining since a peak in 2005. “With the sharp drop off in oil and gas prices in 2009, you saw a slowdown in foreign investment and drilling activity,” he says. “Most of Trinidad’s gas exports are going to the US, where we saw a very large reduction in LNG imports as a result of increased supply in the US and a reduction in demand for natural gas in the US, which itself was caused by the economic slowdown.” Energy Chamber data show that foreign direct investment in oil and gas in T&T dropped to $511 million in 2009 from $973 million in 2004. But Cline sees opportunities for a turnaround as T&T could export natural gas to other regions such as Europe, Asia and South America. The Energy Chamber is actively trying to boost exports. As of late July, it was in the process of organizing a trade mission to East Africa, where it believes there are sales opportunities. The chamber also sees potential for new investment as the government embarks on a bidding round for oil and gas concessions. The government was set to auction shallow/average water depth and deepwater projects, starting in August. The concessions were originally scheduled to be sold at the end of 2008, but were postponed by the global financial crisis. The blocks being awarded range in size from 205 to 2,311 square kilometers. Another challenge is that the government still has assets of bailed-out financial conglomerate CL Financial on its hands and draining resources. “So far, the government has injected $300 million in cash and has issued $540 million in local bonds in exchange for an equity stake,” says Arora. The government took over CL Financial’s local assets in June 2009. As part of the bailout, the central bank had said it would sell, liquidate or collateralize assets and use proceeds to meet funding requirements for CL Financial subsidiaries Clico and British American. It would provide full funding support to meet any remaining deficits. LF

78 LatinFinance

September/October 2010

Latin Finance - September/October 2010

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