36155 Gas Development in Trinidad and Tobago

7/29/2019 36155 Gas Development in Trinidad and Tobago

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SPE 36155

GAS DEVELOPMENT IN TRINIDADV. Ramkd, SPE, Petrotrin and T.

GvYIHw*. sucwdr~ Sqlm

AND TOBAGOM. Boopsingh, SPE, University of the West Indies

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ABSTRACTI%enatural gas industry of Trinidad rind Tobago is separatedinto the upstream gas producers and the downstream whichincludes the direct gas based industries and the gastransmission company. Past financial data was collected forboth the upstream and the downstream. A detailed computermodel was cons~cted and by its use futartcial projectionswere extended for this paper to the year 2015, for both theupstream and downstream. The significance of the installationof a worid-scale liquefied natural gas plant on Governmentrevenue is also discussed. The paper presents relationshipsfound over the period between gas price, profit and taxes andattempts to analyze these relationships. Sensitivities are doneto determine the effect of several factors on the gas producersprofitability.71se paper estimates the total revenue bersetits to theGovernment of Trinidad and Tobago, in particular thosederived fkomtheLNG plant and concludes that the timing andsize of ail escalation factors on gas prices both upstream astddownstream, should be kept under constant review.INTRODUCTIONNatural gas in Trinidad and Tobago occurs under threecategories:- as dty gas reservoirs such as those off the NorthCoasq asW@ #is ift gas cOrtdettasttf!Se!t&VOkSsuch as thOW h

the Teak, Cassia and Kiskidee Fields in the East Cast marinearea; and as dissolved gas in the crude oil and produced asassociated gas during oil producing operations.The gas is of very high quality, containing over 92*Amethane and negligible hydrogen sulphide and is therefore

considered a sweet gas. h is estimated that the proven non-associated natural gas reserves are in the order of 8.7 (TCF)trillion cubic feet of which 70% belong to the East Coastmarine area. At the present rate of production, the expectedlife of the gas reserves are in the order of 45 years.The major gas fields of Trinidad and Tobago and main gaslines are shown in Figure 1. At present, the main supplier of

high pressure natural gas is Amoco Trinidad Oil Companytlom its offshore wells in the Teak, Cassia, Immortelle andFlamboyant fields located off the East Coast of Trinidad.Other suppliers include Enron Gas and Oil Limited andTrintomar.The National Gas Company of Trinidad and Tobago

Limited (NGC) owns and operates two (2) olTshore platformfor compressing low pressure associated gas. This companypurchases and sells natural gas, and transports and distributesit to several consumers throughout the country. NGCSresponsibilities include ensuring security of natural gassupplies to downstream consumers, pricing of natural gas,investigating the f-ibility of gas related projects, and theimplementation of such projects.Natural gas horn the fields offshore is transported via a 24inch and a 30 inch line to the Phoenix Park Gas ProcessorsLimited (PPGPL) plant at Point Lisas, where the heavier gasesmainly propane and butane are extracted for exportationwhile the natural gasolines are utilized in Mrotrins refsningoperations. The methane rich gas is then distributed to variousconsumers across the country where it is used as a feed stockm the petrochemical industry, as fiel fa power generationand in heavy and light manufacturing industries. Natural gassupply and utilization charts are shown in Figure 2. The

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GASDEVELOPMENTNTRtNIOAOANOTOSAGO WE 3s155

brhging on stream of a liquid natural gas (I-BIG) plant in1998 will increase the gas fm the ~ by 40%. Newfields will be developed such as Amocos East Mayaro fieldand British Gas/Texacos Dolphin field to meet the additionalrequirement,The gas industry contributes to the economy through taxwdividends, foreign exchange earnings, attd .ernploymentopportunities. By conservation and prudent managetnen~natural gas resources will undoubtedly play a major role in thenations economy for many years to come.OBJ ECTIVESIk objectives of the study arc as follows1. To analyze gas development in Trinidad attd Tobago tothe year 2015 for both the upstream attd downstream with

emphasis on gas pricing.2. To estimate profitability and taxes for the gas industryincluding the downstream companies to the year 2015.The impact of bringing on stream a 470 (MMSCFD)million standard cubic feet per day liquefied natural gasplant on gas development is to be investigated.3. To determine the effect of gas price on profit attd taxesfor the upstream and downstream.4. To investigate the efft!ct of gas price escalation on therelationship found in (3) above.

BASIS OF ANALYSISUpstream Gas Deliverability ProjectionThe upstream is defined as the gas fields that wili suppiy gasto meet the anticipated demand In order to conduct theanaiysis a twenty (20) year projection for gas deliverabilitywas 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 andTMtomars Pelkan. The new fieids anticipated to come onstream are Amocos South SEG, f%st Mayaro, Kapok BritishGas / Texacos Dolphin and Swordfish.Some of the conditions of the upstream projection are asfolloww - (a) A buffkr of &iiverabiiity in excess of demandof approximately 50-150 MMSCFD is considered desimbie.(b) The coming on stream of new fields are phased in asdemanded (c) If a new fmld has a raiativeiy high condensateratio, gas production flom it wili be given pref-ce to anatready ptuducing field with a smaller condensate yieid. (d)New long term contracts will be negotiated in anticipation ofincreases in demand projection. The producer may supply inexcess of contract volume if the demand situation warrants it.

Downstream Demand ProjectionThe downstream is defined as those companies that receivegas from the gas producers. It was assumed that with theexception of gas for the iiquetied natural gas planL all gas forusc downstream wiil be purchased by the Nationai GasCompany and then sold under contractual atmtttgements to theconsumers. The scope of this paper is iiiited to the directgas-based industries, that is, those industries that use natumigas as a feedstock. It therefore ittciudes the manufacturers ofmethanoi, ammonia naturai gas iiquids and Iiquefted natumigas. The companies in operation at present are as foiiows :-Nationai Gas Company, Hydro-Agri, Arcadian, TrinidadNitrogen, Trinidad and Tobago Methanol Company,Caribbean Methanol Company and Phoenix Park GasProcessors Ltd. New plants projected to come on stream are:-Trinidad LNG Project in 1998, Farmiand Ammonia Plant ini998 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 ofnatural gas daiiy. The project is to be undertaken by aconsortium 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 LNGCorp. of Boston. The capital cost of the project is estimated atUS$ i biilion, which inciudes the cost of an onshore gastransmission iine horn the east coast to the piant site on thewest coast. The liquefied naturai gas wiil be soid at a price ofUS $2.50-3.50 per miilion British Thermai Units (MMBtu).During the liquefaction process substantial voiumes of naturaigas iiquids will be separated from the gas stream, which willbe expated as weil.Petroleum Tax LawsTaxes are calculated based on the Tax Laws of Trinidad andTobago. 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 SPTcalculation. (c) National Recovery Impost is no longerapplicable. (d) SPT mtes are on a siiding acaie iinked to theprice of oil.The taxes applicable to the upstream am : - Royalties,

Suppiementai Petroieum Tax (SPT), Petrokmn Profits Tax(WT) and Unetnpioyment Levy (UL). Government take forthe upstream is the sum of the above taxes.For the downstream the taxation system is much simpierwith fewer ailowattcea. llle taxable profit for a ctmtpany isthe ditTerence between aii income and all expenses. Expensescomprise gas COSLopemting cos~ depreeiatiin and interest

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WE 361ss V.RWIAL TM. ~

expanse with gas coat being the major cost. Tax rate oncorporations is42% oftaxabk profit.Product Price Project&pGas prices to the amm~a and methanol companies aredetermined by negotiated gas pricing formulae. The maincomponents of these f-the are base price of gas, areference price for the produc~ fixed escalators and actualproduct price. The fit .thrcc components arc negotiatedwhile actual product price varies according to global marketsituations. Hence it was necessary to formulate product priceprojections for ammonia and methanol to the year 2015. Thebasis of the predictions were to investigate actual trends inammonia and methanol prices over the past tifleen years andassume that the cycles observed would continue into thetitture. The results were as follows :- (a) Ammoniarealizations will undergo three (3) year sinusoidal cycles withpeaks of about US$I 10 per metric ton and troughs of aboutUS$90 per metric ton. (b) Methanol price will undergo five(5) year sinusoidal cycles with peaks of about US$200 permetric ton and troughs of about $130 per metric ton. (c)LNG is assumed to price at USS3.00/MMBtu (1998) with noescalator.Computer ProgrammeA detailed computer programme was constructed that cancalculate profit and taxes for each gas tield or downstreamplant considered in the model on an annual basis for the years1995-2015. Using built-in equations based on past trendsfrom the year 1985, the program calculates values forfinancial variables so that taxable profit could be computedfor each gas field on downstream plant.The programme allows the user the option of calculating gascost by either inputting a gas price and escalator, or by usingactual gas pricing formulae. The gas price escalator can beturned off in any year desired.ASSUMPTIONSAssumptions for the upstream are as follows :- (1) Aconstant oil price of US $18.00 per barrel for the next twentyyears. (2) The Petroleum Tax Laws will not changesigrtifwantly.Estimates were made in the following areas for theupstream:- (1) proven recoverable gas reserves which arebased on seismic attd reservoir studies conducted by the leaseowner and indcpendmt consultants, (2) Condensate ratioprojections which are based on the results of drill stem testingfor new fields or production trends fkomproducing fields. (3)Capital expenditure for the development of each gas fiel~which is based on a work pqranune of seismic andexploratory work, platform inatalktiq well drilling scheduk

aqd subsequent wttskoycr activity. (4) AMWd operathg costend interest expwe of + project.Assumptions, @r the &wwtmam m as follows- (1) Acompany paya ** if a profit is made for the year. Lossessp carried fortqard to the next fmsrncial year. (2) Corpomtetax concessions or tax holidays to existing and new plants arenot considered in this study. (3) All gas istcomefkosnsakaofgas for electricity generation, refining iron and steelmanufacturing and other industries are taken into account inthe revenue stream of the gas seller. Gas for LNG is notpurchased from the gas seller but rather, directly from the gasproducer. (4) Reduction in the gas volume duringtransmission because of natural gas liquids condensing anddropping out of the gas stream is assumed to be negligible.(5) The caloritic heat value of the gas stream is reduced horn1030 to 1010 Btu/scf on passing through the liquefied naturalgas plant. Gas shrinkage is accounted for as an expense in thecash flow of this plant.RESULTSUpstreamThe relative magnitude of each upstream tax (PPT, Royaltyand SPT) to be collected on an annual basis from gas fielddevelopment is shown in Figure 3. For the period 1995-2015,Petroleum Profits Tax will account for approximately 68V0oftotal Government take, Royalties for 21A and SupplementalPetroleum Tax for 1I%. This projection assumes a fixedescalator of 4% per annum to the year 2015.Cumulative Government take is defined as the sum total ofall petro[eum taxes paid by the producers to the country forthe period 1995-2015. Cumulative Government takes werecomputed for various gas prices each with a 4/0 escalator.Five (5) scenarios were investigated where the 4% escalatorwas terminated in various years : fntly in 1995, then 2000,then 2005, 2010 and finally in 2015. The results are showngraphically in Figure 4. From the graph the following couldbe deduced :- (i) The relationship between gas price andcumulative taxes for the upstream is almost a straight line. (ii)As the gas price escalator is terminated nearer in the fitture theline shifts downwards.The effect of oil price on the Gas Price versus CumulativeGovernment take relationship was also investigated. Theresults of the computer runs are shown in Figure 5. From thegraph it could be deduced that the price of condensate doesnot seem to have a significant impact on profits and taxes fbrthe upstream. For example if condensate price increases by67% from US$l 8.00 per barrel to USS30.00 per barraLCumulative Government take increases by just 1 lYo. Henceprofits and taxes for the upstream are tkr more sensitive to gasprice than to oil price. Varying the volume of codenaateproduces the same effbct as varying the comhwtc price oneurnuktive Government take.

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

SadtMtieawere alaodone todetetmiitbe ef%etsofFe@o&urn Protits Tax~Gaa Royaityrate and -Wee.Eaedatm rata on Cumulative Govemunent take. m resultsamahown in Figurea6,7 and8respedvely. Fromthagraphait couldbededuced that Cumulative Government take is verysensitive to Petroleum Profit Tax rate, moderately sensitive toGas Price Escalation rate and least sensitive to Gas Royaltiesrate.DownstreamThe definition of Cumulative Taxes for the downstreamsimilar to Cumulative Government take for the upstream. It isthe total taxes to the country tkom the downstream direct gas-based industries for the period 1995-2015.An average gas price has to be determined for eaeh companym order to estimate an assumed actual gas price for thedownstream for the twenty year period. The average gas pricefor each company was obtained by the following relationship:-Avg. gas price = ~~ cost over -199520 ~.Volume of gas used over period X 0.001050The units are :

Gas Price : $US/million BtuGas Cost : $US millionsVolume : Million standard cubic feet (MMSCF)Caloritic value of gas is 1050 Btu/sc~ hence the conversionfactor of 0.001050.The assumed actual gas price is a combination of theaverage gas prices of the individual companies as calculatedabove, excluding the transmission company.The gas prices of companies with formula pricing, such as

ammonia and methanol manufwss, will be very sensitiveto changes in their product price, but will also be affkcted bygas price eaealators that are built into their formula. Forcompanies without formula pricing such as the liquefiednatural gas and natural gas liquids plants, their gas prices willdepend solely on the value of the annual gas price escalator aswell as the year that the esealator is &ereased. Results ofcomputer runs for the downstream indicate that gas cost haa agreat impact on the profitability of the consumer. Forexample with the present gas pricing system, the ammonia andmethanol manufacturers are at present marginally profitable,and will beeome unprofmble by the year 2002. However,their degree of profitability depends very much oninternational prices of ammonia and methanol. Also theeeonomies of the proposed LNG plant investment will beseverely affeeted by gas price escalation. Hence it appearsthat a reduction m the gas pries esedator especially * theyear 2000 is a critical f- fti the continued smvival of mostof the downstream eonsmem. A most likely ease wastaken to be one where the 4% annual escalator will terminateintheyear 2000. Itisassumad thattbeupatreamgaa priceescalator will terminate concumently in the year 2000, to

ensurehatthegastransrnisaii&mpany doq3 not subsidizegas costs to its euatomm.In the most likely aeenario, all of the ~companies were fmd to be profitable, with the gastransmission company Mmg the most profitable. With regardto tax= the gas transmission company will contributev!tiInStGly 45% of the cumulative tax over the twen& yearperml followed by methanol 19Y0, liquefied natural gas IS%%ammonia 12??and natural gas liquids 6%. If volunie of gasutilised is taken into account the per MMBTU, ratios for taxare 4396 for the nahsrd gas liquids phn~ 23~0 for methano~14% for the transmtilon company, 10% for ammonia and10% for liquefied natural gas.A graph was plotted of Pereent Deviation from assumedactual gas price versus Cumulative Tax for the most likelycase. A parabolic shaped curve was obtained (Figure 9) withthe 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 fromthe downstream increases. The reason for this is as the gasprice decreases, the industries all make greater profits andhence pay more taxes. On the other hand as the gas priceincreases above the *assumed actual, cumulative taxes akoincrease, even though the plants now pay more for gassupplies. This is so because at the higher gas prices thetransmission company make more profit and hence paygreater taxes, which more than compensate for thecorresponding reduced cash flows realized by the downstreamindustries.

Two (2) other cases were investigated, one wheretheescalator expires in 1995 and the other in 2005. As can beseen in Figure 9, a similar trend was observed but the parabolawas found to shift both vertically and laterally. From this itcould be inferred that :- (i) If the gas price escalator isterminated nearer in the thture, the country collects greaterrevenue from taxation of the downstream. (ii) The COunhywill collect the minimum taxes possible from the downstreamwith the present gas pricing system if the escalator isterminated in 2005. (iii) lhe profitability of the downstreamindustries are enhanced if the gas price eaealator in terminatednearer in the future.A hypothetical case was considered where for some reasonthe liquefied natural gas plant was not constructed. In such asituation, cumulative taxes from the downstream will bereduced by 18%. On the upstream, beeause of the redueddemand, cumulative taxes will be reduced by 21%. LNGproduction on this basis will contribute in taxes and otherlevies USSI.6 billion upstnam, USSO.27 billion downstremand US$O.36 bNion to the gas transmission company.

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upstream Witk DownatraamFortheupatmam, itwaaabown that intmses in the oil priceOrgaspfi cewillincremethe total Government tak~ while forthe downstream the reverse applies up to the minimum pinton the parabola. The nett ethct of upstream and downstreamis presented in Figure 10. flte negative sloping halves of theparabola have been exceeded by the positive slops of theupstream to produce positive sloping curves. lhe curvesindicate that nets upstream and downstream taxes increase asthe gas prices of the upstream and downstream increase, andas 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, sinceprofitabilities of these companies are of prime concern.Results of computer mns show that if the gas price escalator isremoved by the year 2002, the downstream companies willcontinue to be marginally profitable end if the escalator is notremoved, only abnormally high product prices could bringabout positive cash flows. Hence, the gas pricing system tothe downstream must be reviewed with emphasis being placedon the timing pnd size of the annual escalators that are placedon gas base price, and gas floor price and product referenceprice for the ammonia and methanol manufacturers. Forcompanies witbout formula pricing, the timing and size of theannual escalator on gas price must be kept under constantreview. It is recommended that the escalators on the upstreambe adjusted in harmony and concurrently with the downstreamin order to prevent a situation where the transmissioncompany may need to subsidise the price of gas to itsconsumers.CONCLUSION1.

2.

3.

4.

The upstream is the greater contributor to theGovernment 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 notcons(ructe~ cumulative taxes fmrn the downstream willbe reduced by 20%, and tim the upstreamby21%.The 47Q MMSCFD LNG plant will contribute anestimated total of US$2.3 billion to the Government ofTrinidad and Tobago over twenty years in taxes ,royalties and dividends.Profits and taxes for the upstream are most sensitive togas price and Petroleum Profit Tax rate, moderately

Ses3sitivatogas prica acahtkm aedkaat asssaitivetooilpriccandgasmyaltyrate.5. Oaspricccadatkm isacziticd kturfmtheeclmosnic

survival of the domatmm Compaoiea. The timing dsizeofall edators should beadjustcd aamccsaryandthe raktionship between gas purchase ~ intemat andotberoperating cos@and product priceabekept underreview to promote the viability of tba diract gas baaedccmsumers. Escahom should be adjusted m harmonyand concurrently on the upameam prices.

ACKNOWLEDGEMENTSThe authors are grateful to those persons who made this paperpossible by providing much needed advice or information.REFERENCES1.

2.3.

4.

5.

6.

Aron, D. : Gas Contracting Following the Introductionof Competition Into the U.K. Gas Market, SPE Paper24239, 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 Viewtlom the South, Longman Trinidad L@ 1990.Brock, H.R., KlingstedL J.P. and Jon- D.M. :Petroleum Accounting - principles, Prcwedures andIssues, 3rd Edition, professional Development Institute,Denton, TX, 1990.Ramlal, V: A Report on the Development of East CoastGas Fields, Ministry of Energy and Natural ResourcesNovember 1986.Ramlal, V. and Boopsingh T.M. : A Financial Analysisof the Natural Gas Industry of Trinklad and Tobago,SPE PaperNO 27039, p~h?d at 111LACPEC, BuenosAires, Argentin% April 26-291994.Smcial Reuort: Trinklad and Tobago - Planners Switchi Naturai Gas, Petroleum lk&mm~ PctrokumEconomist Ltd, November [993.

!LL METRIC CONVERSION FACTORSbbl X 1.589g73 E-01=m3Btu X 1.055056 E + 00 = KJft X 3.048* E- Ol=mt? x 2.831685 E -02 =m3in x 2.54* E+ OO=CU3

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GASDEVELOPMENTINlRINIOAOANOTOBAGO SPE3S155

TABLE 1 -GAS DELIVERABILITY AND UTILIZATION PROJECTION (MMSCFD)YEAR 1995 2000 200s 2010 2015

DELIVERABILITYAmoco Trinidad 580 900 1015 1005 1085British Gas/Texaco o 400 400 400 400Enron 200 230 220 180 I 70GasCompression 110 100 100 90 90Pelican 10 10 10 10 10

TOTAL 900 1640 1745 1685 1755UTILIZATONElectricityAmmoniaMethanolLNGOil CompanySteelGas Lit?Utility/Process GasOthers

14523 I96074511504532

16029517747085721504642

17729223247091741504754

19529823647092761504958

21630424147093781505063

TOTAL 824 1497 1587 1624 1665Deliverability 900 1640 1745 1685 1755Utiliion 824 1497 1587 1624 1665Buffer 76 143 158 61 90


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~pE.ti,55

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FIG. 2- NATURALGAS IN TRINIDAD AND TOBAGO736


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SPE30155 V.WMWq T.M.BOOPSIWII

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199s 2000 2005 2010 2015Year

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

14. .g q2- - - EscEnd1995. . . . . Esc End2000~E8c End2@5 . . . . . . . . . . . . . . . . . . . . . . . .3 ~Esc End201010- - ~Esc End2015. . . . .

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o , (, , , ( , , )0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.51995 Gas Price with 4% est. ($/MMBTU)

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


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G4S DEVELOPMENTINTRINIMD ANDTOSAGO S- 3s155

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m * k ** * - -* W* M y. mo 0 0 e o 4 - - -1995 Gas Price with 4% est. ($/MMBTU)

Fig. 5- Sensitivity for Gas Fleids of Trhddad and TobagoGas Price at Wellhead vs CumuIatIvt Govt. Take ( 1995-201 5)

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10 20 30 40 50 60 70 80 90 100Petroieum Prifit Tax Rate (%)Fig. 6- Sensidvity for Gas FieIds of Trinidad and TobagoP.P.T. Rate vs Cumulative Govt. Take (1995-2015)


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SPE3615s V. ~ T.M.BOOPW@M

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

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d ii ,, , , !o 1 2 3 4 5 6

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


12/12

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36155 Gas Development in Trinidad and Tobago

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Transcript of 36155 Gas Development in Trinidad and Tobago