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Private Equity and the Energy Market in Trinidad & Tobago
Kristine Gibbon-Thompson, Prometheus Energy Partners.
A drive through Trinidad’s Point Lisas Industrial
Estate takes many visitors by surprise. The estate
is now home to 25 world scale petrochemical plants,
including the largest methanol train in the world.
Journeying further south along the coast to Point
Fortin reveals four liquefied natural gas (LNG)
trains. It becomes clear that something big is
happening in this most southerly of the Caribbean
islands.
Trinidad & Tobago’s Economic Boom
Between 2002 and 2007, the Trinidad & Tobago economy
expanded at an average rate of 9%. Real GDP more
than doubled over the period and per capita income
in 2007 was estimated at US$16,000. Unemployment
fell from 10.4% to 5.9%, public debt as a percentage
of GDP declined from 58% to 28% and foreign direct
investment exceeded US$6 billion. A Heritage and
Stabilization Fund designed to insulate fiscal
policy from fluctuations in revenue from the energy
sector and provide savings for future generations
was established in 2006, and its balance now stands
at US$12 billion.
The Energy Sector
There is no doubt that energy is the engine of this
economy, accounting for 43% of GDP, 56% of
Government revenue and 89% of total exports in 2007.
While the country has benefited substantially from
the increase in commodity prices globally, there has
also been a significant expansion in gas production.
Trinidad & Tobago has transitioned from an oil-based
economy as little as 10 years ago to a gas-based
one, and on a barrel of oil equivalent basis, gas
exceeds oil production by 5:1. The country now
produces almost 4 billion cubic feet of gas per day,
which is consumed 60% by the export-oriented LNG
industry and 40% by the domestic market, in
downstream industries such as ammonia, methanol,
metals, power generation and heavy and light
manufacturing. Trinidad & Tobago now accounts for
approximately 70% of U.S. LNG imports, 32% of global
methanol exports and close to 25% of global ammonia
exports. This expansion of the downstream sector has
been driven by attractive domestic gas prices,
supported by the country’s strategic location
vis-a-vis North and South America and its stable
political and social environment. The upstream
(exploration and production) sector is dominated by
multinationals such as BP, British Gas, BHP Billiton,
EOG Resources and Repsol YPF, who have invested
billions over the last 30 years. Petro Canada and
Canadian Superior made a late but welcome entry.
Smaller independents are also flourishing through
joint ventures with the state-owned oil company,
Petrotrin, to explore and produce state- wned
acreage.
The Future
So what does the future hold? The Government’s
“Vision 2020” strategic plan calls for the
achievement of “developed country status” by 2020,
which includes an ambitious industrial development
programme. However, a gas reserve audit by
independent consultants Ryder Scott in 2006 raised
concerns among many analysts of a tight gas reserve
position, which the Government dismissed. The fact
is that for the last four years or so, there has
been little exploration activity and therefore
insignificant additions to the reserve base.
According to the multinationals, this was in large
part due to the Government’s fiscal regime. The
Government has recognized this as a problem and has
committed to fiscal reform in the short term. While
reserves are becoming more difficult to find and to
produce commercially, it is widely believed that the
country still has massive potential in terms of its
reserve base (it shares its geology with Venezuela)
and there is significant exploration activity
planned for 2008, which has already begun to yield
results. Furthermore, it is expected that more
exploration and production acreage will be put on
the auction block, and in some cases, it will be
accompanied by recent seismic data. In particular,
the ultra deep water (Trinidad Deep Atlantic area)
which lies beyond the continental shelf, is
considered the next frontier. This bodes well for
continued investment on the part of the
multinationals as they race to the negotiating table
on the next LNG train, encouraged by the promise of
better fiscal terms. The smaller independents are
also expected to benefit from this growth by having
the opportunity to acquire “marginal fields” from
the multinationals as they seek larger prospects,
and parts of the Petrotrin portfolio as they pursue
a planned divestment programme. Increased upstream
activity also creates other related investment
opportunities, for example in the area of onshore
and offshore support services. In terms of future
energy projects, the Government has announced its
intention to pursue almost US$10 billion in new
projects, with a focus on moving further downstream
from ammonia and methanol. These include an
ammonia/urea/nitric acid/melamine/UAN complex, an
aluminium smelter complex, an integrated iron and
steel complex, a polyethylene complex, a gas to
polypropylene complex, a calcium chloride/caustic
soda facility and a maleic anhydride complex. Most
of these projects will come on stream on or before
2012, and will serve as nuclei for a myriad of
manufacturing spinoffs further downstream. Examples
of these include decorative laminates and resins
from melamine; rims, wire, cable from aluminium; and
plastic containers, pipes, appliance parts from
polyethylene.
The Government has announced its intention to pursue
almost US $10 billion in new projects...
In the medium to long term, the developmental focus
will be on further diversifying the gas-based
downstream sector into areas such as i) bio chemical
industries based on natural gas, ammonia and
methanol, ii) other specialty chemicals, iii) other
derivatives of ammonia and methanol such as acetic
acid, formaldehyde resins and methyl amines, iv)
renewable and alternative energy industries such as
solar cells and fuel cells and v) non-traditional
hydrocarbons such as tar sands and methane hydrates.
Two new industrial estates will house some of these
new projects, as well as three new power plants (the
smelter alone requires a new, dedicated generation
facility), a number of new desalination plants and
an expanded water treatment facility. In the
midstream sector, a number of pipelines are under
development. The sub-sea Eastern Caribbean Gas
Pipeline will transport natural gas from Tobago to
Barbados , St. Lucia, Dominica, Martinique and
Guadeloupe. Domestically, the National Gas Company
is building a number of pipelines to support
increased exploration and production in Trinidad and
to provide power generating capacity to Tobago.
The Private Equity Opportunity
The private equity opportunity here is significant.
Apart from the deal pipeline described above, which
can be accessed at various points in the investment
life cycle, there exist numerous opportunities to
add value to the installed industrial base, so that
deal flow is not dependent on finding new reserves.
The domestic financial system, with a few notable
exceptions, has neither the capacity nor the risk
appetite to play a meaningful role in these
projects, so that competition for deals has not yet
heated up. Having said that, the sector has started
to attract international private equity attention,
but remains a bit of a well kept secret. Unlike many
other industries in the Caribbean, the energy sector
is global, as are the exit opportunities. Currency
risk, though not a real concern in Trinidad &
Tobago, is minimized through US dollar denominated
projects, and the country rating is strong enough to
attract international lenders.
Kristine Gibbon-Thompson is the Fund Manager of
Prometheus Energy Partners, a private equity
initiative of the Guardian Holdings Group, based in
Trinidad & Tobago. Prometheus is currently in the
process of raising additional capitalfrom external
sources for a second fund. attract international
lenders.
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