Reinvention from Within: On The Island(s)

Unlike nearby Colombia, Trinidad and Tobago is not experiencing a flurry of activity for the first time. In fact, it is experiencing a downturn in activity after 100 years of mostly stable production. Though the nature of the energy sector is often cyclical, the reasons behind this slowdown in production are not simply due to changing headwinds in the global economy. As such, it is important to take a look at the sector and its challenges as they stand currently to understand how reinvention can be achieved from within. The country has no shortage of long-term players of all sizes who can provide an accurate commentary of the issues holding the industry back and how these have been addressed over the years.

Health & Safety Standards

Examining the timeline of Trinidad and Tobago’s production, 2009 was one of the better years in recent history before output numbers decreased significantly. The second quarter of 2010 saw BP experience the Macondo blowout at its Deepwater Horizon rig in the Gulf of Mexico, effectively putting the company’s operations to a global halt. With BP Trinidad and Tobago (bpTT) being one of the company’s highest-performing assets, the effect of a shutdown at bpTT was severe. As bpTT’s Regional President Norman Christie observes: “Because of BP’s contribution of 400,000 barrels of oil per day to Trinidad and Tobago’s overall production, our reduced production has a very visible impact, but the situation has been exacerbated by similar work occurring across the sector at the moment.”

BpTT’s Immortelle Quality of Life Helideck Fabrication at Carillion’s yard in Waterloo.

Following the Macondo disaster, Trinidad and Tobago entered into a maintenance season, with a number of producers on the island using the incident as a catalyst to examining their own integrity and carrying out repair work. This became one of the larger contributing factors to the downturn, with shutdowns occurring across many of the country’s rigs. It must be remembered, however, that in any mature oil or gas industry, maintenance activity will occur eventually, causing a decrease in output for a period of time. The longevity of Trinidad and Tobago’s industry means that it was, regardless, due for some revitalization. While this is to be expected, health and safety guidelines on the whole have not been clearly defined in Trinidad and Tobago until recently.

The North Sea is often taken as the golden standard for safety and integrity management in the oil and gas industry. Companies operating in Trinidad and Tobago are appreciative of the fact that safety levels have been improving over time. On discussing Trinidad and Tobago’s standards, William Eyres, Tidewater Marine International’s Area Manager for the Caribbean & Andean Region, says, “For the last 20 years, the industry as a whole has undergone a substantial shift in focus to reducing the number of injuries in the workplace which, in the past, were accepted with a certain level of machismo and fatalism. The industry has stepped up to curb this and injuries have dropped significantly, which goes to show the improving standards that govern our work.”

Trinidad and Tobago was one of Tidewater’s first international locations outside of the U.S. 40 years ago, and though it is one of their smallest offices, the strong currents coming up from the Orinoco Delta require some of the company’s most advanced positioning vessels to support offshore activity on Trinidad’s east coast.

One of the main initiatives of the Energy Chamber—the energy sector’s representative organization—is the creation of uniform health and safety conditions and competency certification standards. Commenting on the purpose of the Safe To Work (STOW) certification, Chamber CEO Dr. Dax Driver explained, “local companies have to meet certain specifications to work with multinationals, so we decided to make one clear and transparent standard across the industry.”

Roger Packer, the Chamber’s current President, adds, “We are very adamant that multinationals meet the standards as well, which are in fact a step above international standards.” The Chamber has come a long way towards achieving its goals; companies from across the industry agree that standards in the country are of the highest order, often surpassing those required by multinationals across their global operations.

As integrity works are performed, however, many in the sector also question the viability and success of the STOW certifications. Gerard Stauble, CFO and Director of Trinidadian-owned H.J. Stauble Ltd., remarks, “it has been a long process to develop STOW and it definitely has a future, but at the moment it has not achieved the efficiency we had hoped for. For the time being, it has made everyone more aware and committed to safety and created a minimum set of standards for the industry to abide by, which is definitely something we needed.”

H.J. Stauble, a family-run fabrication and maintenance company with a 47-year history in the industry, represents Canadian firm Superior Machine Shop and Engineering Works on the island. As their business has evolved to suit the needs and requirements of the industry, Stauble remains skeptical on the effectiveness of STOW thus far. “In theory, STOW should be more efficient and cost-effective, but it is not. Every plant and every company has their own requirements for which we have to orient workers and, like STOW, these requirements have to be recertified at frequent intervals […] STOW will have achieved its true goal when it has been more fully harmonized with the standards that exist across companies.”

Stauble is one of many in the industry who applaud the Chamber’s intentions but worry that it creates another level of qualification and bureaucracy without truly creating a new and uniform higher standard of health, safety and competence practices. Both the level of standards and the independent body inspecting and implementing them must be clearly established before STOW can bring Trinidad and Tobago on par with the North Sea. On the other hand, Gilberto Ordoñez, Managing Director of the partnership between a local conglomerate and multinational-engineering-company Neal & Massy Wood Group Ltd. points out that “the biggest trend we are seeing is operators wanting to put their money where their mouth is; we are all willing to talk about safety, but implementation is the crucial aspect. Operators are no longer willing to produce if there is a risk to their people, the environment, or to their facility.”

Gilberto Ordoñez, Managing Director, Neal & Massy Wood Group

The awareness of safety requirements has certainly increased, but the added certification must progress beyond its status as “red tape” to a more integral part of the industry. Currently many companies still see the need to call for additional requirements beyond those in the STOW certification. As more companies look to establish a presence in Trinidad and Tobago, they are assessing the amount of time and expense involved in meeting the country’s standards, and whether this is a worthwhile investment. More uniform regulations implemented by an independent body and in line with the highest of multinational expectations must be put into place if the added requirement of STOW is to be seen as a benefit rather than an impediment.

Environmental Standards

Trinidad and Tobago is the fifth highest emitter of CO2 per capita in the world. The country’s oil and gas industry has existed for twice as long as the independent nation itself has, resulting in standards governing the sector evolving in response to its growth rather than in anticipation of it. While most companies operating in Trinidad and Tobago have their own global policies on environmental and community relations, one of the seemingly more frustrating aspects of this industry is the lack of clear guidelines dictating official standard operating procedures for safety, environmental, and human resource departments. Where Trinidad and Tobago was once an attractive operating environment for companies wishing to escape the bureaucracy of more developed oil and gas jurisdictions, a number of organizations touting the causes of environment, health and safety have made operators’ obligations equally present here without any laws to guide them. In no area is this more visible than that of the environment.

Just as the North Sea is seen as a model of health and safety regulation, so too is it seen as one for environmental regulations. Nazeer Gopaul and Frank Teelucksingh, founders of and directors at marine environmental consulting firm Coastal Dynamics Ltd., believe that as much importance needs to be placed on emulating North Sea environmental standards as it does on emulating fiscal and health and safety ones. “One of the main concerns is that companies are still being allowed to discharge waste offshore … the pressure is not on them to install a system that cleans the water,” says Teelucksingh. Coastal Dynamics is the only locally-owned firm to provide numerical modeling in Trinidad and Tobago and since its founding in 1996, has seen immense growth both because of the level of service it provides and its fulfillment of local content requirements for multinationals.

North Sea regulations require safe disposal of cuttings and pooled resources to maintain monitoring of chemical levels in the water. Further to this, community relations are often strained, causing slowdowns in project development which could easily have been avoided. “There is a disconnect between the government, the industry, and the communities. The

government receives money from the industry but the community does not see any of it. As a result, the communities feel left out of the development process and the companies feel they are unfairly targeted by communities,” adds Gopaul. Companies like Coastal Dynamics, in providing consulting services, often become middlemen between communities, companies and the government, negotiating terms in a space where no official ones exist.

A common complaint is that too often companies have shaped standards which the government then follows, rather than the other way around. Discussing the evolution of environmental standards in Trinidad and Tobago Douglas de Freitas, President of Canada-based environmental consultancy Kaizen Environmental, voices the concern that companies have shaped standards which the government then follows, rather than the other way around. “The international risk and requirements for due diligence have changed […] nowadays any of the major players has environmental and safety management programs that are quite clearly defined and listed in their public literature. As a result, they can and are held accountable to those processes. In most cases, they are quite stringent with the targets they place for themselves. Their standards have evolved over time and the country has kept up with them.”

As local communities become more aware of the environment and the effect industries can have upon it, the government will need to dedicate more resources to developing its own set of rules and regulations to govern waste management and project development; local relations and CSR efforts become all the more challenging when companies are wholly accountable for their actions with no system against which to check their performance and impact.

Douglas de Freitas, President of Kaizen Environmental

Despite being one of the largest emitters of CO2 per capita in the world, Trinidad and Tobago was one of the first countries in the world to sign up and ratify the aims of the Kyoto Protocol. One of the country’s largest engineering firms, TOSL Engineering Limited, is taking the lead along with the Energy Chamber in developing the country’s first Clean Development Mechanism (CDM) project for Petrotrin. If successful, the project will reduce carbon emissions equivalent to 80,000 cars per year by capturing, processing, compressing and feeding associated gas into gas pipelines. Says TOSL’s CEO, Shazan Ali, “Trinidad and Tobago’s previous governments have never really paid attention to emission rates; their main focus has always been

maximizing the economic potential of hydrocarbons […] the government now is putting into place a low carbon development strategy.”

Though projects and strategies such as this are but a small step in developing environmental standards across the industry, they are a step in the right direction.

The NGC Model: Renegotiating Terms

The Point Lisas Industrial Estate, Trinidad and Tobago’s economic gem, was created in 1976 to absorb and monetize the excess supply of natural gas that was, until then, being flared. The estate—a fully integrated petrochemical complex—is now home to 90 companies, including the largest methanol plant in the world which, along with five additional plants, produces 13% of global methanol output. The National Gas Co. of Trinidad and Tobago Ltd (NGC) was founded alongside this as an aggregator and distributor of feedstock provided by the upstream. The idea behind the NGC was to consolidate supply and provide guaranteed distribution to the various consumers at the ends of its 880-kilometer network of pipelines. The elimination, by and large, of individual contracts between upstream producers and downstream consumers created an efficient system of gas flow from which the estate was fed.

With the recent downturn in the country’s oil and gas output, however, even the NGC model has failed to prevent a shortage in supply to Point Lisas’ various petrochemical plants. As contracts are due for renewal in the coming years, suppliers question the pricing model and whether it is beneficial to them. “The model of supply from the NGC has historically worked well,” says Eugene Tiah, President of Phoenix Park Gas Processors. “But with the current reduction in supply and maturity of the gas sector, the pros and cons of the model are now a subject for national discussion. Increasing efficiency and avoiding monopoly rates should be the goal.”

Phoenix Park Gas Processors, a joint-venture partnership between the NGC NGL Co. Ltd. of Trinidad and Tobago, ConocoPhilips Inc. and Pan West Engineers and Constructors. This consortium of owners has allowed for a pooling of resources resulting in Phoenix Park becoming one of the largest processors of natural gas in the Americas.

Charles Percy, Managing Director and CEO of Methanex’s Trinidad and Tobago operations, agrees with Gar-nett. “The face of the Trinidadian market is about to change completely,” says Percy. “The government and the associations need to be nimble and wise enough to make the best decisions for the whole of the value chain.” Methanex has recently made the decision to shut down its operations in Chile in favour of opening a methanol plant in the U.S., where cheaper gas prices and more favourable terms made it the more sensible location.

As if to counter this same skepticism in Trinidad and Tobago, industrial gas supplier Air Liquide’s local Managing Director Garnett adds, “Both Trinidad and Tobago and the company have worked on mitigating risk through diversification … People are investing to build long-term plants, which indicates that there is a positive future for the industry as a whole.” Garnett maintains that the country will

have to work on maintaining its competitive edge in such a rapidly changing economy. “There are major economic headwinds to overcome in this regard,” says Garnett.

Traditionally, the price of gas through the NGC has been set according to the price of downstream commodities. Producers are finding that they can receive better prices for their output by shipping more product abroad. While the NGC model is one that can be continued moving forward, its structure and those of its contracts needs to change. bpTT’s Norman Christie suggests that this conversation “must revolve around providing sufficient incentive for the upstream players in this changed paradigm to continue to produce the resources whilst still allowing the ultimate recipients of the gas—the downstream or midstream producers—enough of a return for Trinidad to remain an attractive place to buy the gas.”

Using the analogy of a pie in discussing the reinvention of the industry here, one of the key “slices” to be examined is that of the NGC. “NGC plays an important role in this as an aggregator, and so receives part of the rent. NGC’s role in the future will be determined by how we decide this pie needs to be distributed to incentivize upstream players and ultimate off-takers.” Upstream players and ultimate off-takers also includes a number of smaller companies operating in Trinidad and Tobago’s fields using gas in their recovery methods. Mora Oil, one such player, fears that the NGC model does not cater to small businesses. Kirk La Borde, Offshore Installations Manager of Mora Oil Ventures Ltd., says, “For smaller producers, we need to foster a better working relationship with the NGC … they do not seem to take smaller operators seriously given the relatively small amounts of gas we purchase from them. As contributors to the oil and gas industry of Trinidad and Tobago, we should be treated with the same respect as the multinational companies are.”

A good deal of the country’s reservoirs fall under the radar of global majors; while BP and BG may find Trinidad to be of utmost importance to their network, juniors and smaller operators are finding opportunities in Trinidad and Tobago to be of the perfect risk and investment profile. These companies need to be encouraged and reassured that the industry can and will adjust to their presence as it becomes more relevant.

Onshore Opportunities: Shifting Focus

Recent years have seen proven reserves depleting in the face of no new exploration. While the government prepares to announce the results of the latest successful (and oversubscribed) deepwater bid round and gears up for several further editions in 2013, little attention has been paid to the potential of Trinidad’s existing onshore fields. With an onshore bid round slated to take place early next year, the country need not wait until lengthy offshore exploration is carried out to see a resurgence in its production numbers; a spate of smaller players have had their eyes on opportunities provided by the state oil company’s lease operatorship and farm-out programs in the onshore space.

Neil Ritson, CEO, Leni Gas & Oil plc

Petrotrin believes that only 20% of the estimated 1.5 billion barrels initially in place on shore have been recov-

ered in Trinidad’s 104-year production history. Granted an automatic stake in all exploration and production licenses issued in the country, the company has taken a renewed interest along with the Ministry to increase the current onshore production of just under 14,000 bopd. Since 2005, Petrotrin has been granting licenses to private operators to perform workover activities on idle wells. By the end of the 2005 fiscal year alone, 19.1 million barrels of oil were produced from these programs. With the market dominated by global players such as BP, BG, and EOG Resources, junior operators from across the globe are beginning to realize the underexplored niche market that awaits them.

The program allows for companies to revitalize the significant onshore acreage under Petrotrin’s jurisdiction that it could not exploit on its own. Dwight Mahabir, Chairman of onshore producer-turned-contractor Damus Oil Ltd., says, “Onshore programs are critical for both employment reasons and for putting idle assets to work. The refinery processes about 160,000 bopd, of which only 55-60,000 are locally sourced, because the refinery cannot produce the very light oils from the east coast. Therefore, it has also been very important to reduce the costs of import.” While Damus Oil Ltd. found the opportunities associated with onshore acreage to be numerous, it also found the associated risks to be unsuitable for the company and gave up its position as one of the key lease operators. The importance and viability of the program for other operators must not be forgotten in Trinidad and Tobago’s reinvention.

Wilson Lalla, key architect of the Ministry of Energy and Energy Affairs (MEEA) for the upcoming onshore bid round, points out that, even with a successful deepwater bid round, it may be five to seven years before new and existing players move from exploration, through development and into production. “The need to take initiatives to arrest the decline and increase production is extremely important,” says Lalla. “This is precisely why we are promoting the onshore bid round; it can have an immediate effect on production numbers. Being onshore and in the middle of production country, both the risk and the timeline for seeing results are significantly lowered.”

Trinidad and Tobago has, for much of its history, employed various Enhanced Oil Recovery (EOR) techniques to maximize production. The continued use of EOR in rejuvenating the country’s mature oilfields will also result in increased production almost immediately.

Leni Gas & Oil plc, an AIM-listed junior with assets in Spain, has just sold its operations in the Gulf of Mexico as a part of its strategy to bring increased focus to Trinidad and Tobago. In addition to the company’s 1,900-acre Icacos Oilfield on the Cedros Peninsula, Leni has just acquired the underexplored Gourdon Oilfield in the island’s southeast, which has an estimated production potential in the range of 1,000 to 4,000 bopd. Neil Ritson, Leni’s CEO, sees the mix of already-producing wells and unexplored territory as a golden opportunity for publicly-listed, independent oil companies such as Leni, Range Resources and Trinity (with its newly-acquired Bayfield assets) to

experience some healthy competition. Although these assets are situated in the middle of proven and producing fields, increased attention to deepwater exploration and production has left onshore infrastructure to fall behind. Insufficient rigs and service providers are a persistent impediment to companies looking to ramp up their onshore assets quickly.

Typical well (GY-200) on the Goudron Field

Range Resources, a junior exploration and production company double listed on AIM and the ASX, has adopted a similar tactic to Leni Gas & Oil in making Trinidad and Tobago the center of its operations. Walter Cukavac, Range’s Country Manager for Trinidad and Tobago, says, “Trinidad and Tobago provided an interesting option for Range mainly because there are different levels of projects with different levels of associated risk. Instead of simply offering exploration […] Trinidad offered turnkey opportunities that had existing production and infrastructure.”

Cukavac and Leni’s Ritson both agree that the country’s onshore fields provide investors with an attractive mix of opportunities from across the value chain. The exploration required onshore would also mean several years before production can begin but, as Cukavac points out, the capital flow from wells that are already producing would eliminate any downtime—indeed a luxury in the exploration phase of this industry.

Geologically speaking, the onshore possibilities by and large run along the same trends that feed Trinidad’s massive offshore wells. One of Range’s two main controlling areas falls along a series of anticlines on the Southern Range just off the island’s south coast. A geologist by profession, Cukavac says, “there are over 200 oil seeps along the Southern Range anticline, […] and many of the structures have never actually been drilled onshore, so there are tremendous opportunities that have smaller reservoirs of 5 to 10 million barrels.”

Walter Cukavac, Country Manager for Trinidad and Tobago, Range Resources

Both the government and the industry would do well to keep in mind the role that EOR can play in boosting the sector through other means. Dr Krishna Persad, one of Trinidad and Tobago’s most senior geologists, argues that 90% of the oil recovered to date in Trinidad and Tobago is primary oil. “As much as 4 billion of the 12 billion barrels of oil remaining in the ground is economically recoverable at today’s oil prices using carbon dioxide as the EOR mechanism,” says Dr Persad. With 210,000 acres spread across two blocks just below the Herrera Field, 500 million barrels lie untouched in a low-risk setting ideal for more junior companies to occupy.

Doing Business: Reinventing The Fiscal Regime

Trinidad and Tobago ranks 69th in the World Bank’s “Ease of Doing Business” survey, making it an extremely uncompetitive jurisdiction in which to operate for oil and gas companies. While its attractiveness as a resource-rich destination has kept the industry afloat until now, increasing capital and equipment mobility mean that investors and operators have significantly wider footprints. Companies can afford to be much more fickle in their decision making and with significant oil and natural gas finds in several locations around the world, Trinidad and Tobago can no longer rely on its convenient location and relatively cheap supply. In order to remain competitive, it is imperative that the government re-examine the fiscal regime that governs the oil and gas industry to ensure that current operators remain interested and potential players are attracted to the market. As Minister Ramnarine stated, reinvention of the industry is his main goal, and the financials governing the industry are at the top of the list.

The country has gone through a series of production sharing contracts (PSCs) which govern the relationship and tax structure between the government and the industry. Since the 1970s, the PSC has undergone several reincarnations and adjustments; the 1996 model was the most successful and Trinidad saw some of its best performance years ensue as a result. In 2006, the government of former Prime Minister Patrick Manning’s revisited the PSC and created a new model which introduced less favourable terms for cost recovery. This slowed down interest in exploring Trinidad and Tobago’s field any further, and subsequent bid rounds were largely unsuccessful as a result. Under Minister Kevin Ramnarine, this structure has been revisited and a new PSC has been put into place taking into account the shortcomings of previous models. The latest bid round was oversubscribed for five of the six blocks included, drawing attention from such varied parts of the world as Israel, Azerbaijan, and China. A series of bid rounds is scheduled for 2013 aimed at encouraging further exploration and given the continued interest being shown, indicators point towards the fiscal regime being on its way to recovery.

Ernst & Young’s Gregory Han-nays believes that the face of the industry would have been quite different were it not for the hiccup caused by the 2006 PSC revision. “The momentum which Trinidad and Tobago had from contracts signed between 1996 and 2006 should have continued quite nicely to keep our replacement ratios high,” says Hannays. “The activity that is taking place today with the current bid rounds is really a natural progression of the run that Trinidad and Tobago had between 1996 and 2006.”

Given the rising costs associated with the various parts of the industry value chain, Trinidad and Tobago will have to reconsider government take in profits to ensure a more balanced and reasonable environment for incoming and existing operators.