With Europe and Asia currently experiencing record high spot prices on imported LNG, there is a lot of interest whether these prices will find their way back to the wellhead price in Trinidad & Tobago and hence provide a much-needed boost to government revenue.
The data contained the Ministry of Finance’s “Estimates of Revenue”, released at the same time as the national budget statement, suggest that so far these record natural gas prices, and the healthy oil prices, have not led to a boost in revenue. Indeed, the documents record that the estimated royalties received in 2021 financial year were down on the 2020 financial year.
As royalties are based on top line revenue rather than profits, this lower figure is surprising. However, there may be some good reasons that the published number is lower, despite the good prices. The first reason is just an issue of timing, as the number in the “Estimates of Revenue” is just that: an estimate made some time before the close of the financial year. The final confirmed number may be significantly higher (or lower) than the estimate. The estimated royalty number for fiscal 2020 presented this time last year was revised 8% upwards when the final confirmed numbers were published this year.
Prices have spiked towards the end of the financial year, so this may not have been anticipated when the estimates were generated. It is also worth noting that the prices realised on a cargo of LNG delivered in October may have been priced based on a marker from July or August.
The other timing issue that is important is when payments are received by the government. The government accounts on a cash basis, rather than an accrual basis, so if a big cheque is received from one of the major oil and gas producers a few days before or after the close of the financial year it can make a material difference to the figures as reported. This has been something that has been consistently highlighted in the reports of the Extractive Industries Transparency Initiative.
Apart from these two accounting issues, it is important to also realise that royalties reflect not just price, but also production and gas production has been a lot lower in the first half of 2021 than it was in 2020 (the July – September 2021 production figures are not yet available).
It is also important to remember that gas prices have huge variations between geographical areas and between marketing contracts. While you can be certain that crude oil prices will be within a reasonable percentage margin of the published benchmarks, gas prices can vary by many orders of magnitude. It is important to note that the very high prices that are getting the media attention are spot prices, rather than long-term contract prices. Within the Asian and European gas markets there will be tranches of pipeline gas or domestic gas production that are being delivered at much lower prices. While everybody loves the spot market when prices soar, they are not as keen when they crash. In January 2021 Asian LNG spot prices more than halved in 24 hours, after a few weeks of strong growth.
For Trinidad & Tobago, there is a tranche of gas from some of the producers that is sold at very low prices for supply to the electricity sector. Other upstream producers have sales contracts with set sales prices that will not vary with the international prices. Other sales contracts have prices linked to the petrochemical commodity prices. Ammonia and methanol prices have been very healthy in the recent past, but they have not shown the astronomical growth of European and Asian LNG spot prices.
For LNG sales there are various marketing contracts in place for the different producers selling through the various trains. In many cases the LNG cargoes will be contracted to specific markets and usually linked to the US Henry Hub price, which remains the key benchmark to determine the likely realised value of our LNG exports. Henry Hub prices are significantly up, currently around three times higher than this time last year, but not as spectacularly high as the Asian and European spot market gas prices, which are currently a staggering seven times higher than this time last year. As the Trinidad & Tobago LNG exporters will have contracts to fulfil in the Americas, including the key markets of Brazil, Argentina and Chile, they may not be able to divert many of their cargoes to Asia and Europe.
In short, the full extent to which Trinidad & Tobago has been able to benefit from the high gas prices in Europe and Asia remains to be seen. While the additional revenue would be most welcome, it is probably not a good idea for Trinidad & Tobago to get too carried away with the media reports on the Asian and European spot gas prices.
