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Petrotrin’s Mittal approach

Thursday, September 20, 2018

In the 2018 Midyear Budget Review, the Finance Minister paraphrased Jimmy Cliff’s hit song “I can see clearly now” to say that the economy had been stabilised and that brighter days were ahead. Like his predecessor Winston Dookeran, this stabilisation is not due to any intervention or policy measures on his part, but to a change in the fortunes of the energy sector.

In 2011, oil and energy prices recovered from the effect of the global financial crisis. In 2018, this “stabilisation” is due to the improvement in gas production as the energy sector responded to the fiscal incentives to encourage drilling. The Finance Minister made no mention of the substantial changes to come in Petrotrin’s operations or its impact on growth. Clearly, this will muddy the economic waters of 2019 and beyond.

In response to the “Big Question” published in another newspaper on September 18 “Do you think the Government has been transparent in its plans for Petrotrin?”, nine out of the ten respondents indicated that it had not.

One key issue has been the number of staff to be terminated. Petrotrin’s chairman, Wilfred Espinet, took responsibility for any miscommunication on this matter by Government spokespersons, particularly the Prime Minister and the Energy Minister. On Tuesday, the chairman noted that it was important to give the “new” company a chance to develop a new performance-based culture and leave the excesses behind. Therefore, all staff would be terminated. We can see clearly now.

What the future company will look like and its ownership is still unclear. Chairman Espinet, in a pre-2019 Budget seminar organised by the Greater Tunapuna Chamber of Commerce on the September 17, outlined what the Petrotrin board saw as its options. First, to continue business as usual; second to improve the financial performance of the company; third to transform the financial performance of the organisation. The board has opted to use the third alternative.

In keeping with the circumstances, the presentation was highly aggregated and compared the cash flow of Refinery and Marketing (R&M) to that generated by Exploration and Production (E&P) over a five-year period. The rationale for this approach is that the E&P generates a positive cash flow which the refinery consumes. Therefore, the decision was taken to reduce the size of the R&M losses so that it does not eradicate the E&P profits. The number of employees in the new slimline E&P and terminal operations will approximate 1,000.

Listening to the chairman being interviewed this week, it is clear that the sequencing and workflow changes are works in progress. But he emphasised that the change was irreversible and that the priority is to facilitate a smooth and efficient transition to preserve the value of assets.

The union’s plan was rejected. None of the options on the table are palatable, even if they are entirely necessary. There are many moving parts and options. In the Prime Minister’s words “a future of some sort will have to be designed…to ensure that the taxpayers...get whatever value that can be derived from its use or disposal.” Indeed, the chairman Espinet yesterday indicated that “some parts would be sold to companies that need those assets…some parts would be absorbed.”

There are many critical assumptions underpinning the positive cash flow projections. I identify three only. First, the existing debt has to be renegotiated on terms that allow the revamped company some breathing space and so that neither becomes an obligation of the state. This alone is a critical task. If unsuccessful it would carry the country’s debt to GDP ratio close to the 70 per cent mark and thereby reducing the borrowing country’s borrowing capacity.

The second is the size of the investment required to make the marine operations successful, efficient and profitable in that order. This is estimated at $6 billion. Given the likely difficulties in any renegotiation without a government guarantee, raising an additional $6 billion is a pretty tall order. Further, this number may be grossly underestimated given the low level of asset integrity.

The Solomon report et al highlight the asset integrity issues. The marine field is the most extensive lease in T&T by size, but its equipment is outdated and there are many small wells which need to be aggregated to allow for greater efficiency. However, once you begin to replace old equipment, costs multiply. So that the required investment may be much greater than estimated.

Third, the exit costs also have to be financed, ie, severance payment benefits and decommissioning costs. The figures have not yet been finalised and all estimates are subject to various errors and are generally understated. Current interest costs amount to $1.2 billion-plus and have wiped out operating margins.

We are only at the starting gates and those questioned in the survey are probably correct. Petrotrin clearly demonstrates the failure of the state enterprise model as practised. Growth projections for the next five years are flat and there are many more difficult decisions to make. These require high calibre leadership and management skills. Time is of the essence.


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