essay reserves to production ratio, trinidad and tobago context
TRANSCRIPT
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Introduction
Problem definition
The recently released Ryder Scott report gives Trinidad and Tobagos Reserves-to-production ratio for proven reserves of Natural Gas at January 1 st, 2007 was at a
level of about 12 years. This figure is in marked contrast to peak R/P ratio of 50.2 yrs
achieved in 1998 [some nine years ago]. Several questions in this paper attempt to
discuss the reasons for and the implications of reserves to production ratio of 12 years to
the Government of Trinidad and Tobago [GORTT].
There exist several factors that which must be discussed when analyzing the
relevance and influence of a Reserves-to-production ratio to a particular countries
economy. Analysis of these factors is especially important if the economics of a
particular country are dependent on the production of these reserves is a crucial element
of its revenue. In many countries, this ratio is an indicator to companies of the potential
of exploitation of a particular resource because cost recovery may not be realized if the
reserves dont produce long enough and hence make capital investment unattractive.
These factors can be considered in the broad categories of those factors
concerning reserves and those factors concerning production. Factors involving the
reserves may involve the nature of the resource itself, area in which the reserve is being
depleted, degree of exploration used in finding the resource and economic exploitation of
the resource itself. With production, factors such as rate of production, equity of
produced resource, nature of production [production techniques] , politics of the country
in which production takes place, geographic position of the resource, dynamics of the
current economic market and the sufficiency of reserves, either probable or possible, to
meet the demands of production.
With natural gas as a resource, some of these factors weigh very heavily with
regards to their significance. Analysis of the r/p ratio will greatly rely on the economic
exploitation of gas reserves to achieve good value for the product as gas has always been
cheaper than oil and, for gas based reservoirs, had to be produced in large enough scale to
economically viable. Also, the rate and volume at which gas can be put to productive use
by either physical or chemical means is important as both forms of production have
different effects on rate and volume of natural gas produced.
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Currently the GORTT is experiencing great revenues from natural gas that
surpass that of oil. In fact the country now produces more gas in bpoe/d than it does crude
oil in bpd. The first commercial use of natural gas was in 1953 as a fuel for power
generation by the Trinidad and Tobago Electricity Commission. In 1959, natural gas was
used for the first by time by Federation Chemical Ltd. to manufacture anhydrous
ammonia. Gas based industries started with the National Gas Company [NGC] of
Trinidad and Tobago formed in 1975 and mandated to develop the gas market in Trinidad
and was granted monopoly rights for the purchase, transmission, and sale of gas within
the country asserious planning for the development of the natural gas sector was needed.
At the time significant gas reserves off the East Coast of Trinidad were discovered and
the government struck a deal with oil companies at the time to give associated gas from
oil production to the government instead of being flared.
The main supply of natural gas in the country comes from British Petroleums
(BP) wells in the Teak, Poui, Cassia, Immortelle, Flambouyant and Mahogany fields
located off the East Coast of Trinidad. Other suppliers of natural gas include British Gas
(BG) and Enron Oil and Gas (EOG) Resources Trinidad. In addition, NGC owns and
operates two offshore gas compression platforms, located in the Teak and Poui fields,
offshore the southeast coast of the island. BHP Billington also has significant gas
reserves both associated and non-associated in the Angostura field but the associated gas
is yet to be used commercially. NGC purchases high pressure gas from its suppliers and
together with its own supply of compressed gas, transports this gas via pipelines to the
Phoenix Park Gas Processors Limited (PPGPL) plant at Point Lisas. At PPGPL, the
heavier gases, mainly propane and butanes and other natural gas liquids [NGLs] are
extracted and exported, while the natural gasolines are utilized in refining operations. The
methane-rich gas is then distributed to various consumers across the country for the
production of electricity, petrochemicals (such as methanol, ammonia and urea), iron and
steel, and liquefied natural gas (LNG).It is known that almost two thirds (2/3) of the possible acreage within GORTT
waters has yet to be assessed for hydrocarbon potential. Most of this acreage is, however,
off shore in fairly deep water.
Questions for discussion
What are the reasons for the decrease in R/P ratio over the last ten yrs?
What are the current implications for Trinidad and Tobago, if any, of the current ratio?
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What level should the R/P ratio take? [higher, lower, where?]
What actions can be suggested to stabilize or increase the R/P ratio?
What are the consequences of, and the possible strategies for dealing with, a continuing
decline of natural gas R/P ratios?
Background
Definitions
Definition of the Reserves to Production
The Reserves to Production ratio is defined for any year as the quantitative relationship
between the average rate of production during the previous year and the volume of
existing proved reserves
Definition of Reserves used to calculate Reserves-to-production ratio
A reserve is considered proven when the accumulation of hydrocarbons is known to exist
and can be technically and economically recovered from the present time onward.
In Trinidad, Ryder Scott is the auditing company that was hired by the Government ofTrinidad and Tobago [GORTT] to account for the amount of proved gas reserves in the
onshore and offshore reservoirs in Trinidad and Tobago. They have taken data given to
them and have computed the reserves to production ratio with these figures however the
accuracy associated with the calculation of proved reserves can always become a point
of contention as there are many assumptions that are made while calculating these
volumes of recoverable. Reserves development will be considered to be the exploitation
of probable reserves while exploration will seek to find possible reserves.
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Definition of Production and primary sources of gas utilization
Production may be defined removal of hydrocarbon gas from the reservoir and utilization
of this gas by either physical or chemical means over a period of unit time. This leads to
specific sources of domestic and international gas utilization in Trinidad which include
re-injection, electricity generation, ammonia production, methanol production, urea
production, gas liquefaction [LNG for export], Hydrogen production and cooking fuel [in
minimal amounts domestically] and natural gas liquids [extracted from natural gas]. The
capability to sustain these different types of production at their current rate will be
considered the productive capacity.
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Appendix B at back gives the breakdown of how gas is being utilized for production.
Where ever possible, words will follow meanings set out by the SPEs 2005 Glossary ofTerms Used in Petroleum Reserves/Resources Definitions document.
Assumptions
The assumptions made were that the current infrastructure with regards to gas
transmission remains the same, Henry Hub gas price remains at a value which keeps gas
production economical, all figures and dates provided by the Ministry of Trade and
Industry, Ministry of Energy and Energy Industries, South Trinidad Chamber of
Commerce and Industry and SPE papers referenced below are considered true and
geopolitical factors for GORTT remain constant.
Literature review
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Research into the significance of the Reserves-to-production ratio lead to a paper
published in 2001 called Natural Gas Supply/Demand Balance: The Case of Trinidad
and Tobago by authors Godfrey Ransome, SPE, and Haydn Furlonge, NGC
Trinidad/Tobago Ltd.. This paper discusses scenarios pertaining to the sustainability of
gas production on the island in the cases of low, medium and high gas consumption.
It states, that given the anticipated development of the natural gas
industry in Trinidad and Tobago, that the supply/demand balance can
be mathematical modeled and shows the optimal reserves addition
profile needed to meet all projected demand scenarios. It shows that
there is a need to boost reserves by up to 39 TSCF in a 20-year period
to satisfy a high demand scenario and to maintain a minimum
reserves-to-production ratio of 25 years.There were obvious limitations to this mathematical optimization
approach such as the assumptions that supply and demand remained
constant after 2005. However the most interesting part of this paper is
the fact that current production and utilization surpasses the high
demand scenario projected for the paper by about 213 MMCFD which
gives an indication that the projection of gas needed to fill out current
projects needs to be raised past the additional 36.2 TCF projected in
2001 so that a decent reserves-to-production ratio can be kept for
security of long term projects. Currently, reserves are being found at a
rate that can sustain current production for a while but not a consistent
reserves-to-production ratio.
The statement issued by the South Trinidad Chamber of Industry
and Commerce [STCIC] on their website entitled The Future Of The
Energy Sector was published after the leak of the Ryder Scott Report
to the Guardian Newspaper on 5th of August, 2007 was made public
and after the stakeholders meeting at the Governments Conference on
The Future Development of The Energy Sector in Trinidad & Tobago held on August
13th and 14th of 2007. This document makes suggestions for significant
reform of policies in areas concerning the petrochemical sector, the
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legal and fiscal regimes necessary to promote exploration and advice
on forming state owned energy companies.
Recommendations are mentioned in the document that are
meant to create incentives for oil companies to do exploration in the
deep water blocks off the east coast of Trinidad which would help
improve the reserves profile of the country. It also considers the
scenario of Trinidad and Tobago not being able to find sufficient
reserves to cope with the current needs of production. It seems to
purport that an economy emphasized downstream sector with post gas
processing for conversion into petrochemicals should be seen as
plausible considering our geographic position to Venezuelas
resources. Hence the importation of gas may be a desirable alternativeto a shortage in domestic supply.
Discussion
Given mathematical considerations, and a steady-state of factors, a reserves-to-
production ratio can only decrease for two reasons: either the amounts of reserves
decreases over time while production stays constant; or the rate of production increases
while reserves are constantly replenished at the same rate. In a real world scenario neither
factor ever stays in a steady state but examination of both factors will lead to an objective
decision as to which one has the greater influence.
Over the last ten years, the amounts of proven reserves have been steadily for the
years 1997 to 2003 [on average]. Only within the years 2003 to 2007 were decreases
seen. GORTT reserves are currently given as 17.71 TCF at the end of 2006 according to
the Ryder Scott report but stood at 22 TCF at the end of 1999. What is most interesting
about the current reserves figure is the value in spite of discoveries of gas fields off the
south east coast by BP of about 5 TCF in total. In light of this, the paper now discusses
production
According to the NGC total production of all of the gas producing companies in
the country was at an average of 3883 MMCFD which gives an annual production of
about 1.4 TCF for the year 2006. Not all of this gas was utilized in production but the
figure does represent the amount of gas removed from the reservoir.
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This production represents an overall increase in produced gas of about 20% from
the previous year. [3217 MMCFD] This increase in produced gas is mainly due to the
increase in commitments in gas to be liquefied at Atlantic LNG plant. This trend of
increasing production has been seen throughout the past ten years.
Figures show values of production increasing steadily until the year 2000 where
production rose by twenty one percent from the previous year in the most recent
publication of the BP Statistical review 2007. Another sudden increase occurs between
the years 2002 to 2004 and 2005 to 2006 with the later having and increase in production
of a little more than fifteen percent accounting for 1 per cent of total world gas
production in 2006.
It is noteworthy to mention that all these increases in production positively
correlate to the commissioning of four LNG trains over these periods. Train 1 was
commissioned in 1999 currently processing 520 MMCFD while trains 2 & 3 were
commissioned in 2002 and 2003 respectively with a combined gas usage of 1120
MMCFD. Train 4 was commissioned in 2005 to utilize 800MMCFD of natural gas.
These LNG trains currently take a 56.8 % share of usage of total gas production in
Trinidad with total production capability of utilising 2099.4 MMCFD in 2006. LNG is
currently the principal export of the economy accounting for over TT 8 billion dollars in
revenue in the first quarter of 2006.
Given that the reserve profile of the country has actually decreased steadily over
these years somewhat, we can conclude that the decrease in the reserves-to-production
ratio was overall due mainly to a phenomenal increase in production capacity of the
country through the four LNG trains.
Implications and Consequences
With Trinidad and Tobago in context, there are several implications for a low
reserves-to-production ratio on this countrys economy. Given that the economy is gasbased, the ratio is a signal to downstream investors that the length of time available for a
secure supply of gas for capital investment projects is too short and that cost will may not
be recovered. The ratio also means that the government needs to improve its current
incentives to attract upstream investors to explore for more gas before the supply runs
dry. Overall, these implications mean that policy changes must take place if the economy
is to continue to be based in gas revenues.
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Hence it is the writers belief that the ratio should be a bit higher [about 25 years
is safe] so that downstream investors may find security in the obtaining supplies of gas
for capital investment in the energy sector. Most petrochemical plants have a lifespan of
about 25 to 40 years and recover there initial investment between 10 to 15 years.
Although there are other countries around the world that operate with low r/p ratios like
America and the United Kingdom, these countries import the gas they use from different
sources such as pipelines. This thereby supplements their limited domestic reserves.
However in Trinidad, all of the local gas production is fully supplemented by domestic
reserves.
If the ratio were to continue to decrease, the two broad scenarios possible after
exploration are that there exist gas to sustain projects and that there is no gas to sustain
projects currently underway. In the second scenario, the GORTT must now seek either
alternatives to the domestic natural gas supply for downstream companies or/and must
abandon its dependence on gas revenues so that a recession and bust does not take place
in the economy. A declining ratio could also lead to the larger multinational oil and gas
companies leaving the country. As the gas runs dry, these companies may no longer seek
interest in performing further exploration activity as this option would expose the
companies to less risk.
Enticing foreign companies to perform exploration activity requires a delicate
balance of incentives, tax regimes and legal framework that will show them the
governments commitment to ensuring the viability of their business while yet still not
selling itself short on possible gas revenues.
Conclusions and Recommendations
Currently, given the latest reserves to production ratio and the particular nature of
current production within Trinidad, complete replacement of produced reserves now is
not necessary to maintain current productive capacity, but it will be necessary in the very
near future and preparations should be made for such an exploration intensive climate.
Reserves development in some of the existing fields will not cost as much as the
exploration for new reservoirs at deeper depths and in the deep water blocks because of
the existing equipment and infrastructure. However, the economics which govern the
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choices between these two will depend upon the price of gas and at what rate will current
production take in the future. A search for more difficult [deeper depths] and
unconventional sources of gas will become more feasible as world supplies for gas and
LNG decrease and prices increase but must be made attractive to bigger business
companies to that they may be made aware of the potential targets for production in
acreage not yet up for bid.
Increasing current productive capacity will require an aggressive search to
increase the proven reserves profile to help maintain production and ensure a dedicated
gas supply for large and long term capital projects in order to positively widen the gap
between reserves and production.
However, further LNG expansion may not be feasible for Trinidad in terms
longevity of gas income or value for gas. A study is currently being conducted by the
GORTT for the establishment of a fifth LNG train [Train X] which will discuss the
financial and economic feasibility of this project given the possibility of increasing
reserves, the risk involved, along with considering social externalities not considered in
this report. Programs such as the methanol to power research project being conducted
by University of Trinidad and Tobago [UTT] in conjunction with Methanol Holding
Trinidad Ltd. [MHTL] in investigating the feasibility of methanol as a fuel are great ways
of expanding the downstream scope of petrochemicals and will add value to methanol
because, as a fuel, methanol is easier to transport than LNG.
A working reserves-to-production ratio of about 20 years may be considered safe
for long term petrochemical sector investments and this would require atleast additional
39.1 TCF to be found over the next twenty years given current rate of consumption stays
constant. This figure is calculated given that last years rate of consumption was about
3878 MMCFD [on average 1.42 TCF per year] and that current reserves stand at 17.7
TCF.
References: BP Statistical Review 2007
Guardian Newspaper on 5th of August, 2007, page 3
Marcelle-De Silva, J. , Jagai, T. ; Monetizing Gas Reserves: Trinidad and Tobago's Approach ;
SPE 69524; Copyright 2001, Society of Petroleum Engineers Inc. ;This paper was prepared for
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presentation at the SPE Latin American and Caribbean Petroleum Engineering Conference held in
Buenos Aires, Argentina, 25-28 March 2001.
Ransome, G and Furlonge, H; Natural Gas Supply/Demand Balance: The Case of Trinidad and
Tobago ; SPE 69521; Copyright 2001, Society of Petroleum Engineers Inc. ;This paper was
prepared for presentation at the SPE Latin American and Caribbean Petroleum Engineering
Conference held in Buenos Aires, Argentina, 25-28 March 2001
South Trinidad Chamber of Industry and Commerce [STCIC]; The Future OfThe Energy Sector; http://www.stcic.org/index.php?categoryid=47&p2001_articleid=147 ; Retrieved November 6th ,2007 at2:00pm
http://www.spe.org/spe-app/spe/industry/reference ; Retrieved November2nd , 2007
NGC http://www.ngc.co.tt/Publications/11GASCO-Juy%2006.pdf GASCOMagazine, July 2006
Ministry of Energy and Energy Industries [MEEI]
http://www.energy.gov.tt/applicationloader.asp?app=doc_lib_details&id=273 ;Retrieved October 26th , 2007
Ministry of Trade and Industry, [MTI] http://www.tradeind.gov.tt/Economic%20Data/2007/val_imps.htm ; Retrieved November 2nd, 2007
Methanol Holdings [Trinidad] Limitedhttp://www.ttmethanol.com/web/index.htm
Appendix ATable showing Integrated Upstream and downstram Processes, percentage Equity and Natural Gas Supply
[Courtesy BG website http://www.bg-group.com/international/trinidad.htm, Retrieved November 2nd, 2007]
http://www.stcic.org/index.php?categoryid=47&p2001_articleid=147http://www.stcic.org/index.php?categoryid=47&p2001_articleid=147http://www.spe.org/spe-app/spe/industry/referencehttp://www.energy.gov.tt/applicationloader.asp?app=doc_lib_details&id=273http://www.tradeind.gov.tt/Economic%20Data/2007/val_imps.htmhttp://www.tradeind.gov.tt/Economic%20Data/2007/val_imps.htmhttp://www.ttmethanol.com/web/index.htmhttp://www.bg-group.com/international/trinidad.htmhttp://www.bg-group.com/international/trinidad.htmhttp://www.stcic.org/index.php?categoryid=47&p2001_articleid=147http://www.stcic.org/index.php?categoryid=47&p2001_articleid=147http://www.spe.org/spe-app/spe/industry/referencehttp://www.energy.gov.tt/applicationloader.asp?app=doc_lib_details&id=273http://www.tradeind.gov.tt/Economic%20Data/2007/val_imps.htmhttp://www.tradeind.gov.tt/Economic%20Data/2007/val_imps.htmhttp://www.ttmethanol.com/web/index.htmhttp://www.bg-group.com/international/trinidad.htm -
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Appendix