Energy Minister Lenny Saith addresses a
recent post-Cabinet press conference. Next to him is Local
Government Minister Rennie Dumas.
Guardian file photo
On Friday morning, after weeks of trying, I got hold of Energy
Minister Lenny Saith, to discuss some of the points I raised
in two columns this year concerning the proposal by Alcoa
to establish a 341,000 tonne aluminium smelter in south western
The columns were one on July 13, headlined Fixed or
flexible? and the other was published on April 6 and
headlined Would smelter profit us?
In the July 13 BG View, I raised the possibility that the
price of natural gas sold to Alcoa would be fixed.
I wrote, It seems that if the price of natural gas
is not going to be based on the final price of aluminium,
Alcoa will find it infinitely more difficult to convince thinking
Trinidadians of the merits of the smelter project.
I also wrote that, If T&Ts natural gas is
to be sold to Alcoa cheaply and at a fixed price, that represents
a radical shift in the Governments well-established
pricing policy for the downstream use of the countrys
It is important to note in both of those quotes the use
of the conditional if.
And it is also important to note that it took the Minister
of Energy two weeks before he finally got around to taking
Officials of Alcoa, which stood to lose the most from the
perception that the Government was considering a fixed price
for T&Ts natural gas, refused to clarify the issue.
They consistently cited the secrecy of the pricing arrangements.
That being said, I would like to thank Dr Saith for finally
clearing up what was becoming a source of some disturbance
to me and to others like Prof John Spence and regular Business
Guardian correspondent, Reg Potter.
Below is a synopsis of the telephone discussion we had on
Friday which, in the interest of accuracy, I sent to Dr Saith
on Fridayonly because after 16 years in this profession,
my typing is still not as fast as it should be.
Fixed and floating
Dr Saith said:
The price of natural gas to be sold to Alcoa for conversion
into electricity will be linked to the international benchmark
price of aluminium which is quoted daily on the London Metal
In the contract that T&T will sign with Alcoa, there
will be a base or reference price for natural gas which will
be linked to the LME price for aluminium.
If the price of aluminium goes below the base, the price
will be fixed at the base and if world aluminium prices go
above the base, there is a formula for increasing the price.
In other words, as the aluminium price goes up, the price
of natural gas goes up but if aluminium prices fall below
a certain level there is no corresponding decline in the natural
The price being offered to Alcoa is both fixed and floating
in that T&T takes no risk on the downside, if world aluminium
prices fall below the base, but we will receive more money
for gas on the upside if the product price rises above the
base. There is no risk on the downside once you have set the
By way of example, let us suppose that the aluminium companies
buy gas at US$1 per unit based on a LME aluminium price of
US$1,500 per tonne. If the LME price of aluminium falls to
US$1,000 a tonne, the price of gas stays at US$1 per unit.
But if the world market price for aluminium increases to US$2,000
per tonne, the price of natural gas will increase based on
The base price has been derived from what the historic price
says it should be today. The normal natural gas contracts
between the National Gas Company and users of gas are for
15 to 20 years and I imagine that the aluminium companies
will receive the same length of contract.
We have not as yet finalised the base price. There is an
indicative price that is on the table that we have to finalise.
Alcoa proposed a price at which it wants to buy electricity
and we then have to work that back through the conversion
of gas to electricity to arrive at a gas price.
Its not only about receiving the highest price for
our natural gas, its about development in total.
If we were looking for the highest gas price, then we would
only export the gas as LNG. In that way, we get the most revenue
but not much is happening with the economy in terms of jobs
and valued added industries.
With aluminium, you need to add up the downstream value
added and the jobs created directly by the aluminium smelters,
by companies downstream of the smelters and by the companies
and individuals who will service the smelters and the downstream
companies and service industries.
All of this creates a multiplier effect of new industries
and new sustainable jobs. In other words, the value that the
aluminium smelters can create will have a tangible part and
an intangible part.
Because of the royalty agreement with bpTT, were it not
for the fact that the natural gas was going to be converted
to electricity for industry, it would not be available to
There is enough royalty gas for the aluminium smelters and
for some local power generation but not enough royalty gas
for Essar, the Indian-owned iron and steel complex, which
will benefit from normal gas purchases. This is not preference
for aluminium, its the fact that aluminium and iron
and steel are different industries.
We are still looking at Alcoas proposal to own the
power generation plant that will run the smelters. But let
me say this: nothing stops Trinidad institutions from forming
a consortium and putting up a proposal to become an independent
power producer. But putting money into a power generator is
not an investmentsomeone has to run the plant efficiently.
The difference between the aluminium pricing and the price
of LNG, for example, is that aluminium is priced from an international
benchmark whereas LNG is priced from national benchmarks,
such as the Nymex or Henry Hub.
While the revenue to the State may have suffered in the
early LNG negotiations leading to the diversion of LNG cargoes
from Spain to the more lucrative US market, in Train IV the
Government ensured that the reference benchmark was Henry
Hub and if LNG is sold in a market where there is a premium
to Henry Hub, the State shares that premium.
Alcoa will not receive a tax holiday. It will be paying
corporate taxes from day one. Previously what people got was
duty-free access and VAT-exemption. That continues, but we
have removed the tax holiday so if you make profit in a year,
you pay taxes on it.