Thursday 3rd August 2006

 

Saith on Alcoa

 
 
 
 
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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 Trinidad.

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&T’s natural gas is to be sold to Alcoa cheaply and at a fixed price, that represents a radical shift in the Government’s well-established pricing policy for the downstream use of the country’s natural gas.”

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 my call.

Officials of Alcoa, which stood to lose the most from the perception that the Government was considering a fixed price for T&T’s 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 Friday—only 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 Exchange (LME).

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 gas price.

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 base rate.

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 a formula.

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.

It’s not only about receiving the highest price for our natural gas, it’s 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 us.

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, it’s the fact that aluminium and iron and steel are different industries.

We are still looking at Alcoa’s 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 investment—someone has to run the plant efficiently.

Different strokes?

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.

Tax holiday?

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.

 

 

 

 

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