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Where is the plan for Petrotrin’s transition?
On Tuesday 28th, Petrotrin’s chairman likened the company’s ailment to cancer. Patients suffering from a terminal illness (cancer or otherwise) are well advised to plan for their eventual demise. His statements provided no comfort or assurance that transitional and legacy arrangements have been adequately addressed.
It is common knowledge that Petrotrin has undertaken several unsuccessful projects over the past few years, thereby burdening the company’s operations and cash flow. A considerable amount of time, expertise and expense have been spent in defining, identifying, and ruminating on these problems. It was clear that action was required. One expected that any action would be guided by a well-articulated plan addressing the myriad of issues arising therefrom. Neither the press release nor press conference gave that confidence.
First, there is no easy way to break an egg; dealing with the OWTU was always going to be difficult. But there was an MOU which called for consultation. Chairman Espinet explains this away saying “…We were not going to go to them with a problem. We were going to go to them with a solution…” He also noted that action was required as Petrotrin is in a difficult situation and has a US$850 million ($5.7 billion TT) bullet payment coming due in August 2019.
This leads to a second concern. Surely the Petrotrin’s Board (and advisers) would be aware that the legal documentation for multimillion-dollar loans are detailed and seek to cover any eventuality including incidents of default and business cessation risk. As the country ought to have learned through the bitter CLF experience, default clauses are instantly triggered. Yesterday’s announcement of the refinery’s closure is such an eventuality and was reported by Bloomberg in real time sending a signal to lender/ creditors.
The announcement would have had the immediate effect not merely of triggering the loan due in 2019 (US$850 million) but also the loan due in 2020 (US$ 50 million). If Petrotrin could not pay US$850 million due in 2019, how it is going to pay US$1.6 billion today? International creditors/ suppliers will not have the forbearance Government did with CLF in delaying action. Has this been factored into the equation? Or has GORTT given assurances? If GORTT has given such assurances, it makes nonsense of the argument that $24 billion would be needed to keep Petrotrin open. What are the closure costs of severance pay and decommissioning for example?
What if local creditors or unpaid suppliers petition the court for winding up action on the ground of insolvency? If the company is insolvent (technically the Finance Minister has said this every time he says taxes have not been paid) the directors are exposed.
Third, how do we reconcile the statement that Petrotrin suffered losses for the last five years but reported profits last quarter? Was this an anomaly or evidence of turnaround capacity? No explanation has been forthcoming.
Fourth, Petrotrin has been close to an agreement with a reputed international contractor to remedy the structural engineering difficulties of the ultra-low sulphur diesel plant. Such discussions could not have been lightly undertaken and associated expenditure proposed unless business continuation was on the cards. So, what changed to lead to this precipitate announcement?
Fifth, the press release attributes the following statement to the chairman. “With the termination of the refining operations and the redesign of Exploration and Production, Petrotrin will now be able to independently finance all of its debt and become a sustainable business.” Really? Petrotrin has always been in exploration and production; how will a simple re-design make it profitable enough to finance all its debt and become a sustainable business? The statement begs belief. Production has been declining; there have been no new reserves found due to underinvestment and inadequate cash flow to fund new development. So how will a redesign make any difference? Where will the new resource to fund investment come from?
My sixth concern arose from the statement that the refinery would (could?) not be sold. This suggested that something would be and if so what?
Seventh, the transitional arrangements were glossed over or barely acknowledged. Inventory of diesel, gasoline, aviation, and other fuels are Petrotrin’s inventory and supplied ex-bond to NP et al. The bond needs upgrading and modern telemetry. How is this to be handled? Niquan’s GTL plant is supported by several sweetheart arrangements on Petrotrin’s site. Has it been given a discount and a monopoly too? What of the pricing arrangements for imported fuel and how will the tax arrangements at the pump change?
Eight, who or what is responsible for decommissioning the plant, pipelines and the dilapidated tank farm and the associated costs. And the environmental risks posed by deteriorating plant and pipelines? Who is responsible for these legacy and environmental issues?
The list is not exhaustive and there are other contingencies that ought to have been addressed. What of the economic and social ramifications? Leadership and management are critical if we are to avoid repeating the mistakes and repercussions of the Galicia fiasco. As Naipaul said, “The world is what it is; men who are nothing, who allow themselves to become nothing, have no place in it.”
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