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The LNG volte-face

ANTHONY GOMES

Wednesday, October 03, 2012    

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The government's unexpected abandonment of Liquefied Natural Gas as a possible alternative to national fuel came as a surprise, following negotiations involving multiple participants dealing with the different aspects of the ambitious concept. We bemoan the significant financial loss related to the hyperactivity over the years involving experts - both foreign and local - with bids and counter bids, all of which, at the end of the day, determined that the project was unaffordable. It was naturally anticipated that impact and feasibility studies at the start of the evaluation process would have indicated the viability of the project. It must be speculated, therefore, that a new influence has come to bear on the project rendering it redundant.

This occurrence has changed Jamaica's long-standing approach with the objective of obtaining LNG from Trinidad and Tobago as an entitlement, according to the Revised Treaty of Chaguaramas (RTC) and invoking the principle of "national treatment". It seems that the GOJ would no longer need to press its case to buy LNG at the same FOB Port of Spain price, as granted to the T&T manufacturing sector. Jamaica's case now rests on equalising the cost differential enjoyed by T&T manufacturers due to the low preferential cost of their electricity, which is alleged to be subsidised.

This tectonic shift in direction requires a revised appraisal of GOJ's posture towards the defence of domestic manufacturers and exporters competing with duty-free imported T&T goods which are very competitively priced due to their low manufacturing costs enjoyed at home. The GOJ may now consider adopting a defensive mode regarding the ever-growing trade deficit with Caricom and T&T in particular. This necessitates identifying the alleged subsidy granted to the T&T manufacturing sector by the provision of preferentially priced electricity.

As reported in the media, on July 19 two Trinidadian energy ministers visited Minister Anthony Hylton for talks dealing with a possible solution to the perennial deficit problem with T&T. It was stated that the visitors agreed to get back to Minister Hylton in about a month with suggested ways to deal with the problem. To date nothing further has been heard.

Consideing the protracted period that the trade deficit with T&T has been endured by Jamaica's private sector, the time has come for a "red line" to be drawn on the questionable practice of alleged subsidised goods being imported duty-free, and causing material injury to domestic manufacturers experiencing serious difficulty in competing against such preferentially priced merchandise.

Where such adverse effects take the form of material injury to a domestic industry in the importing country, the Subsidies & Countervailing Measures (SCM) Agreement authorises that country to levy countervailing duties to offset the subsidy. Such duties can be levied only if, after duly conducted investigations, the investigating authorities are satisfied that there is a causal link between subsidised or dumped imports and material injury to the industry concerned. Furthermore, such investigations can normally be initiated only on the basis of a petition from the affected industry alleging that such imports are causing it damage.

The second development, due to the reversal of GOJ's interest in T&T LNG, is the possibility for Jamaican private sector extractive and power generation industries, considering conversion to LNG sourced from T&T and elsewhere, possibly together with other interested local businesses. As the GOJ would not be involved, such a private sector industrial group may have to negotiate directly with Atlantic LNG which own the four gas-producing trains. However, Atlantic LNG has indicated that its entire product is currently committed to long-term contracts, therefore arrangements would have to be discussed with Atlantic's existing customers. Such a relationship would be a company-to-company initiative that excludes governments. The base price therefore would be determined by Atlantic LNG's customer, using one of the four international gas-pricing models.

The question of "national treatment" then arises. As stated by a former T&T energy minister, in coming to a Caribbean price, it would have to be the price as determined by the net back position at the well head. This refers to a pricing mechanism that shares the end market value of gas with all parties in the value chain. The netback pricing formula is a common feature of most, if not all LNG contracts. The well head value of gas is the residual amount after subtracting from market value, the cost of liquefaction, transport, storage and re-gasification. To comply with T&T's market value as granted to their manufacturing sector, that price could only be obtained from the T&T owned National Gas Company, and it is doubtful if such a price would be acceptable to an Atlantic LNG customer in a company-to-company price negotiation. However, as a Caricom product, the LNG should be duty-free when landed in Jamaica, according to the certificate of origin, for LNG purchased from both the National Gas Company or an Atlantic LNG customer.

Time and space do not permit a full examination of this complex situation dealing with the basic solution to Jamaica's alternative energy dilemma. It is widely believed that Jamaica's future prospect for alternative energy rests with the private sector. Now that government has withdrawn from the exploratory exercise with LNG, it is time for the private sector companies to get involved with the LNG option.

Meanwhile, the GOJ is expected to proceed with its negotiations to equalise the cost of Jamaica's locally produced goods with those imported from T&T.

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