Impact of Shale Gas on The Trinidad & Tobago Economy

IMPACT OF SHALE GAS ON THE TRINIDAD & TOBAGO ECONOMY

What The Shale?

• Shale gas is natural gas trapped within shale formations of fine-grained sedimentary rock.

• The rock comprises silt and clay-size mineral particles that we commonly call "mud".

• Its first recorded use was in Switzerland and Austria in the 14th Century.

• Lower quality gas than conventional.

Shale Formation

Shale Vs. Natural

Cost Difference: Shale vs. Conventional

• The cost of drilling for conventional gas is US$1MM per well on average

• The cost of hydraulic fracturing a shale play is US 2.5$MM.

• High environmental costs associated with shale fracturing

Shale is 250% more costly to ‘frac’.

WHYFRAC

China 17%

Argentina 2%

Algeria 21% United States 43%

Canada 9% Mexico 2% Australia 6%

China Argentina Algeria United States Canada Mexico Australia

Proven Shale Gas Reserves

US NATURAL GAS SUPPLY-2011

Natural Gas remains the most economic Energy Source

Energy Quantity Unit Price Cost Per Energy Unit

Coal 1.07 4.83 5.18

Gas 0.00798 3.44 0.02

Oil 0.00184 109.25 0.20

ALTERNATIVE MARKETS

ASIA

SOUTH AMERICA

JAPAN

SPAINARGENTINA

Basic Assumptions

Harvesting of global shale gas will inevitably force the price of natural gas to be reduced even further.

Trinidad’s Natural Gas Reserves are not infinite and have been projected by BP as approx. 10 years of reserves.

How Important is Natural Gas To Trinidad & Tobago

Oil & Gas contributes 40-50 percent of government’s revenue

Provides downstream & upstream employment in the economy

Up to 2011/2012 Trinidad supplied approx 50% of the US requirements for LNG

Dependent Industries

OGPI – Ammonia; Methanol; Melamine; UreaIron & SteelPower Generation

Service companies to OGPI; Iron & Steel; Construction

Downstream industries – Plastics Education – MIC; UTT

DIRECT IMPACT:

INDIRECT IMPACT:

Natural Gas Utilization

GDP CONTRIBUTION 2007

• GDP 2007agriculture

0%

Petroleum45%

manufacturing5%

electricity&water1%

construction8%

distribution6%

tranport,storage&communicati

on12%

finance11%

government7%

other4%

GDP 2007

GDP CONTRIBUTION 2011

• GDP 2007 agriculture1%

Petroleum45%

manufacturing5%

electricity&water1%

construction6%

distribution5%

tranport,storage&commu

nication12%

finance11%

government9%

other4%

GDP 2011

ANNUAL GDP GROWTH RATETrinidad and Tobago is the leading Caribbean producer of oil and gas, its economy is heavily

dependent upon these resources but it also supplies manufactured goods, notably food products

and beverages, as well as cement to the Caribbean region

Economic growth between 2000 and 2007 averaged slightly over 8% significantly above

the regional average of about 3.7% for that same period

GDP has slowed down since then and contracted during 2009-2011 due to depressed

natural gas prices and changing markets.

Growth fueled by investments in liquefied natural gas, petrochemicals, and steel.

ANNUAL GDP GROWTH RATE

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

2.79

-1.51

-0.83

2.67

-4.56

-0.44

-3.49

2.33

-2.58

-1.77

0.11

2.96

GDP SEMI-ANNUAL GROWTH RATE

GDP 2004-2012

Aggregate Demand

• The sum of all expenditure in the economy over a period of time

Formula: AD = C+I+G+(X-M)

• C= Consumption Spending• I = Investment Spending• G = Government Spending• (X-M) = difference between spending on imports

and receipts from exports (Balance of Payments)

BALANCE OF VISIBLE TRADE 2010/2011

COUNTRIES

JANUARY - MARCH 2011 JANUARY - MARCH 2010

IMPORTS (C.I.F.)

TOTAL EXPORTS

(F.O.B.)BALANCE IMPORTS

(C.I.F.)

TOTAL EXPORTS

(F.O.B.)BALANCE

U. S. A. 2,156,776.9 8,447,529.7 6,290,752.8 2,734,386.3 9,463,822.3 6,729,436.0

CARICOM 182,364.6 2,933,838.1 2,751,473.5 178,164.1 4,894,921.4 4,716,757.3

SPAIN 102,970.7 1,449,636.0 1,346,665.3 36,597.6 275,294.8 238,697.2

UNITED KINGDOM 162,691.4 885,948.6 723,257.1 181,817.6 243,462.9 61,645.3

ARGENTINA 24,304.4 627,501.6 603,197.1 34,143.4 168.9 -33,974.5

BRAZIL 1,339,390.3 465,743.1 (873,647.2) 896,476.3 213,043.3 (683,432.9)

Aggregate Demand

Issue Classical Keynesian Monetarist

Theorist Adam Smith John Maynard Keynes

Milton Friedman

Stability of Economy

Stable in the Long Run at full employment

Inherently unstable at less than full employment

Stable in the long run at full employment

Price Wage Flexibility

Yes No Yes

Velocity of Money Stable Unstable Predictable

Cause of Inflation Excess Money Supply

Excess Aggregate Demand

Excess Money Supply

Cause of Unemployment

Short Run Price and wage adjustment

Inadequate Aggregate Demand

Short Run Price and wage adjustment.

Monetary Policy Changes aggregate demand and prices

Changes interest rate, which changes

Changes aggregate demand and prices

Fiscal Policy Not necessary Spending Multiplier changes aggregate demand

No effect because of crowding out effect.

Keynes Model

Keynes argues against classical economists and Says Law that there is no self correcting mechanism that eventually moves the economy to full employment.

Inflation

UNEMPLOYMENT

DEVALUATION

REMVED GAS SUBSIDY

BRAIN DRAIN

BALANCE OF TRADE

BALANCE OF PAYMENTS

FOREIGN INVESTMENT

EFFECTS OF DEPLETED OIL & GAS RESOURCES

Therefore…

Government must utilize Fiscal & Monetary Policy to drive diversification of the economy and thus mitigate the effects of depleting hydrocarbon reserves and falling gas prices.

CURRENT INITIATIVES

EASTERN CARIBBEAN GAS PIPEINE (ECGP) - • Phase I – Pipeline to be built from Tobago to Barbados• Phase II – from Barbados to Eastern Caribbean Islands

PETROTRIN CLEAN FUELS PROGRAM• Gasoline Optimization Program (GOP) & Ultra-Low Sulphur Diesel

project (USLD)• PETRO Connect 2011:2012

GREATER COMPRESSED NATURAL GAS (CNG)• Subsidy removal to improve annual savings for the Government • Additional income will now be obtained on open market for liquid

fuels displaced by CNG

ALTERNATIVES FOR THE LOCAL ECONOMY

AGRICULTURE • Expand production in traditional agriculture• Diversify food crop production for local consumption and exports

FISHERIES• Maintain healthy marine & fresh water eco-systems to manage

natural fish stock• Legislation to address conservation to manage ocean fish stock

MANUFACTURING• Cluster development and specialized skilled training to encourage

competitiveness and to capitalize on business to business opportunities

• Adherence to high environmental standards

ALTERNATIVES FOR THE LOCAL ECONOMY

TOURISM• Promote Eco-tourism as an avenue of revenue while maintaining the

environment• Tourism development of clusters

EXPANSION OF PORT FACILITIES• Improve existing port facilities to accommodate greater

industrial activity (transshipments) & Cruise Lines

EDUCATIONAL SERVICES• Implement additional tertiary infrastructure that attracts

regional & international students

INNOVATION• Nurture & Foster innovation culture through initiatives such

as silicon valleys