We ended the Part 1 with the cash margin on a metric tonne of methanol being US$56.20 to US$81.20 under optimal conditions, including a good market price.
There is further downside to this cash margin when you layer on the risks associated with the following:
• There is increased gas consumption per metric tonne associated with operating below nameplate capacity. This can increase the gas required to produce a metric tonne of methanol from US$36 to US$38 per mmbtu which reduces cash margin by US$5 US$10 per metric tonne;
• Short-term natural gas contracts of one or two years and a scenario where a downstream producer has a significant expenditure of circa US$40 US$60 million of major maintenance costs occurring during that 1-to-2-year contract period;
• Exposure to take or pay provisions in the agreement with no reciprocal supply or pay provisions etc. When a plant has unplanned downtime, it can further cost a plant if NGC doesn’t grant a waiver;
• A risk that royalty payments could be passed through to downstream customers potentially further increasing the price of natural gas; and
• A methanol price outlook that is not as favourable as the last five years. Methanol prices are correlated with crude oil prices and crude oil prices are expected to be ‘soft‘ over the next few years. A methanol price of between US$300 and US$330 per metric tonne, which has at least a 50 per cent chance of occurring would further erode the margin by US$22 to US$ 52 per metric tonne.
The net result, when risks are included, is that there is further erosion of the cash margin of US$56.20 to US$81.20 per metric tonne to, in the worst case, close to a zero or a negative outcome.
Of course, if the facility is still servicing debt for the investment in the facility, then there is almost a certainty that the cash margin will be negative. Further, such a change can trigger default conditions on the loans. That is a really a very difficult place for a producer.
One can now appreciate how concerned methanol producers would be in getting to a point where the cash margin falls into to zero or negative range. Methanex, as stated in their market updates, does a stress test at an average realised price of US$300 per metric tonne.
The T&T methanol businesses under such a case with risks considered could fail the test. A similar assessment can be made for ammonia, urea and steel and there likely will be similar concerns. LNG is different given the value it provides for the upstream producers who own the processing plants and market their LNG.
There is no easy solution to the current challenges being faced by the natural gas downstream sector in T&T. There is optimism that some of these challenges may be reduced when the Shell Manatee gas comes on stream in 2027.
What is clear is that Government’s policy and associated actions now related to the downstream sector will either stabilise, destabilise or at worst set it on a path of accelerated decline.
The principle of matching risk and reward along the value chain is essential for finding a space that will enable the downstream value chain to be sustainable. Think slow ,act fast is the maxim that the Government should be adopting in these circumstances. The think part should also involve a lot of dialogue and consultation with the industry.
“Every choice starts with a decision. Every decision starts with a thought. Every thought starts with a pre-conceived idea. It is up to you to decide what you do with each but always remember that the choice you make will result in the consequence you face.” — Kemi Sogunle.
