As North America’s three leaders meet in Toluca, Mexico today it will be in the shadow of NAFTA’s 20th Anniversary, with discussions likely to focus on trade. Regional energy trade is an important part of this picture. So is trilateral energy cooperaƟon, as North America burnishes its status as a regional energy hub.
SANTO DOMINGO – For over 10 years, the Dominican Republic has counted natural gas as an important fuel source for its energy matrix. Yet despite developments that have catapulted gas-fired power generation to almost 1/3 of installed capacity, 40% of the nation’s electricity is still generated from fuel oil. Dependence on oil is a familiar story across the Caribbean. According to a study by AES, fuel oil comprises 85% of power generation in the region.
And while the current high price oil environment presents a financial driver to pursue natural gas as an alternate power generation source in the Caribbean, its introduction would also lower the environmental costs of fuel oil consumption.
The natural gas boom in the United States has further piqued the interest of policy-makers and project developers across the Caribbean, raising hopes that cheaper natural gas supplies from the US will open a new chapter for the Caribbean’s energy outlook and an alternate to the status quo.
These were the issues over one hundred policy makers and industry experts debated at the Institute of the Americas’ Forum on the Outlook for Natural Gas in the Caribbean on February 13 in Santo Domingo.
That interest in natural gas for the region exists is not surprising. However, several nations of the Caribbean face a troika of impediments, ranging from scale to supply to credit.
The size of most Caribbean nations and, more importantly, their power generation demand do not reach the threshold for traditional LNG imports. Moreover, their small market size has kept traditional LNG suppliers from focusing on the region. Despite the increased discussion of smaller scale LNG or compressed natural gas (CNG) supply options, none have completely materialized in a commercial manner.
Further, when it comes to the LNG business, one industry member was quick to highlight that “credit is king”. When the costs of the LNG business are taken into account and the requirements for strict take or pay terms in contracts are considered, most off takers (utilities, really) in the Caribbean are unable to post the requisite guarantees.
Forum participants agreed upon four focal points that must be further addressed and considered by regional policy makers, multilateral development bank officials and the private sector to overcome these hurdles in the near term: 1) A Caribbean Basin Index; 2) Guarantees and credit enhancement; 3) Supply and the role of Trinidad & Tobago; and, 4) Clarification on US restrictions for re-export of LNG.
Perhaps most challenging, but important, is the need for a price index for natural gas in the Caribbean. Today’s focus on Henry Hub prices does not properly reflect the realistic options for landing natural gas in the Caribbean. A more accurate index as conceived by a “Caribbean Basin Index” would more appropriately inform policy makers and sector participants and allow for more transparency vis-à-vis project development.
Devising a way to address the lack of access to credit or reasonably priced credit options is also key for realizing LNG opportunities in the Caribbean. Moreover, as part of the equation, understanding options to burdensome “take or pay” contract language and clauses is essential.
Indeed, credit enhancement support is perhaps the linchpin to landing LNG in the broader Caribbean basin. It is a role that multilateral development banks such as the IDB and CAF could fill.
The long history of LNG exports from Trinidad & Tobago should be used as a way to further deployment of natural gas in its Caribbean neighborhood. Dealing with the issues of scale must be addressed but there are huge upsides including geopolitical, distance and, most notably, cost. Liquefaction infrastructure in Trinidad & Tobago has the huge benefit of being largely depreciated and thus not as costly in terms of the LNG value chain for new LNG contracts.
The Caribbean coast of Colombia also offers a potential regional supply source and fit in terms of scale, size and cost for the nations of the Caribbean basin.
Finally, there is great optimism that the boom in US natural gas production and potential for LNG exports from the Gulf Coast will provide increased supply options for the Caribbean.
But many of these opportunities rely on the concept of a “hub and spoke” system for delivering natural gas supplies to the broader Caribbean basin. That is, a main, larger scale receipt terminal that distributes smaller cargoes of LNG to forward destinations.
This raises a potential problem for US supplies. If LNG were exported from the US to a “hub” that had a Free Trade Agreement (FTA), such as the Dominican Republic, it is currently unclear whether LNG could then be delivered to a “spoke” location that was not party to an FTA with the US. The issue merits further review and clarification by officials at the US Department of Energy.
The Caribbean’s long-time dependence on oil-derived products for the bulk of its energy needs has increasingly come with deleterious effects. Despite increased attention on diversification and deployment of renewable energy, as well as cut-rate oil imports through the Petrocaribe agreement, the volatility of oil prices continues to impact economies of most Caribbean nations.
The potential and opportunity provided by incorporating (or in the case of the Dominican Republic, increasing) the potentially cheaper and cleaner-burning natural gas supplies has raised hopes for a new chapter for the Caribbean’s energy outlook.
But, as the foregoing analysis underscores, there are several key elements of the equation that demand attention and will determine exactly what role natural gas will play for the energy future of the Caribbean.