Petrotrin reinventing self? Really?

MARK FELT

PETROTRIN IS an integrated oil company that converts the low-valued crude oils extracted and produced from the land and marine areas of Trinidad into finished petroleum products for local, regional and international sales. This conversion is achieved at the Pointe-a-Pierre refinery and involves the blending of higher quality imported crudes to obtain the maximum product yield.

The position articulated – not too clearly – that the company will soon exit the oil refining business and “reinvent itself” is lacking in credibility when the underlying assumptions and implications of such a position are closely examined.

The first inaccurate assumption states as a matter of fact that the reinvented company will now export its crude oil and the revenue derived will be used to fund the company’s operations and debt repayments. There are three factors that mitigate the validity of this assumption. They are quality, quantity and location.

With respect to quality, it is worth rehashing that there are approximately 160 different oils traded on the market these days, but for simplicity’s sake, the three primary oils that get most of the serious attention in the news and in the markets are:

West Texas Intermediate (WTI), which is an extremely high-quality crude oil, greatly valued for the fact that it is of such premium quality more and better gasoline can be refined from a single barrel than from most other types of oil available on the market. The WTI crude has an “API gravity” of 39.6 degrees, which makes it a “light” crude oil, with only 0.24 per cent sulfur and is referred to as a “sweet” crude oil.

The term API gravity refers to the “American Petroleum Institute gravity,” which is a measure that compares how light or heavy a crude oil is in relation to water. If an oil’s API gravity is greater than 10 then it is lighter than water and will float on it. If an oil’s API gravity is less than 10, it is heavier than water and will sinks.

These combined qualities as well as location make WTI a prime crude oil to be refined in the United States, which is by far the largest gasoline consuming country on the planet. The vast majority of WTI crude oils are refined in the Midwest and Gulf coast regions.

Even with production of WTI crude oil in decline, it is often priced from US$5 to US$7 higher per barrel than OPEC Basket oil and, on average, US$1 to $2 higher per barrel than Brent Blend oils.

Brent Blend is actually a combination of different oils from 15 fields throughout the Scottish Brent and Ninian systems located in the North Sea. Its API gravity is 38.3 degrees, which makes it a “light” crude oil, but clearly not quite as “light” as WTI. It also contains about 0.37 per cent sulfur, which makes it a “sweet” crude oil, but then again not quite as “sweet” as WTI. The Brent Blend oil price is often priced at US$4 higher per barrel compared to the OPEC Basket price.

OPEC Basket oil is a collective of seven different crude oils from Algeria, Saudi Arabia, Indonesia, Nigeria, Dubai, Venezuela and the Mexican isthmus. Because OPEC oil has a much higher percentage of sulfur within its natural make-up and therefore is not nearly as “sweet” as WTI or even Brent Blend and since it is also not naturally as “light” as well, the prices of OPEC oil are normally consistently lower than either Brent Blend or WTI.

Trinidad’s crude oil has an average API of 27-29, which means it is heaver than a typical WTI or Brent oil and has a higher percentage sulfur content. This, together with the fact that our crude is not “known” on the international market, means that the likely sale prices for Trinidad’s crude oil will be at significant discounts to WTI. Some have suggested as much as US$10/bbl less.

The other issues are the quantity of crude oil produced and our relative location. At 40,000 bbls/day, Trinidad is a low volume producer (compared to Guyana where first production is estimated at 150-200,000 bbls/day) located in the southern Caribbean.

This means that the reinvented company will have to sell low-quality, low-volume crude oil to a trader who will have to charter a vessel to come to the southern Caribbean to collect and then head back north to sell to a refiner either in North America or Europe. In this scenario the economies of scale are just poor, and the projected sale prices will be significantly discounted to WTI.

Consequently, the revenue and cash projections for the reinvented company will be far below the exuberance expressed at a recent press conference. The reinvented company will be significantly disadvantaged and will underperform.