Trinidad's Energy Landscape: A Natural Gas Hub with Infrastructure Advantages

• Touchstone Exploration is the largest on-shore oil & gas producer in Trinidad, focused on developing significant natural gas reserves
• Trinidad's on-shore natural gas sector offers a unique investment opportunity due to the country's well-established energy infrastructure, supportive policies, and significant untapped resource potential.
• Successful natural gas development in Trinidad follows a three-pronged strategy: consolidating land positions in proven hydrocarbon fairways, controlling strategic processing infrastructure, and executing targeted drilling campaigns that balance near-term production growth with exploration upside.
• Trinidad's natural gas wells are characterized by strong initial production rates followed by predictable long-term declines, providing rapid payback of drilling capital and attractive return potential.
• Touchstone Exploration is well-positioned to capitalize on Trinidad's natural gas opportunity by leveraging their local knowledge, technical expertise, and infrastructure advantages to deliver a combination of low-risk development drilling and step-change exploration potential.

In the energy investment landscape, natural gas continues to play a crucial role in the global transition toward cleaner fuels. While many investors focus on traditional North American and European markets, significant opportunities exist in less-explored regions with established hydrocarbon systems. Trinidad & Tobago represents one such opportunity – a small but significant player in the global natural gas market, particularly given its strategic position near the Venezuelan Basin, described as one of the most hydrocarbon-rich basins worldwide.

With substantial existing infrastructure, a supportive regulatory environment, and untapped reserves, Trinidad offers a compelling investment case for companies with the right expertise and approach. Touchstone Exploration, a Canadian-based company focusing exclusively on developing Trinidad's on-shore oil & gas resources, is poised for significant growth by developing vast gas reserves with premium pricing and exploration upside.

The Untapped Caribbean Energy Potential

Trinidad & Tobago's economy is heavily energy-dependent, with oil production dating back to 1908 and a well-established natural gas sector that includes LNG export facilities and petrochemical plants. This small Caribbean nation has developed a sophisticated energy infrastructure that punches above its weight globally.

The country presents several advantages for natural gas development:

1. Established Production History: Over a century of hydrocarbon production with over 15,000 wells drilled onshore
2. Existing Infrastructure: Processing facilities, pipelines, and export terminals already in place
3. Energy-Based Economy: Government policies strongly support energy development
4. Domestic and Export Markets: Options to sell into both local petrochemical industry and international LNG markets
5. Regulatory Framework: Based on British law with clear processes, albeit sometimes lengthy

Trinidad's energy sector is divided between off-shore operations dominated by major international companies (BP, Shell, EOG, Woodside) and on-shore operations primarily handled by smaller independent producers. This bifurcation creates a niche for companies willing to navigate the local regulatory environment while applying modern technologies to potentially underexplored assets.

The Development Strategy: Three-Stage Approach to Natural Gas Value Creation

Successful natural gas development in markets like Trinidad follows a three-stage approach that balances risk management with capital efficiency. This strategy involves securing land positions, controlling infrastructure, and implementing targeted drilling programs.

Land Acquisition: Securing the Resource Base

The foundation of any natural gas development strategy is securing the necessary land position that provides both development and exploration opportunities. In Trinidad's case, recent government bid rounds have allowed companies to acquire significant acreage positions with existing data packages.

"We picked up all the land in the Fairway, from the West to the East part of the island," explains Paul Baay, CEO of Touchstone Exploration. "If you go back a year ago I had referred to the Shell property as the Holy Grail of Trinidad and for a couple of reasons: number one [being] it's beautiful facility located right in the heart of the Fairway."

This approach of consolidating acreage positions along proven hydrocarbon trends provides the inventory necessary for long-term development. In Trinidad's case, the advantage comes from the ability to acquire extensive seismic data that would otherwise be prohibitively expensive to shoot from scratch.

Infrastructure Control: The Processing Advantage

The second critical element is controlling processing infrastructure. In natural gas development, the ability to quickly bring new production online without waiting for processing capacity is a significant competitive advantage. This is particularly important in Trinidad, where there are limited gas processing facilities on-shore.

The acquisition of existing processing facilities provides immediate capacity and reduces the capital required for new infrastructure development. It also creates potential third-party processing opportunities that can generate additional revenue streams.

The recent acquisition of Shell's on-shore processing facility represents a strategic infrastructure advantage that provides not just processing capacity but access to higher-value markets:

"What really changes with the Shell deal is it allows us to go to the LNG market, and we'll get LNG pricing for that gas," notes Baay. "To give you a magnitude, we're getting $2.50 right now, and LNG is selling for $12 or $14."

This price differential highlights how infrastructure control can dramatically change the economics of natural gas production, potentially multiplying revenue without requiring proportional increases in production.

Drilling Execution: Converting Reserves to Cash Flow

The final stage involves implementing a disciplined drilling program that balances development of proven reserves with selective exploration to identify new resources. This approach allows for steady production growth while managing capital expenditures to align with available cash flow.

In Trinidad's context, companies can benefit from extensive historical drilling data combined with modern reprocessing techniques to identify the most promising targets. The focus on development drilling in known productive formations provides the base production and cash flow, while targeted exploration adds potential upside.

Modern technology plays a key role in this execution phase, with AI and advanced processing helping to reinterpret existing seismic data to identify previously overlooked opportunities.

Interview with President & CEO Paul Baay

The Trinidad Production Profile: Understanding Flow Characteristics

Investors evaluating natural gas opportunities need to understand the specific production characteristics of the target reservoirs. Trinidad's natural gas reservoirs present a unique production profile that significantly impacts investment returns but requires appropriate interpretation.

Initial Flush Production and Decline Curves

Trinidad's natural gas wells exhibit substantial initial production rates followed by relatively steep initial declines before stabilizing at lower, long-term production levels. This pattern reflects the dual-porosity nature of the reservoir systems.

"These wells have huge initial flush production, and then they turn a corner and level out," explains Baay. "You get spikes in the production base. It's difficult, if you're not in the business, to understand how these declines work."

The production profile typically follows a pattern where initial production might reach 40 million cubic feet per day, with first-year declines potentially reaching 70%. However, production then stabilizes for long-term production spanning 15-20 years.

This pattern creates a favourable economic profile where capital recovery occurs relatively quickly (often within the first 5-6 months), with subsequent production representing profit. Understanding this production behavior is essential for properly valuing assets and projecting financial returns.

Reservoir Characteristics and Technical Challenges

The natural gas reservoirs in Trinidad present certain technical challenges that impact development. The relatively young geological formations include swelling clays that can create drilling complications, often requiring sidetracking of wells to reach target zones.

The reservoirs themselves appear to have dual-porosity characteristics: natural fracture systems that provide the initial high flow rates, and matrix porosity that supplies the long-term, stable production

Once wells transition from fracture-dominated flow to matrix-dominated flow, they exhibit more predictable decline rates. Modeling these transitions is critical for accurate reserve estimates and production forecasts. Companies operating in Trinidad must adjust their technical approach to address these characteristics, using appropriate drilling techniques and completing wells to maximize both initial production and long-term recovery.

Market Dynamics: Supply Gaps and Pricing Advantages

The economics of natural gas development in Trinidad benefit from a significant supply-demand imbalance and multiple marketing options. Understanding these market dynamics is crucial for evaluating investment potential.

Domestic Supply Gap

Trinidad's current natural gas demand significantly exceeds available supply, creating assured market access for producers:

"Demand on the island, if all of the petrochemical business is running and all the LNG trains are running, is about 4 billion cubic feet a day, and right now they're at about 2.3 billion cubic feet of day of supply," notes Baay. "There's this huge gap, so we sell every molecule every day."

This supply shortfall provides producers with guaranteed off-take without concerns about takeaway capacity or market access that often plague other natural gas producing regions.

Multiple Marketing Options with Price Differentials

A significant recent development in Trinidad's gas market is the transition of the LNG facilities to a common carrier model, opening access to higher-priced international markets. Previously, only the major producers could access LNG export markets, while smaller producers were limited to the domestic petrochemical market.

This change creates pricing optionality, with potential access to global LNG pricing that can be multiples of the domestic market price. While some discounting occurs through the aggregator (National Gas Company), the differential remains substantial.

Additionally, all sales are denominated in US dollars with predictable payment terms, reducing currency and counterparty risks. This combination of guaranteed market access and potential price upside significantly enhances the investment case.

Capital Allocation and Risk Management

Successful natural gas development requires disciplined capital allocation balanced with appropriate risk management. The approach involves:

Self-Funded Development

Maintaining a largely self-funded development model allows companies to match capital expenditures with cash flow generation, minimizing dilution and debt accumulation. In the Trinidad context, this typically involves:

1. Prioritizing development drilling to maximize near-term cash flow
2. Selective infrastructure investments to expand capacity and market access
3. Targeted exploration representing a manageable portion of overall capital (typically 20%)

This balanced approach provides investors with both near-term returns and long-term growth potential.

Risk-Adjusted Capital Deployment

With multiple potential investment opportunities, companies must rigorously evaluate risk-adjusted returns. This evaluation includes:

1. Minimum necessary maintenance capital to fulfill leasehold obligations
2. Prioritizing high-return, lower-risk development opportunities
3. Selective higher-risk, higher-reward exploration prospects

For investors, this means supporting companies that demonstrate discipline in capital allocation while maintaining exposure to potential exploration upside.

Deeper Potential: The Cretaceous Opportunity

Beyond the current development focus, Trinidad offers significant deeper exploration potential that could substantially increase reserves and production. The Cretaceous formations that source the current production represent a largely untested play that could mirror the massive discoveries in nearby Guyana.

Previous Cretaceous exploration in Trinidad proved unsuccessful, largely because companies applied structural models rather than the stratigraphic approach that has worked so successfully offshore. By applying modern exploration techniques and learnings from Guyana's success, there's potential to unlock significant new resources.

"The nice thing is the Herrera sits above it (the Cretaceous). If you look back at the last 10 years, that (legacy oil) production's been unbelievably stable. By having the oil at world price, it moves around and still gives investors an opportunity to take advantage of higher or lower oil prices."

This deeper potential represents a free option for investors in Trinidad's natural gas sector – near-term value is supported by existing production and development, while longer-term upside exists through potential Cretaceous discoveries.

Competitive Advantages in the Trinidad Market

Companies focused on Trinidad's natural gas sector benefit from several competitive advantages:

1. Limited Competition: Few public companies operate onshore in Trinidad, reducing competitive pressure
2. Barrier to Entry: The regulatory process and relationships required create natural barriers to new entrants
3. Extensive Data: Historical drilling combined with modern reprocessing provides information advantages
4. Infrastructure Control: Limited processing capacity creates advantages for those with existing facilities
5. Market Access: Established relationships with national purchasers ensure sales channels

For investors, these competitive advantages can translate to more sustainable returns compared to more crowded natural gas markets.

The Trinidad Natural Gas Investment Opportunity

Trinidad's natural gas sector offers a compelling investment opportunity based on established infrastructure, proven hydrocarbon systems, and favorable market dynamics. While the market has historically received less attention than major natural gas producing regions, its combination of development opportunities and exploration upside provides an attractive risk-reward profile.

Companies that can successfully navigate the local regulatory environment while applying modern technologies to development drilling stand to benefit from the significant supply-demand imbalance and potential access to premium LNG pricing. For investors seeking natural gas exposure with both near-term cash flow and longer-term growth potential, Trinidad merits serious consideration.

The Investment Thesis for Touchstone Exploration

• Established Production Base: Current production provides cash flow foundation with stable oil production and growing gas contribution
• Infrastructure Advantage: Acquisition of Shell's processing facility provides capacity and market access advantage
• LNG Price Potential: Transition from domestic gas pricing ($2.50/Mcf) to potential LNG-linked pricing ($12-14/Mcf) represents substantial upside
• Drilling Inventory: 229 identified drilling locations with 20 wells per year drilling capacity provides decades of development potential
• Rapid Payback Model: High initial production rates provide 5-6 month payback on drilling capital, reducing capital at risk
• Trinidad Supply Gap: Significant domestic supply shortage ensures market for all production
• Debt Management Strategy: Target of 1-1.5x debt/cash flow with efficient local financing at effective 4.5-5% after-tax cost
• Exploration Upside: Potential Cretaceous discovery represents free option with transformational upside
• Experienced Management: Leadership team has successfully built and sold two previous energy companies
• Clear Growth Path: Targeting 7,000 BOE/day in 2025 with further growth potential through identified development

The natural gas opportunity in Trinidad offers investors exposure to a market with significant supply-demand imbalance, established infrastructure, and potential access to premium pricing. Companies like Touchstone Exploration that have secured land positions, control processing infrastructure, and possess the technical capability to navigate local conditions stand to benefit substantially as they develop existing assets and explore new potential. With a focus on disciplined capital allocation balancing development and exploration, investors can gain exposure to both near-term cash flow growth and longer-term exploration upside in a market with limited competition. As global natural gas demand continues to grow, Trinidad's strategic position and untapped potential make it an intriguing opportunity for energy investors seeking differentiated exposure to the natural gas value chain.