Policy of tax cuts for deepwater, LO/FO model up for review

Cycles of growth and decline are characteristic of the energy sector in Trinidad and Tobago.

When either prices or production fall significantly, our economy is adversely affected, as we then have less economic activity; lower government revenue, resulting in government cutting back on expenditures; and foreign exchange becomes scarce.

This is our historical experience.

Case in point would have been the economic crisis from 1981 to 1994, as the economy declined for 13 long years, after a prolonged increase in both prices and production between 1973 and 1980.

Unfortunately, it is only when things are not good in the sector that there is cause for concern, and then the discussion of diversification takes a prominent position in the national discourse.

The reality is that this diversification will have to be financed onshore by the offshore hydrocarbon revenue.

This, therefore, means that a robust energy sector is critical for the transformation of the domestic economy.

Maximum benefits will only be derived from this sector under a comprehensive National Energy Policy, which should be premised on sustaining revenue inflows at an optimal level and ensuring security of supply. There are several areas which are key to the success of such a policy.

The first focus must be on the increased production of both oil and gas. There must be a drive to increase land-based production through the state company, Petrotrin. This land-based crude is heavy-oil and is known to exist in large volumes.

Petrotrin requires special tax incentives to explore for and produce this oil, as well as to increase production from existing fields through secondary and enhanced oil recovery techniques. This must be undertaken in a safe and sustainable manner.

It must be noted that we do not agree with the strategy of the widespread use of farm-out and lease-out arrangements, and this must be reviewed in the re-engineering of the sector.

Further, activity in the upstream sector should be aggressively pursued. Rather than trying to find large fields in the deepwater horizon using very generous tax incentives (which results in significant loss of tax revenue without any guarantee of future streams of revenue if no gas is found or produced), we should be seeking to produce from smaller gas fields that do not have the burden of big contract volumes or expensive infrastructure.

In addition, we should pursue the mechanism of utilising improved data quality and other marketing strategies to attract investment in the deepwater horizons.

A policy of investing overseas in low-risk global assets should be adopted by all state companies in the energy sector, as the National Gas Company (NGC) has begun to do.

This would ensure that we have access to oil and gas fields outside of Trinidad and Tobago in which we have equity participation and thus supplies of crude and natural gas.

There should be a satisfactory completion of the negotiations for the cross-border gas fields between Trinidad and Tobago and Venezuela (in particular, the Loran-Manatee gas field).

As oil and gas production is expanded, mechanisms must be set up to monitor and adjust the tax policies related to these activities to ensure the efficient extraction of natural resources.

In addition to increased production, there must be a concerted focus on maximising the natural gas value chain.

The contractual and marketing arrangements within the LNG sector need to be immediately re-examined to ensure that the revenues coming to Trinidad and Tobago are being optimised, given the current dynamics within the gas industry.

The MSJ is of the view that the existing contractual arrangements are resulting in a huge loss of revenue and foreign exchange to Trinidad and Tobago, as a significant part of our gas sales is based on pricing close to or linked to the North American Spot Price (Henry Hub), which is the lowest globally.

If we are correct, we have been losing billions in US$ per year. Contracts need to be tightened to ensure that, as a country, we do not pay a buyer of LNG to take our gas. (No sensible consumer of any product would expect the seller to pay the consumer to take the product.)

New forms of international cooperation should be developed within the petrochemical sector, with particular emphasis on downstream activities. This would include cooperation in areas such as technology and research.

The wealth of knowledge developed within the sector now provides us with an asset base which can be exported as skilled expertise.

The adherence to the principles of transparency is especially important in this sector. The current arrangement has led us previously to place the management of these critical entities in the hands of party appointees, who sometimes make politically-oriented decisions rather than economic ones.

It is critical that the administration of the state enterprises be significantly reorganised to reflect a managerial framework which is beyond the influence of narrow partisan interests.

To complement this shift, the Trinidad and Tobago Extractive Industries Initiative must be encouraged and facilitated so that information can be disseminated to the public on the tax and other relevant transactions between the Government and firms.

There are other key areas which the MSJ has also paid attention to, including local content optimisation and the issue of conservation. The real issue for Trinidad and Tobago is the failure of successive administrations to do more than merely pay lip service to the issue of diversification.

The MSJ is clear that a sustainable economy is contingent on the optimisation of the energy sector, and to have that revenue finance the diversification.