Increase hydrocarbon production, expand tax base

Budget recommendations: increase the SPT base, incentivise investment in small gas fields and re-examine PSCs.

Trinidad and Tobago’s new Minister of Finance, The Honourable Colm Imbert, has been given a very short timeframe in which to complete an extremely important national budget. The 2015-16 national budget takes place in the context of not only low oil, gas and petrochemical prices, but also significant and continued shortfalls in gas production.

There are many different and overlapping issues that need to be addressed to ensure the energy sector weathers the very turbulent current market conditions, and realistically, Minister Imbert and the newly installed Minister of Energy, The Honourable Nicole Olivierre, will only be able to address a few of the most immediate challenges in the 2015-16 national budget. One of the top issues for oil companies in Trinidad and Tobago has been the Supplemental Petroleum Tax, or SPT.

SPT is a tax against revenue rather than against profits and is paid once prices rise above US$50 per barrel, at a rate of 33 percent for marine operations and 18 percent for land-based operations.

When the tax was introduced in 1981, US$50 was considered a very high price, but due to inflation over subsequent decades, US$50 is now considered a low price, and many oil companies in Trinidad and Tobago struggle to be profitable at this level of revenue. Because SPT is assessed against revenue rather than profits, oil companies have to pay the tax even if they are losing money at any given price level over $50.

This has led to a strange situation in which oil companies are actually better off when oil prices are below US$50 than when prices are in the US$50-60 range. Clearly, this anomaly has come about due to a lack of attention over time, and the details of SPT need to be revised to ensure that it once again becomes a windfall tax. This can best be achieved by significantly raising the price level at which the tax kicks in.

While an increase in the base price at which SPT kicks in will help improve the economics of potential oil projects, it will not help change the economics for gas, as SPT is only charged on oil production. Given the persistent shortfalls in gas production, it is extremely important that something also be done to incentivise investment in gas projects.

There are many gas reservoirs in Trinidad and Tobago that have been discovered but which are not economically viable to develop, often because they are too small or have complicated geology, thus resulting in higher development costs. Measures need to be introduced to incentivise development of these fields.

While these changes to the fiscal regime could help incentivise investment for areas under Exploration and Production licenses, it is also very important to recognise that a significant percentage of the country’s offshore acreage is held under production-sharing contracts (PSCs). Changing the fiscal legislation does not have any impact on the terms for the PSCs. This is one of the strengths of the PSC system, as it means that oil and gas companies do not have to worry about the changing of tax terms negatively affecting their projects during the life of a contract.

The flip side of this, however, is that incentives introduced under the national tax code are not available to operators with PSCs. Given the urgent need to incentivise investment into gas production, the Government needs to consider how it can reopen discussions with operators under PSCs and whether this will help stimulate the needed investment.