Calls for review of Supplemental Petroleum Tax regime

Trinidad and Tobago remains “the land of opportunity” for oil and gas explorers and producers, insists Paul Baay, president and chief executive officer (CEO) of Canada’s Touchstone Exploration Inc., one of the leading independents (small and medium-sized operators) in the country’s hydrocarbon sector.

“There is so much original oil still in place onshore in particular,” he enthuses.

But — and it’s a big but — Mr. Baay thinks the current tax system is hindering the aggressive pursuit of oil and gas extraction by companies like his, particularly on land.

“The biggest problem for onshore producers,” he says, “is that we are being penalised on our taxes right now.”

It is true that the People’s Partnership (PP) government has offered a number of fiscal incentives over the past five years, designed to encourage companies to undertake the type of activity to which Baay is referring.

But he is convinced that enough focus has not been put on tax rates per se, particularly for the supplemental petroleum tax (SPT).

The rate is nil on income from oil priced up to US$50 a barrel, then goes to 35 percent for marine operations at an oil price of US$50.01 to US$90 and 18 percent on land and in deepwater blocks. From US$90.01 to US$200 a barrel, SPT is the base rate plus 0.2 percent.

It’s the rate at US$50.01-US$90 that Baay doesn’t like, and oil seems likely to be priced within that range for some time to come.

He complains that Touchstone Exploration makes more money when the oil price is US$49 a barrel than it does at more than US$50 a barrel, simply because the company then has to cough up 18 percent in SPT.

For the independents like himself, he insists that “this big cross-over at US$50 doesn’t make any sense.”

The price paid to independents for crude supplied to the Petrotrin refinery is set by the state company itself, with Brent pricing as the baseline.

Though Petrotrin is not supposed to be the government or to act on its behalf in these matters, the Touchstone Exploration boss describes it as “a huge ambiguity” when the state-owned company is “setting the price it pays us.”

He suggests the “crossover point” between not paying any tax and 18 percent tax should not be US$50 a barrel but closer to US$70 a barrel.

Baay points out that SPT was originally designed as a “windfall tax — so if the oil companies got a windfall in pricing, the government should get a portion of that windfall.”

But with oil likely to hover around US$60 a barrel, “windfall” conditions no longer apply. “So US$50 for the commencement of SPT is the wrong number.

The government should not penalise producers at US$50 and still say it is encouraging them to expand.”

He draws the usual reference made by oil company executives these days to Colombia, “where significant changes were made to their tax and royalty regime to make it one of the most competitive in the world, and they went from 500,000 b/d to 2 million b/d. So the government should think about that.”

At the right tax rate, the potential on land is enormous, Baay insists.

“There’s a lot of exploration potential in deeper lands in Trinidad. A lot of the wells here are still shallow. The Cretaceous has hardly been drilled at all, and it’s one of the bigger-producing horizons in the world. But the tax system doesn’t justify us going after it.”

Baay has no quarrel with the royalty rate, which is 12.5 percent. “That’s reasonable,” he says, “and competitive worldwide. But that’s not the issue. It’s the tax.

The government take overall is 60 percent in Trinidad and Tobago. You can look anywhere else in the world you want to, but 40 percent is the maximum I have seen.”