“Oil is still good business’ has been one of Minister of Energy and Energy Industries Franklin Khan’s signature catch phrases over the past few years. The newly reappointed Minister of Energy and Energy Industries has consistently pointed out that oil remains an important and very valuable commodity for Trinidad and Tobago, notwithstanding the fact that our hydrocarbon sector is dominated by natural gas.
Even at the current depressed oil prices, a barrel of oil is far more valuable than the equivalent volume of natural gas. Oil is easier to store and transport and is a commodity with a global market with well-established benchmark prices and existing markets all over the globe. While the energy transition will certainly mean that demand for oil is unlikely to grow at the same pace as overall energy demand over the next few decades, it will still remain the dominant source of energy for transport for many years to come.
As Minister Khan often points out, oil wells typically involve more ongoing maintenance work than gas wells. With 32% of Trinidad and Tobago oil production coming from land production, this is also a sector that provides economic opportunity for many locally owned small and medium-sized contractors and jobs in rural communities in south Trinidad. Drilling activity can provide a significant boost to the local economy for communities with few other economic activities, other than agriculture.
Despite still being good business, oil production in Trinidad and Tobago has been trending downwards ever since reaching a peak in the early 1980s. There have been occasional upticks, for example, when the Angostura field first came into operation, but the trend has been generally downwards. Last year the country produced just 58,900 barrels of oil per day, compared to a peak of 144,000 in 2005.
As the recently released national oil reserves clearly indicate, the problem for oil production has not been the absence of oil reserves to be produced. The challenge has been attracting the capital necessary to develop the fields and to keep reinvesting in drilling, work-overs, and secondary and tertiary recovery techniques to offset natural reservoir decline. If oil companies operating in Trinidad are to attract capital, it is vital that we reform the current tax structure that makes it almost impossible for companies to be profitable if oil prices are in the US$50 to $60 range. This issue arises because of the way that Supplemental Petroleum Tax (SPT) is calculated as a tax against revenue rather than profits.
The Energy Chamber of Trinidad and Tobago (Energy Chamber) was extremely pleased to read the commitment made in the PNM manifesto to raise the threshold at which SPT begins to be levied from the current US$50 to US$75 per barrel for small oil producers. SPT was originally introduced in 1981 as a windfall tax to make sure that the people of Trinidad and Tobago benefitted when oil process was unusually high. As the government has recognised, US$50 may have been a windfall price in 1980s but it can hardly be considered a windfall price in 2020.
This proposed change is welcomed by the Energy Chamber and we look forward to discussing the details of how the reform is implemented in the upcoming national budget in order to ensure that we meet the objective of increasing capital investment and economic activity in the traditional oil sector. We share the Minister of Energy and Energy Industries’ view that oil is still good business and we look forward to demonstrating this reality to the country.