In last year’s national budget statement, the Minister of Finance announced that the Government would undertake a comprehensive review of upstream fiscal terms. Speaking shortly after the budget announcement at the Energy Chamber’s annual policy review forum, the Minister of Energy announced that the review would be completed by the end of the first quarter of 2022. As of July 2022, this review has not been completed.
The Energy Chamber strongly encourages the Government to avoid any further delay in reforming the upstream fiscal terms in Trinidad & Tobago. The time to act is now.
With the continued push for net-zero by 2050, the window for investment in gas and especially in crude oil production is narrowing every day. Across the world, oil and gas companies have remained very disciplined in how they are allocating capital to upstream investments even with the current high global oil prices.
When oil and gas companies are assessing investments, they do not base their decisions on today’s oil and gas prices, but rather on the future long-term projected prices. Companies want to make sure the investment makes sense at prices under US$50 per barrel as well as at prices over US$100 per barrel.
Unfortunately, in Trinidad & Tobago the structure of the upstream fiscal regime, especially for oil, means that it is extremely difficult to be profitable after-tax once prices are in the US$ 50 range. This is primarily because of the way in which royalties (on oil and gas) and supplemental petroleum tax (on oil) are calculated. While this does not impact investment in the acreage under production sharing contracts, it does impact potential investments in acreage under the Exploration & Production (E&P) licensing regime.
The current high-price environment does open a significant opportunity to restructure the tax system and to reform how these top-line taxes operate. Supplemental petroleum tax (SPT) was originally introduced as a windfall tax to ensure that government benefitted from the upside in times of high oil prices. Unfortunately, over the decades the $50 per barrel price trigger point at which SPT becomes payable has remained the same while inflation has marched ever onwards. US$ 50 per barrel would now be considered a low price.
By returning SPT to its original windfall focus the Government would be able to still collect significant revenue in the current high price environment, but at the same time given oil and gas companies the assurance that they can still be profitable in the future if prices fall.
Likewise, changes to the gas royalty regime can be structure so that companies will pay higher royalty rates on larger and more profitable fields and lower rates on smaller and more marginal fields. This change would mean that exploration risk for gas production would be reduced and help spur on the much-needed investment in new gas production.
The Government has shown itself open to negotiating revised production sharing contract agreements to stimulate new investment. It now needs to do the same with the overall fiscal regime. With the current onshore bid round using the E&P licensing regime model, changes to the fiscal terms could help stimulate much needed interest in this acreage. The recent success of onshore exploration shows that there is still potential for new finds and new production in this mature acreage, but this will only be realised if companies bid for the acreage and allocated the needed capital investment.
The government has repeatedly stated that it is prioritising increasing oil and gas production. They now need to follow-up these words with action. Time is running out and the moment to act is now.