In the 2019-2020 budget presentation, Minister Imbert announced some changes to the fiscal environment under which the oil and gas companies operate, but more so oil. Many oil producers have lobbied for the government to adjust the Supplemental Petroleum Tax (SPT) to make it less burdensome. When the Minister announced the changes, at first glance it seemed like a positive change, however the Minister also announced changes to the capital allowance schedule for energy companies involved in exploration and development. The result will have a negative impact for companies in the oil sector. Paul Baay, President and CEO of Touchstone Exploration said in an interview, “We’re definitely in a worse position than we were before the budget.” 

The SPT is a tax that kicks in at $50 per barrel and is paid on production revenue. The jump in taxation at this point puts many companies in a negative cash flow position and this makes it very difficult to increase investment into exploration work including drilling new wells. 

Many companies report that they are in a better position at $49 per barrel than they are at $51 per barrel. Now that the Minister has also changed the capital allowance framework, it worsens companies’ ability to invest in new drilling operations. 

The Minister said, “I propose to increase the Investment Tax Credit for energy companies from 20.0% to 25.0% to stimulate further exploration and development related investments in the Energy sector. This increase will give companies the ability to claim 25.0% of the expenditure on development activity for mature fields and enhanced oil recovery projects as a credit against their Supplemental Petroleum Tax Liability. This measure will take effect on January 1 2020. 

“Madam Speaker, the capital allowance for energy companies involved in exploration and development is currently 50.0% for the first year, 30.0% for the second year and 20.0% for the third year. I propose to provide a capital allowance for exploration and development for both tangible and intangible expenditure to be computed on a straight-line basis over five years, i.e. at 20% per year. This measure will result in significant additional revenue for the Government and will take effect on January 1 2020.” 

“Quite frankly, what we gained on the SPT, we lost with the change to capital allowance,” said Touchstone Exploration CEO, Paul Baay. 

Baay also said, “When we run the numbers over the next five years, it’s going to cost us about USD$5.4 million.” 

The Touchstone CEO also pointed to the fact that oil prices are projected to stay in the worse for onshore producers. Most projections point to the price staying around $60-$65 per barrel. 

Paul Baay has indicated that the impact of the changes means that they will be able to drill five fewer wells over the next five years. Baay has indicated that it costs approximately $1m to drill a well. He consistently argues that the SPT affects the cash flow of the company negatively and essentially makes it more difficult to drill and improve production. 

As a consequence, Baay has indicated that the company will focus on looking for natural gas opportunities since natural gas isn’t subject to the SPT. Touchstone Exploration recently drilled an onshore gas well in Trinidad, the Coho-1 well. 

The well has had positive results from the tests conducted on the well. According to a release from the company, the average natural gas rate was 17.5 MMCFD. 

Baay also indicated that, “the Coho-1 well is in the smallest prospect of the Ortoire exploration programme.” In the long run however, Baay has indicated that “for the first time in 10 years we are looking at allocating capital outside of Trinidad.” 

He pointed to other favourable fiscal regimes in Central and South America.