If Trinidad and Tobago is going to make a success of the newly formed state oil company, Heritage Petroleum (Heritage), the Minister of Finance is going to have to follow through on his previous commitments to review the way in which Supplemental Petroleum Tax (SPT) is structured. The current way in which this tax against revenue is structured acts as a serious impediment to investment in the oil sector.
Any international investors looking at the possibility of investing in oil production in Trinidad who runs a financial model on US$50 per barrel of oil may well conclude that it is not a good jurisdiction in which to place capital. This is because the SPT kicks in at its full amount as soon as prices average above that level in a quarter and this seriously constrains the cash flow of any oil company when prices are in that range. It is a crazy situation when the oil companies have better cash flows when prices average under US$50 per barrel rather than when they are in the $50-60 range.
This is a serious problem and one that needs to be resolved quickly. As our existing oil sector investors make it clear, Trinidad and Tobago has a lot going for it as an investment destination, not least the fact that there is significant oil still to be produced. But, if the SPT issue is not addressed, we will not be able to attract the much needed capital investment needed to make a success of Heritage or indeed the other players in the oil industry.
The contracting and service company sector in south Trinidad is under considerable strain since the closure of the refinery. Many of our member companies lost significant business when the refinery closed and they have been struggling to stay in business. One of the promises held out to the country when the government took the tough, but ultimately correct, decision to get out of the refining business was that the new streamlined, upstream-focused Heritage Petroleum would create significant new business opportunities as it pursued new drilling programmes and upgraded its production infrastructure.
The current way in which SPT is administered has the potential to hamper the ability of Heritage to follow through on this promise.
While we fully understand the Minister of Finance’s dilemma and his need to maximise revenue, his current apparent unwillingness to reform the way in which the tax is administered is undermining the long-term viability of the industry. A failure to reform the SPT will, in the medium term, lead to further tax revenue erosion as oil production continues to decline. The long-term future of oil is uncertain and if we do not act quickly, there is a very real danger that we will leave unexploited oil in the ground in the not-too-distant future.
The International Monetary Fund (IMF) technical team that the Minister of Finance brought in to review the fiscal regime in 2015 and 2016 clearly highlighted the problems created by SPT and advocated reforms to the system. The Energy Chamber of Trinidad and Tobago urges the Minister of Finance to listen to the technical advice and revise the tax.