Article originally published by Upstream Online on February 11th, 2019 by Kathrine Schmidt
Trinidad & Tobago players pushing for tax reforms:
Companies call for government to change levy on oil output to help to boost competition
Oil players in Trinidad & Tobago are urging changes to the government’s supplemental petroleum tax on oil production, which they say in its current form discourages investment and inhibits oil exploration.
Multiple attendees at the Trinidad & Tobago Energy Conference last week expressed concern about the issue and specifically in regard to Heritage Petroleum, which late last year was spun out to handle the upstream assets of previous state oil company Petrotrin.
“What is of undoubted importance to Trinidad & Tobago is making a success of the new upstream-focused Heritage Petroleum,” said Eugene Tiah, chairman of Trinidad & Tobago’s Energy Chamber and executive chairman of Massy Group's Energy & Industrial Gases division.
"Without the right institutional structures and policy environment it is going to be difficult to attract the necessary private capital that will be crucial to the success of Heritage and the oil sector more widely.
“One of the key inhibiting factors is the current structure of supplemental petroleum taxation, which severely inhibits competitiveness of the Trinidad oil sector.”
Under the current fiscal regime, Supplemental Petroleum Tax (SPT) kicks in when oil prices hit $50.
When introduced it was aimed at placing a higher government take on then-thriving oil production, with lower rates on gas designed to act as an incentive to help boost activity.
The scenario has now reversed. Gas output is rising, rebounding to 3.6 billion cubic feet per day in 2018 and expected to climb to 3.9 Bcfd in 2019 and stabilise at around 4 Bcfd over the 2020 to 2023 period.
By contrast, oil output has fallen to a multi-year low of about 66,000 bpd.
Part of the problem lies in what happens when oil prices hover between US$50 and US$60 — territory where the commodity has spent a lot of time recently.
"Oil companies in Trinidad & Tobago are in a negative cash flow situation when prices are in the low (US$50s), only returning to positive cash flows when prices are in the (US$60) region," the chamber wrote in an op-ed that ran in T&T's Guardian late last year.
"Because companies are running scenarios on (US$50) oil before making investment decisions, addressing the issue of how SPT is calculated and payable, is crucial to attracting investment into the traditional oil sector."
Neither Prime Minister Keith Rowley nor Energy Minister Franklin Khan explicitly mentioned SPT but Rowley did express willingness to work together on improving output.
“We need to expand the level of collaboration to maximise the level of hydrocarbon output,” he said.
Paul Baay, chief executive at T&T-focused independent Touchstone Exploration, said that while tax incentives had been successful in encouraging gas production, the oil sector was having a harder time with fewer wells being drilled and output down.
“One of the benefits that we have this year is Heritage, now broken out from Petrotrin, is actually going to have to pay that tax as opposed to just accrue it,” he explained.
“I think we have a much better ally now with Heritage on this particular issue. It’s going to give us an opportunity.”
He explained how the SPT plays out from the point of view of his company, which works to revitalise onshore fields. Last year, he said, the company had some US$11 million in cash flow.
“We make almost that same amount again with oil roughly at US$47.60. The minute you cross over to US$50 and the SPT kicks in, our actual cash flow drops to US$5 million. It actually gets cut more than in half.”
As an onshore producer, Baay sees his company as “lucky” because his company pays out some 18% in taxes.
That take rises as high as 33% when it comes to offshore operations.
“When you look at a company like Heritage that’s going to have to grow that offshore production, if they have a burden of a 30% SPT tax they really just don’t stand a chance,” Baay continued.
“Whether it’s an increase in deductibility or changing of the tax, something’s got to give at some point if we want to meet that objective of growing production.”
Kevin Ramnarine, who served as Trinidad & Tobago's energy minister from 2011 to 2015, has also been outspoken on the SPT issue.
His administration offered its own incentives to grow production, measures he acknowledges confronted their share of criticism.
“If we reduce taxation, we get a big positive effect in more activity... which means you grow the pie, so in the end the government gets more tax because you have a larger pie,” he told Upstream on the sidelines of the conference.
However, in other areas, the government has shown signs of tightening up the fiscal regime.
The government has been trying to make up ground after the drastic decline in commodity prices earlier this decade hurt the country’s economy significantly.
Revenues from petroleum fell 90% from over TT$19 billion (US$2.8 billion) in 2014 to less than TT$2 billion in 2016, Upstream previously reported.
In two examples, the government has both pushed for re-negotiation with majors for contracts in Atlantic LNG, as well as employing a 12.5% royalty in model production-sharing contracts to be used in the country’s upcoming shallow-water bid round.
The decision to implement the royalty is in keeping with the government’s “philosophy that the state must be assured a steady stream of revenue,” Khan said.
The process has so far attracted "strong interest by the major upstream companies".
Ramnarine, however, expressed concern that those terms may be “very difficult” for companies, with the process potentially struggling to attract new players other than those already working in the country.
“I think that attractiveness of investment is under threat and I think that’s something all governments have to constantly be fine-tuning,” he said.
“Because capital is not obligated to come to any country.”