Urgent government action is required to halt the current significant decline in activity in the Trinidad and Tobago oil sector and the knock-on impact that this is having on both crude oil production and the energy service industry, the major generator of employment in the sector. Since September 2015, the government has been promising a consultation process to discuss energy sector taxation and other issues facing the industry, but to date, no such consultation has taken place and there is no clear signal being provided of when or how this will occur.
The Energy Chamber is aware that the International Monetary Fund has been asked to review Trinidad and Tobago’s oil and gas sector taxation measures and we met with the International Monetary Fund team when they were in country in April 2016. It is unclear, however, how this process with the IMF will unfold and if there are any target dates for definite decisions about reforms to the fiscal and regulatory regime for the industry.
While the uncertainty about the policy direction persists and prices remain depressed, the oil industry is facing a very uncertain future. Data collected by the Energy Chamber shows that production from the smaller independent oil companies declined by 12% in Q1 2016, compared to a 2015 average, and drilling activity levels in the sub-sector are now less than one third of their levels prior to the oil price collapse.
These declines in activity and production have very serious implications for economic activity in south Trinidad, the state-owned oil company, Petrotrin, and the country’s macro-economic position. The traditional onshore oil sector is a major driver of economic activity, especially in rural south Trinidad. The industry employs hundreds of small contractors and service companies and there are thousands of jobs in support industries, such as transport, that are reliant on the sector. Many of our member companies have reported that they are cutting employees in an effort to remain in business.
Falling domestic production has serious implications for Petrotrin, who are forced to buy more crude on the international markets to keep the Pointe-à-Pierre refinery running near capacity. This in turn has implications for Trinidad and Tobago’s balance of payments as the country needs to allocate more US dollars to the purchase of crude oil on international markets.
The structure of the fiscal system for the oil sector means that many oil companies are currently in a negative cash flow situation, as they are forced to pay royalties on production even when they are suffering losses. The structure of the supplemental petroleum tax, which kicks in when prices reach US$50 per barrel, also acts as a disincentive for any investments, as companies are likely to be in a negative cash flow situation if, and when, prices rise above US$50. If companies will be losing more money on each barrel that they produce, they are certainly not going to invest in additional production.
While the Minister of Finance has repeatedly indicated that he is aware of this problem and will take action to reform the supplemental petroleum tax, to date there has been no definitive word on how or when this will take place. The industry needs urgent action from the government now, not just promises of future action at some unspecified date.