The last few days have seen a flurry of positive developments in the Trinidad & Tobago energy sector: the Trinidad & Tobago and Venezuelan government agreement on the development of the Dragon gas field, the agreement of production sharing contracts for a Shell/bp consortium to explore three deepwater blocks, the NGC – Shell Manatee field offtake contract for domestic gas, the visit from Marubeni and discussions with the Minister of Energy on power, hydrogen and wind, and the recommitment of Hydrogen de France to invest in hydrogen production in Trinidad and the upcoming visit of senior executives from the company.
There was also news that bpTT and Shell executives had special meetings with the Board of Directors of NGC, their discussions centered around long-term gas supply, strategies for decarbonisation of the energy and industrial sectors, and mechanisms to help transition the energy value chain to a low-carbon future. All of this is positive news for the future of the Trinidad & Tobago energy sector and they all relate to elements of the Energy Chamber’s six-point plan to secure the future of our gas industry and future exports of gas and petrochemicals.
We’ve also had news of the Cascadura field coming onstream, the completion of the bp Trinidad Offshore Pipeline Replacement (TOPR) project and the application for environmental clearance for the Manatee field. When the industry came together on 20th September for our Upstream Operators Forum, we heard detailed plans and updates from nine different operator companies. Across the industry there are wells being drilled, platforms being constructed, pipelines being installed, equipment being maintained, and facilities being upgraded.
These are all positive developments, but the reality is that we still need more investment, more exploration, more development wells being drilled, and more facilities being upgraded if we are to return gas production to the levels we saw a decade ago and to stop (and hopefully turn around) the slide in oil production. And we need to do all of this at speed. Oil and gas reservoirs have a natural decline in production over time, so with every day wasted we drift further from our target to increase oil and gas production.
Our eyes are now firmly on the national budget due on Monday 2nd October.
The item in our six-point plan that we will be especially looking out for in the national budget obviously relates to changes in oil and gas taxation. The budget last year included a significant change to Supplemental Petroleum Tax (SPT), which was very much welcomed by the industry. This year we will be looking for further changes, something which the Prime Minister signaled was under consideration at his press conference after the Cabinet retreat.
SPT was originally designed as a windfall tax, but with inflation over the years, the US$ 50 per barrel rate at which it kicks in is clearly no longer a windfall rate. Today it would be considered a low oil price. The changes introduced last year saw revised SPT rates being introduced for production from new wells to incentivize new drilling. We also saw the indefinite extension of a higher US$ 75 per barrel threshold for smaller onshore oil producers, which had previously been introduced as a temporary measure. These changes were welcomed by the industry and they helped encourage the positive response to the Onshore Bid Round.
But further changes are required if we really are to give the upstream sector the boost it needs. We need to find a system where the revised SPT terms can be applied not just to oil from new wells, but also to all new incremental production from investments in existing wells, for example from workovers or other improvements in production facilities. SPT related directly to liquids production and while this can help in the economics of gas fields that also deliver condensate, we also need measures that specifically help the economics of gas developments, especially from small fields.
One mechanism to do this would be to create a variable royalty rate, which recognizes that small fields with lower levels of production do not have the same economics as large fields. There are also changes to the structure of profit taxes that could really help to incentivize new investments.
There have been some incentives introduced for Carbon Capture and Sequestration projects, but the upper threshold of these mean that they are not going to realistically encourage investments in this expensive undertaking. Other measures to encourage this are going to have to be developed.
Fiscal reform alone is not going to deliver increased production, and this is just one element in our overall six-point plan. There are other policy items that we are going to be looking out for in the budget speech, including the electricity rate review, the long awaited feed-in tariff policy, public sector reform (remembering that delivering projects faster significantly helps economics) and the development of new sectors taking advantage of the need to decarbonize, for example the development of the hydrogen economy and methanol as a low carbon marine fuel. Like many other companies, our members would most certainly welcome commitment on the timely repayment of VAT refunds, and it would be good to have updates on the previously announced liberalization of the fuel retail market.
But a national budget is first and foremost about the government’s plans for taxation and spending, so our main focus next week will be fiscal reform. We know that the government has been working hard on assessing possible reforms and we anxiously await the announcements next week.