Thursday 21st April 2005


Tax regime may scare off investors

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On March 11, bpTT announced its plans to sell their Teak, Samaan and Poui (TSP) assets. Exactly one month later on April 11, Venture Production plc, the Aberdeen-based oil and gas production company released their preliminary results for 2004 and included in their report a public statement that they are in the process of withdrawing from T&T.

Venture Production explicitly pointed to the Government’s inability to implement the anticipated fiscal reform package as a primary reason for this strategic decision stating that “this anticipated fiscal reform did not materialise during 2004, which… prompted the company to conduct the recently completed strategic review of its operations in that country.”

Publicly, bpTT has clearly stated that the primary reason for its sale of TSP was the fact that these assets had to compete for investment capital with very profitable assets elsewhere and that under these circumstances bpTT were unable to put in the sort of investments needed to squeeze the most out of these aging reservoirs.

While bpTT has made no public statement on this matter, it would be interesting to know to what extent the current and proposed fiscal regime for oil production influenced the bpTT decision to sell.

In his presentation to TTPC 2005, Peter Inglefield, managing partner of PriceWaterhouseCoopers and an expert on T&T taxation, suggested that the total government take from oil and gas production was above global averages. For oil production, the government tax take was in excess of 80 per cent and in excess of 60 per cent for gas production.

Overall taxation of oil and gas production is budgeted to contribute $9.0 billion, or 45 per cent of total revenue for the 2004-5 fiscal year, up from $6.5 billion (38 per cent of total revenue) in 2003-4. This does not include the very significant corporate tax revenue collected from the downstream plants and Atlantic LNG nor the taxes paid by companies who service the energy sector

The Government’s stated policy is to ensure that we have a fiscal regime that balances both the need to continue to attract new investment and, in the words of Conrad Enill, “the receipt on a long-run basis of a reasonable share of the economic rent from the commercialisation of our energy resources” (speaking at TTPC 2005).

It is clear that the Government does not consider the amount of revenue currently being enjoyed to be a “reasonable share” and that it is committed to increasing its take, especially from gas production.

The clear danger, however, is that the current taxation regime for oil production, especially with the recent tightening up on a number of “anomalies,” simply makes investment in marginal fields unprofitable. This has certainly been the case in the independent sector on-shore where the level of investment has plummeted, despite record high oil prices.

While TSP continue to represent a significant asset, with estimates of some 50 to 60 million barrels of recoverable oil, questions need to be asked about whether the fiscal regime is conducive to encouraging renewed activity and investment in the fields.

It would be interesting to know what impact the recently announced changes to the taxation regime have had on the economic models being run by the potential investors in TSP.

While the Government has characterised these as minor fixes to a few “anomalies” they could have large potential impacts on the investment profile.

The continued uncertainty over the fiscal regime for gas production adds an element of uncertainty and risk to the whole investment climate in the petroleum production sector. It remains unclear how the efforts to totally separate oil and gas taxation will actually work, especially in fields producing both hydro-carbons.

These elements of uncertainty could have serious impacts on the desire of some investors to make a strong commitment to T&T.

It is important to note that marginality of a field is not merely a function of size —though this is a crucially important variable—but the costs associated with investing in and managing the asset.

Older fields with decreasing production profiles, such as TSP, require higher levels of on-going maintenance, and hence higher costs per barrel, in order to keep on producing oil. This is why smaller, younger companies, with lower fixed operating costs, have moved into the mature provinces such as the North Sea, as the majors have departed as noted by Bruce Dingwall, the founder of Venture and former president of the UK Offshore Operators Association in his presentation to TTPC 2005.

The arrival of new companies into the North Sea has sparked new activity and reversals in production declines from marginal fields.

In T&T the current regime offers few incentives to drill new wells or work-over old ones, especially in marginal fields, but this activity is crucial if production is to be increased.

In other mature provinces specific incentives are included in the fiscal regime in order to stimulate investment and renewed activity. Similar incentives are urgently required in T&T especially if Eric Williams is to see his long held desire for a deep exploration programme on-shore actually bear fruit.

In his budget presentation Prime Minister Patrick Manning specifically stated his Government’s commitment to the traditional oil production sector, but made no specific mentions of any measures being introduced to reverse the production declines.

With the Government’s eye on increasing its take from new gas developments and fixing anomalies in the oil taxation regime, the STCIC sincerely hopes that they do not miss a narrowing window of opportunity to stimulate investment in traditional oil.

Without decisive action in this area we are likely to see more companies exit T&T’s oil production business. We wait to see who will take their place and whether these changes will be in the best interest of T&T Inc.


The President of the STCIC, Dr Jim Lee Young, is the general manager of Venture Production (Trinidad & Tobago) Ltd. Given the potential conflict of interest, Dr Lee Young has neither commented on nor contributed to this article— Dr Thackwray Driver, CEO, STCIC.




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