Broken Promises - The Decline of Oil Production and Economic Growth in Trinidad and Tobago

As Keith Rowley, Prime Minister of Trinidad and Tobago (TT) since September 2015, finished his keynote speech to the Energy Chamber's 2022 Energy Conference last week a round of applause broke out from the assembled delegates. It was, however, swiftly followed by a wave of deja vu washing over the 738 conference goers.

Dr Rowley had, among other things, just told them that:

The proliferation of bid-rounds will increase the competition for capital in an energy market that is undergoing transition. While we are acknowledged as a proven hydrocarbon province with substantial unrealized potential, we need to maintain our competitiveness and resilience. This involves the lowering production costs, improving oil and gas production efficiency, an attractive fiscal regime and a more expeditious execution of the regulatory oversight.

To that end, the Ministry of Finance in collaboration with the Ministry of Energy and Energy Industries, is conducting a comprehensive review of our oil and gas taxation regime to ensure that Trinidad and Tobago remains an internationally competitive hydrocarbon province. The review encompasses capital allowances, petroleum profits tax, supplemental petroleum tax and royalty, both onshore and offshore, in shallow water and deep-water.

A combination of covid-19, low commodity prices and technical issues have setback levels of both oil and gas production. However, with the ease in the pandemic and new activity both oil and gas production are set to rise.

Since the Energy Chamber has long been campaigning for an "attractive fiscal regime" that will ensure TT is "an internationally competitive hydrocarbon province" where "both oil and gas production are set to rise", Dr Rowley's words were exactly what the audience was hoping to hear. 

Moreover, there can be little doubt that Dr Rowley was saying the right things. Colm Imbert, TT's Finance Minister since September 2015, is a very clever man with almost as many degrees as TT has Members of Parliament, including a Master's Degree, with distinction from the University of Aberdeen, in Oil and Gas Law with a specialisation in Fiscal Regimes and Oil Taxation. Mr Imbert has previously addressed the House of Representatives with the following:

This Government is committed to taking measures to reverse the decline in oil and gas production and to boost exploration activity.

Accordingly, in the shortest time possible, after consultation with the industry, we will introduce a new and appropriate fiscal regime designed to encourage further exploration in fields on land, and in shallow and deep water acreage. We cannot sit idly by and allow production to decline and revenues to fall, and in finding a solution to the difficulties that we now face as a country, we must all work together.

We have already received a request to re-examine the current levels of Supplementary Petroleum Tax (SPT), and to create better incentives for production from small and medium–sized fields, which we are carefully considering, with the assistance of energy experts.

Madam Speaker, the energy sector has always been the main driver of economic growth in this country contributing on the average approximately 40.0 percent of GDP.

Unless oil and gas prices and output recover dramatically, projections show that our real GDP growth will continue to be no more than 1.0 - 1.4 percent per year. 

There is nothing in those comments that would displease the people assembled in last week's conference hall, but what gave to rise to the collective feeling of deja vu is that Mr Imbert made those comments in his October 5th 2015 Budget Statement. 

Between October 5th 2015 and last week, similar comments were made by ministers on numerous occasions, including the following:

• In early 2016, Nicole Olivierre told the 2016 Energy Conference that TT faced an unabated decline in oil and gas reserves and production, and that action was needed to halt the downward trend. She emphasised the need to reinvigorate the energy industry to accelerate production.
• On September 30th 2016, in his Budget Statement, Mr Imbert said the "stark reality is that the energy sector will continue to be the driver our economy for at least the next decade. Thus it is important that we fully exploit these natural endowments." Importantly, he observed that "the supplementary petroleum tax (SPT) is viewed as a serious disincentive to small and medium sized producers. For traditional fields, SPT kicks in at US$50 a barrel and companies have complained that it is unprofitable to produce oil at US$51, as compared to US$49, since the SPT is charged on gross income, rather than on profits, causing an immediate 18 percent charge on incremental income from the time the price of oil crosses US$50. This conundrum is being actively examined by the Government of Trinidad and Tobago, with technical assistance from experts engaged by the IMF." He went on to explain that the IMF had, free of charge, advised on changes to the fiscal system that would both promote investment and ensure that the government received a substantial share of the profits. With those aims in mind, he explained that "Essentially, the IMF has recommended a moderate fixed rate royalty in the order of 10–12 percent to ensure a minimum income stream, a cashflow tax that replaces the existing SPT, and a reformed petroleum profits tax (PPT), where the PPT rate is reduced and harmonised across projects and capital allowances are streamlined."
• On January 18th 2017, Mr Imbert was reported as saying "We will to change the way in which our oil and gas fiscal regime works so that we would achieve two objectives - motivate investor companies to get involved in exploration and development, while we maximize our return from the petroleum sector."
• On October 2nd 2017, in his Budget Statement, Mr Imbert stated that "with the decline in oil and gas production, it is imperative that the oil and gas producing industry be incentivized to maintain exploration activity in key petroleum provinces, including shallow water and new fields in deep water areas. Such an activity would require significant capital investment by international oil companies. In pursuing foreign direct investment, Trinidad and Tobago must compete with investment opportunities in other countries to attract a share of the limited exploration and development funds available." He continued with "the oil and gas fiscal regimes must incorporate a balance among the objectives of providing terms attractive for investment while securing for the country a substantial share of the value of the petroleum resources."
• On February 3rd 2020, addressing the 2020 Energy Conference, Dr Rowley observed that "There have been challenges with respect to oil and gas production. A lack of investment by upstream companies has been a major factor in the decline in production particularly of natural gas from levels achieved in 2009/2010."
• On October 5th 2020, in his Budget Statement, Mr Imbert stated that "We are keenly focused on improving the investment climate in the energy sector through a review of the Petroleum Taxes Act with a view to simplifying the existing oil and gas fiscal regime and making it more competitive to investors." He also predicted that crude oil and condensate production would reach 80,000 barrels per day in 2022 (it is current around about 61,700 barrels per day). 
• In June 2021, Stuart Young, shortly after his appointment as Minister of Energy, told the 2021 Energy Conference that his focus was on bringing oil and gas resources to market as quickly as possible and that he needed to review fiscal terms before embarking on the next bid rounds.
• On October 4th 2021, in his Budget Statement, Mr Imbert stated that "For some time now, we have been advised that we should review our energy taxation regime to remain competitive, especially because of recent significant oil finds in neighbouring countries. It goes with saying that “discovering, developing, exploiting, and decommissioning” an oil or gas field can cost hundreds of millions of dollars and take decades. Oilfields are unique and expensive investments, therefore. Furthermore, the costs involved in developing an oil or gas field are largely incurred at the beginning of the project, before the earning of any income, and are thus sunk costs. These facts are central to the development of tax policy in the energy sector since at the beginning of an oil or gas field development project, there is significant uncertainty as to the outcome, i.e., no guarantee that oil or gas will be found in commercially viable quantities. If investors believe that the balance between risk and reward is unfavourable, i.e., that the taxation regime is skewed in favour of the Government, not “fair” or not economically feasible, or that the Government may capriciously reverse incentives and eliminate tax concessions, they will simply not participate. In that context, in collaboration with the Ministry of Energy and Energy Industries, the Ministry of Finance will very shortly conduct a comprehensive review of our oil and gas taxation regime to ensure that Trinidad and Tobago remains an internationally competitive hydrocarbon province. We intend to review the appropriateness in today’s environment of our three main petroleum taxes, namely Petroleum Profits Tax (also known as Corporation Tax in this Sector), Supplemental Petroleum Tax and Royalty, both onshore and offshore, in the deep water and shallow water, and for large and small producers. We shall also examine the relevance of the existing suite of fiscal incentives, licensing regimes and production sharing contracts, in terms of providing sufficient motivation for oil and gas companies to bid for blocks and engage in exploration and production, while at the same time ensuring that the citizens of Trinidad get their fair share of revenues from our natural resources. Simply put, oil or gas in the ground is of little practical use to anyone. It must be produced and sold profitably, and the profits derived from its sale shared equitably, to have any intrinsic value." Notwithstanding the Minister of Energy's recent comment that he was not surprised at the lack of interest in the Deep Water Bid Round, Mr Imbert also stated that "We are accordingly deeply hopeful that the next rounds of bids in 2022 will attract significant investor interest on land, in shallow water marine areas and our deep-water marine areas".
• Shortly after the budget, Mr Imbert was reported as stating that the fiscal review announced in the budget would take place "expeditiously". 
• On December 10th 2021 Mr Young stated in the House of Representatives (at page 51) that "With respect to the fiscal terms, Trinidad and Tobago is very aware that we have to stay competitive globally. We have to attract that global money, that global expenditure by the big multinational oil companies to Trinidad and Tobago, and that is exactly what we are doing. We are working with the Ministry of Finance to look at and reform the fiscal terms on the oil side. We will be coming with an SPT fiscal regime that will be reformed. I have already told the Minister of Finance; he has agreed. We are looking at it now and they are working the numbers to be able to do that. That will assist us in staying competitive."

The intricacies of fiscal systems are highly technical and can appear to be boring. As a consequence they are of little interest to most people. However, they are incredibly important. As Mr Imbert observed in September 2015, TT's economic growth (and with it the wellbeing of TT's people) is dependant on increasing energy production from its historic lows. Whilst the government has spent almost seven years promising to reform the fiscal system so as to encourage investment to boost energy production and reserves and thereby drive economic growth/government revenue for the benefit of the people of TT, it has unfortunately broken those promises. Rather than deliver the promised fiscal reform, year after year it says that it will happen after the next review.

The consequences of those broken promises are shown in the IMF charts below: oil and gas production has significantly decreased since 2015; that fall in production has led, as predicted by Mr Imbert in September 2015, to TT's record of economic growth being poor (the economy is smaller now than it was in 2015); and government revenues from the energy sector are lower than they were in 2015. 

This decline in energy production, the poor record of economic growth and the energy revenues lost to the government by the fall in production were avoidable. Worse, the government has known since 2015 what needed to be done to prevent this economic disaster and to ensure that the people of TT were not deprived of the full benefit of the country's rich energy resources. 

Oil and gas prices are presently flying high and it's possible they may remain so for some time. If reform had taken in place six or seven years ago as promised in Mr Imbert's first budget, TT's energy production would now be much higher and the full reward of high prices would be being reaped. However, it's not too late to act and important that the government now urgently does so. High energy prices encourage investment by energy companies. If TT wants to grab a share of that investment (which will not last for long - as soon as energy prices start to fall it will shrink) it must act without delay.

In June 2021 the Energy Chamber stated that there was an urgent need for changes to TT's fiscal regime. That urgency has only grown in the past year. Rather than politely applaud Dr Rowley for repeating his still unfulfilled promises from 2015, the Energy Chamber should put into the public domain the report into Fiscal Reform prepared last year by its Fiscal Reform Task Force. It should also publish, or urgently obtain if it has not already done so, any economic analysis showing the detrimental effect to economic growth that the lack of reform has caused and the economic benefits that will be brought about by its implementation.