Doomed to Disappoint - Trinidad's Deep Water Bid Round

On December 3rd 2021 Trinidad and Tobago's Energy Minister, Stuart Young, launched the country's Deep Water Competitive Bid Round offering 17 deep water blocks off the northern and eastern coasts. 

The round was launched as part of the government's commitment to increasing hydrocarbon production and hopes were then high that the the round would be a success, with Mr Young noting that, "We have opened our data room in July and so far 12 companies have accessed it".

Unfortunately, there was disappointment on June 2nd 2022 when bidding closed and it was revealed that bids had been received for just four blocks. Whilst Mr Young claimed not to be surprised by the poor response to the bid round, this disappointing result was the consequence of the government's repeated failure to improve the fiscal environment in which energy companies operate; a measure that the government has repeatedly said is necessary if energy production is to increase. 

In June 2021, soon after his appointment, Mr Young attended the annual Trinidad and Tobago Energy Conference where he told the energy industry that his focus was on bringing oil and gas resources to market as quickly as possible. He went on to acknowledge "that he needed to review fiscal terms before embarking on the next bid rounds and asked that the Energy Chamber provide the Ministry with their views on the issues."

Following that acknowledgement, 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 energy industry had been led to believe that the reformed fiscal regime would be announced in May's mid-year budget review. Regrettably no such announcement was made and that perhaps explains why, especially given that Mr Young himself had acknowledged that success was dependent upon fiscal reform, ten of the 12 companies who accessed the Deep Water data room did not go on to make bids and the outcome was so disappointing. 

The government of Keith Rowley came to power in 2015 promising to halt the downward trend of energy production and acknowledging that fiscal reform was required in order to achieve that. The Supplementary Petroleum Tax (SPT) is especially problematic. As the Oxford Business Group explained in 2016:

"The SPT was originally introduced as a windfall tax kicking in when oil prices reached $50 a barrel or higher. As a result of inflation over the years, together with oil market changes, $50 a barrel is no longer seen as exceptionally high price level. Since the SPT is levied on revenue, not profit, it is seen as particularly onerous. Companies say at prices of under $40 a barrel (as experienced during early 2016) they have difficulty operating profitably. Things begin to improve as prices rise above $40, but in the $50-60 range the extra tax burden of the SPT kicks in and pushes them into a “poverty trap” from which they cannot escape until prices move up beyond the $60 a barrel mark. This creates significant uncertainty over the financial consequences of the eventual oil market recovery. A recovery which sees prices hovering consistently around the $50-60 range would intensify the negative poverty trap effect. For this reason the Energy Chamber of Trinidad and Tobago, which represents companies active in the sector, has been suggesting potential amendments to SPT. One solution might be to taper the tax rate, so that the poverty trap effect is reduced."

To put that in other words, energy companies struggle to make a profit from their operations in Trinidad and Tobago when, as it often has been, the price of oil is between $50 and $60. As a consequence, they are reluctant to invest the enormous sums of money required to explore and bring into production new oil. The effect is striking: in 2007 the country's oil production was 121,000 barrels of oil per day, in 2015 (when the government came to power with a commitment to increase production) it was 78,000 barrels, and today it's between 59,000 and 60,000 barrels. The fall in production since 2015 alone means that in just 2022 Trinidad and Tobago has lost over US$650 in oil sales. 

That significant and unnecessarily prolonged decline in production has deprived the people of Trinidad and Tobago of billions of dollars of oil revenue and goes a long way to explaining the country's poor record of economic growth in recent years. 

Appallingly, it is a situation that was avoidable and one that need not continue for any longer. The government must merely do what it has been promising to do since it was elected in 2015 and reform the fiscal system (the Energy Chamber has long proposed some sensible measures that will improve the system so that investment is attracted, rather than cause the country to lose out). The  success of the 2022 Onshore Bid Round, which launches in June, and the country's future prosperity depends upon it. 

The government knows what it needs to do, now for the sake of Trinidad and Tobago it must act.