The Sun Doesn't Have to Set Yet on Trinidad and Tobago's Energy Industry

The importance of Trinidad and Tobago's "oil and gas industry cannot be understated. The industry has been the main driver of the country's social and economic development, accounting for an estimated 32% of... GPD." Not my words, but rather those of Stuart Young, Minister of Energy and Energy Industries, in his keynote address to the Energy Conference 2022 on June 1st 2022. He went on to state that, "Our hydrocarbons have provided us with much developmentally in the past decades since out independence and we must not allow ourselves to ignore or forget this".

Unfortunately, the importance of T&T's energy industry to the country's development has been ignored and forgotten in recent years. Although the current government came to power in 2015 warning that the "natural rates of decline and the absence of new [energy] discoveries are impacting on the major economic growth driver and our revenues" and promising "decisive action" to boost the energy industry (see page 13 of Colm Imbert's, Minister for Finance, Budget Statement 2016), it has presided over a significant fall in oil and gas production.

As the following charts show, gas production has fallen from 36 billion cubic feet in 2015 to just 24.7 billion cubic feet in 2021, and oil production has fallen from 79,000 barrels per day in 2015 to 60,000 barrels per day in 2021 (and by May 2022 to just 57,400 barrels per day).

A shrinking oil and gas industry is not only bad for the people who work in it, the people who work in the various downstream energy processing industries, and those who upon depend upon all those industries for their livelihoods, but also bad for the country as a whole. Although energy prices will likely be considerably higher in 2022 than they were during the last price peak in 2014*, the government's revenues from the energy industry will be significantly lower. As the chart below, taken from T&T's recent Spotlight on the Economy 2022 presentation, shows, total revenues from petroleum amounted to TT$19.4 billion in 2014, but are only predicted to reach TT$16.2 billion in 2022. Think what they would be if the government had actually managed to increase production since 2015 or even simply maintain it and what those additional revenues could be used for to the benefit of the people of T&T.

Moreover, the significant decline in the energy industry's real GDP (see the chart immediately below) has dragged the whole economy down with it. There hasn't been a whole year of economic growth in T&T since 2015 and GDP per person, on a constant basis, has shrunk by about 19% since then (see the second chart below). 

In other words, the decline in energy production since 2015 has led to reduced employment prospects, lower government revenues, a declining economy, and falling living standards. 

It doesn't have to be like this. As the T&T Guardian reported on August 7th 2020, it's thought that the country may still have as much as 5 billion barrels of oil and over 52 trillion cubic feet of gas still to find. 

Given all of that potential energy, one might wonder why, for example, bpTT (historically one of the largest gas producers in T&T) hasn't made more effort to drill for new gas (see the chart below) even as it's daily production has fallen from almost 2 billion bcf to about 1 billion bfc in just three years.

Unfortunately, the search for oil and gas is expensive and risky, especially now that the easy discoveries have been made. Now T&T must explore for energy in the more technically challenging deeper levels and deep-water areas. As Newsday reported on June 17th 2021, "out of approximately 100 exploration wells in the Columbus basin up to 2020, there are approximately 35 discoveries. These were mainly in the shallow water areas offshore, where prospecting for resources is relatively easier than in the deeper-water areas, which are more challenging. This success ratio gets lower based on the geological challenges as we step further away from land." 

Additionally, the decline in energy prices following the 2014 peak resulted in significantly lower annual global investment in oil and gas by energy companies encouraging those companies to prioritise the most appealing projects and to ignore the least. 

Energy companies have vast experience of managing expense and risk, so the presence of these factors alone doesn't explain the lack of exploration activity taking place in T&T. The problem is T&T's fiscal regime and, to a lesser extent, the ease with which companies can do business.

Simply put, the fiscal system discourages investment in the oil and gas industry because companies can't be satisfied that they will make sufficient profit to justify the expense and risk of exploration and production. The government has known this since October 2015, when Mr Imbert stated the following in the Budget Statement 2016 (also on page 13, see the hyperlink above): 

"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.

Unfortunately, by the time the Budget Statement 2017 came around almost a year later (by which time there had already been a significant fall in oil and gas production), Mr Imbert still hadn't put in place the "new and appropriate fiscal regime". He did, however, provide some more details, stating at page 18 of the Statement 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.


"In addition, the Government is working on the design of a special system of fiscal incentives for small and marginal fields and for secondary recovery, since it is estimated that there is as much as 3 billion barrels of so-called "stranded" oil in mature oilfields in Trinidad and Tobago, both onshore and offshore, that can be recovered with a suitably modified fiscal regime. Accordingly, we must do whatever we can to access this "stranded" oil."

Regrettably, nearly seven years after a "new and appropriate fiscal regime" was promised, T&T is still waiting for it and in the main the changes made to the fiscal regime over the past 7 years have only had the effect of reversing past investment incentives (you can read more about the repeated promises of reform made over the years in my previous blog article: Broken Promises - The Decline of Oil Production and Economic Growth in Trinidad and Tobago). 

In such circumstances, it's no wonder that energy production and government revenues from the industry have fallen: the government warned itself in 2015 that this would happen if it failed to act and so far it has failed to act.

Improving the ease with which energy companies can do business will also help draw in more investment. As The Energy Chamber of Trinidad and Tobago recently observed:

"Improving regulatory approval processes will reduce the time between the award of new acreage and first gas production.  This will significantly improve project economics and make new gas available faster.  A one-year reduction in the time taken to first gas has been calculated to create US$120 million in additional net present value for a typical Trinidad & Tobago medium-sized offshore gas field."

The ability to create an additional US$120 million in net present value will obviously
make any potential project more appealing to energy companies and thereby increase the prospect of such projects being entered into. 

Whilst T&T fails to amend its fiscal regime and improve the ease of doing business, other countries are taking such steps and reaping the consequent investment rewards. In addition to Guyana and Suriname, Africa is experiencing a significant oil and gas investment boom (see the chart below) and having the right polices has played an important role in achieving that.  

Whilst it will probably take at least five years to make major new finds and bring them into production, fiscal reform and any improvements in the ease of doing business will bring immediate rewards. When the Energy Chamber of Trinidad and Tobago made one of its frequent pleas for urgent changes to T&T's fiscal regime on October 6th 2021, it observed that reform would result in "some investment decisions being taken very quickly and new production being brought onstream". 

That is undoubtedly true. This state of the art, low carbon, US$200 million project, based on oil first discovered in 2013, which is capable of increasing oil production, from just the first of three planned off-shore platforms, by 7,000 barrels of oil per day is currently on hold, but could be producing in little over 12 months.

Obviously, if projects such as this and the others the Energy Chamber has in mind remain on hold, the government will receive no revenue from them. Expanding the size of the energy sector, even if it comes at the price of taking a smaller share of the profits generated, will still result in higher revenues for the government (it's better to have a slightly smaller share of a big and growing cake than a larger share of a small and shrinking cake) and more money to spend on the additional public services that T&T desperately needs.

2022 is likely to be the first year since 2015 in which T&T's economy grows. Whilst that, and the significant boost to the government's revenues, is something to be pleased about, it’s a consequence of the extraordinary high energy prices resulting from Russia's invasion of Ukraine. The country's energy industry is dying a slow death and if the government is to be in a position to sustainably provide decent public services to the people of T&T the industry must urgently be revived by the passing of appropriate measures in the forthcoming budget. Given the increasing amounts of money being spent on alternative energies (over US$800 billion in 2022) and the increased speed at which they are being rolled out, there may not be a tomorrow for the energy sector and the energy in the ground that's currently worth hundreds of billions of dollars will then be of little value.

* In 2014 the Henry Hub gas price averaged US$4.20 and it’s currently US$8.39 (having been as high as US$10.03 earlier in 2022). In 2014 the WTI oil price averaged US$93.10 and so far this year it’s averaged US$98.75.


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