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Trinidad & Tobago Guardian Online

Energy companies seek increased allowances in 2013 budget

Published: 
Thursday, July 26, 2012
Energy Minister Kevin Ramnarine (standing right) addresses members of the Energy Chamber of Trinidad and Tobago and representatives of oil and gas companies at the first of his ministry's budget consultations

 

The Energy Chamber of Trinidad and Tobago is seeking increased capital allowances, increased supplemental petroleum tax (SPT) allowances, group tax relief, exploration incentives, the elimination of Value Added Tax on oilfield equipment, and more from the 2012/2013 national budget. In its “Submission to the Minister of Energy and Energy Affairs” for the national budget 2012/2013, the Energy Chamber offered “summary recommendations” from the upstream oil and gas industry. The recommendations were made at the first of two consultations between the Energy Chamber and the ministry at the latter’s head office on the Port-of-Spain waterfront. The first consultation was held with Energy Chamber President and Tucker Energy Services managing director Roger Packer, Energy Chamber Chief Executive Officer Thackwray Driver, representatives of BP, BG, BHP Billiton, Repsol, Petrotrin, the National Gas Company, Bayfield Energy and others. The second consultation takes place with downstream operators next week.

 

“The key to a successful hydrocarbon- driven economy is to ensure alignment between investors (oil and gas companies) and the Government,” the document presented to Energy Minister Kevin Ramnarine said. “Currently Trinidad and Tobago’s fiscal terms are ranked as very uncompetitive by the major international consulting firms: Wood McKenzie ranks Trinidad and Tobago’s fiscal attractiveness as 99th out of 103 jurisdictions. “Trinidad and Tobago has experienced long-term declines in oil production and from mid-2011 onwards has experienced significant curtailments in gas production, leading to declines in LNG and petrochemical production and significant lost Government revenue. Significant long-term investment is required to increase oil and gas production. The current investment climate in T&T does not give potential investors adequate returns from capital invested in new fields or in enhancing production from existing fields. This situation is exacerbated by the tight global capital markets,” the chamber said.

 

“The Government of Trinidad and Tobago is in the fortunate position of being able to reverse this situation with some relatively straightforward changes to the current fiscal regime. It is widely accepted that Trinidad and Tobago holds sizeable undiscovered resources of both oil and gas. Much of the remaining potential lies in smaller pools (10-50 million barrels of oil/100-500 billion cubic feet of gas) that do not meet with the return profiles requested by investors.” The Energy Chamber said its “suggested amendments” are based on “ensuring that fiscal incentives are provided to those companies who make additional investments, rather than decreasing the tax take for companies who do not invest in new production. Focusing amendments on capital allowances ensures that those companies investing in new production receive a lower effective tax rate than those not investing.” The chamber recommended that government increase capital allowances by 5 per cent. At present, on tangible costs, oil and gas companies enjoy an initial allowance of 20 per cent and annual allowances of 20 per cent, and the chamber is proposing an initial allowance of 20 per cent and an increase in the annual allowance to 25 per cent.

 

On intangible costs, energy companies enjoy an initial allowance of 10 per cent and annual allowances of 20 per cent and the chamber is proposing an initial allowance of 20 per cent and annual allowances of 25 per cent. The chamber’s second recommendation is that government “increase SPT allowances for small/mature marine fields to 100 per cent of capex (capital expenditure) and allow unutilised allowances to be rolled-forward for use in future years.” At present, the investment incentive for “mature/small marine fields” is 20 per cent of capital expenditure against SPT in the year incurred” and the chamber is asking for an “investment incentive of 100 per cent of capes against SPT in year incurred, and allow incentive to be rolled forward for future years for eligible fields. Eligible fields would have an approved development plan, be under 50 million barrels and projected production under 10,000 barrels per day.”

 

The chamber’s third recommendation to government is that “if investment incentives are not included, revise Supplemental Petroleum Tax (SPT) rates...to create uniformity and equity across the various licence regimes and sufficient incentives to bring new small fields (under 50 million barrels [of] recoverable reserves) into production.” Fourth, the chamber said: “Currently taxation is ring-fenced by each entity. Allowing group tax relief would enable more rapid recovery of costs for those oil companies with profits elsewhere within their group.” Fifth, the chamber asked government to “incentivise exploration by introduction of cash refunds at marginal tax rate” as it is done in Norway. “Trinidad and Tobago should examine the Norwegian system which incentivises new exploration by allowing all exploration costs to be expensed and provides cash refunds for companies that are in a loss position up to the value of the marginal tax rate (of) 78 per cent. The introduction of the cash refund has meant that banks have been willing to provide significant debt financing for exploration activities.”

 

Ease of doing business

The chamber also suggested some fiscal measures for the “ease of doing business.” In the national budget 2011-2012, Government removed VAT from a limited number of items of major equipment to service the oil and gas sector. “This has been a positive development that has helped to reduce costs and administrative delay, especially in new drilling programs,” the chamber said. “However, the vast majority of service companies who bring in these items of equipment are foreign-owned contractors who employ few nationals and who typically do not build long-term sustainable businesses in Trinidad and Tobago.” Smaller local contractors continue to pay VAT when they import equipment into Trinidad and Tobago and also have to pay VAT on spare parts imported for their equipment, the chamber said.

 

“Companies are able to reclaim this VAT over time, but paying the upfront VAT costs puts a strain on cash flows. The high mobilization costs associated with the industry mean that these costs often come back at the exact point when cash flow is tightest for contractors. Removing VAT from all imported items of equipment will have no overall negative impact on Government, but will help local businesses grow and develop. The Energy Chamber therefore recommends that the Government of Trinidad and Tobago” apply “zero rate VAT on all items of oilfield equipment and marine vessels imported by Trinidad and Tobago VAT registered companies” and “implement the ATA Carnet system to facilitate movement of equipment into and out of Trinidad and Tobago.”

 

The ATA Carnet is an international customs document that allows the holder to temporarily (up to one year) import goods without payment of normally applicable duties and taxes, including value-added taxes. The chamber also recommended that government introduce fiscal measures to encourage the sustainable development of local companies by offering “additional tax allowance uplift for services procured from Trinidad and Tobago-owned and operated companies, and for equipment manufactured within Trinidad and Tobago. The allowance would not apply to equipment sales made through T&T agents.”

 

Oil price for the budget

At the start of the meeting, the Guardian asked the Energy Minister for the oil price on which the 2012/2013 budget will be calculated. Ramnarine said: “We wouldn’t have that yet, but the last budget was based on US$75 per barrel, and a gas price of US$2.75 per million standard cubic feet. The gas price for the first half of this fiscal year has averaged at US$2.91, which is above the budgeted price, and the oil price, of course, has averaged well above US$75.” After the meeting, Energy Chamber President and Tucker boss Roger Packer told the Guardian: “We discussed a lot of common ideas, areas where we can work together. Of course, taxation was a part of it. Some good ideas came out where it’s win win for both parties. I think the goal is to get production up.” Asked if revenue from oil and gas is trending up or down, Packer said: “Oil revenue is coming down. That’s what I think we foresee.” As for natural gas, he said he thinks it’s not going to go back up. I think it’s going to remain where it is.”

 

Asked if a solution to the gas curtailment problem at Point Lisas was agreed upon, he said, “There is no short term solution. A lot has to be done over the next year, so that hopefully by maybe 2014 or thereabouts, we can see some results; we hope. There is no short term solution.” Companies in Point Lisas have been affected by gas curtailments from NGC. It has been causing them to cut back on production and brings into question whether NGC would be able to supply new plants being constructed to begin business in the near future. Regarding infrastructural improvements being lobbied for by the Energy Chamber, looking directly at Packer, the Minister said: “I have written to the Minister of Works regarding Rivulet Road, which is a single lane road connecting Point Lisas to the Highway. I think the Government has done very well to upgrade the interchange at Balmain, and you also have Port Galeota.”