Energy Chamber: Lower productivity reduces profits, taxes

While there is a tendency to concentrate on the benchmark price of crude oil, government revenue from the energy sector is determined by a number of different factors. Firstly, it is important to recognise a significant percentage of revenue comes from gas and not just oil. Gas is different to oil in that there is not a global commodity price for gas and prices vary significantly between different markets. There has been a tendency in the local media to concentrate on the US Henry Hub gas price, but the reality is that only a small percentage of our liquefied natural gas (LNG) exports now go to the United States. LNG cargoes from T&T go to a diverse range of different markets, including to the Asian markets, which are index linked to oil prices and have therefore seen high prices over the past year. 

 

 

Furthermore, around 40 per cent of gas sold in T&T is sold by the National Gas Company (NGC) into the local market to be used as feedstock for the petrochemical industry, or for power generation and for local manufacturers. The prices for this gas vary considerably, with the majority of this gas (around 30 per cent of the total) being sold to the petrochemical plants at prices linked to the prices of the end products, primarily methanol and ammonia. High prices for these commodities in the global market mean that sale prices in Point Lisas have usually been considerably higher than Henry Hub over the past couple of years. This means that in order to predict prices at which to set a national budget, the Government needs to look at a basket of different commodities and to take a weighted average.  Working with the Central Bank, the Energy Chamber has developed a T&T commodity index, taking into account prices of most of the important commodities that we export in an effort to have a more nuanced picture of the sector, rather than using benchmark international oil prices and US gas prices.

 

Overall revenue collection

 

 It is also important to recognise that levels of production are just as important to determining overall revenue collection as prices. If prices remain steady but production decreases, the total amount of revenue will inevitably fall. As oil and gas fields have a natural decline rate, it is clear that production will fall over time if no new investments are made into new drilling and new production infrastructure. In addition to considering prices, the national budget process needs to also consider planned  production over the coming year and planned maintenance schedules that will take production offline for a period. As there are significant maintenance projects being implemented in September and October 2012, revenue during this period will inevitably be lower than during periods of full production.  The majority of taxes come from profits, rather than taxes on income. This means it is also important to look at costs in making predictions about the total revenue to be collected. The lack of productivity in the overall economy increases the cost base for the industry and therefore leads to lower profits and lower taxes. Measures of cost are therefore just as important to predict and track as prices: in the oil and gas industry, these would typically be expressed as the cost to produce a unit of oil or gas and described as the “lifting cost”.

 

Trend in lifting costs

 

In presenting a comprehensive picture of the energy industry revenue predications, it would also ideal to provide a statement on the trend in lifting costs in T&T’s oil and gas fields. As the industry and the Government can both implement measures to control costs of production through improved efficiency, it is important to track these costs to determine if we are moving in the right direction or not.  

In terms of determining a specific price for commodities, there are some widely varying projections being made from different analysts at the present time. The decline in growth rates in China, India and the US and contracting economies in Europe would typically signal a decrease in demand and falling prices. On the other hand, there are considerable geopolitical issues, especially in the Middle East, which could have the opposite impact and much of the anticipated significant increases in production from the massive new provinces, like Brazil and Australia, has been delayed due to project execution constraints. Nevertheless, the Energy Chamber would advocate setting a conservative budget price for all of the commodities and to make sure that the national budget can be balanced at a low price point, with any surplus revenue being placed within the Heritage and Stabilisation Fund. To do otherwise places T&T at the risk of forces over which we have no control.