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Higher energy sector output improves 2018 growth prospects

Thursday, December 14, 2017

For the first two and a half months into the new fiscal year crude prices have been stronger than what Finance Minister Colm Imbert budgeted. In October, Brent averaged US $54.92 a barrel, while last month that average price shot up to US $59.93.

This would be welcomed news for the Finance Minister since he had budgeted that crude prices would average US$50 a barrel. It must be noted that 30 per cent of the crude we produce actually earns close to US$2 more than Brent prices and, therefore, the actual average prices for East Coast crude and condensate would be in the vicinity of US$57 in October and US$61 in November.

West Texas Intermediate prices, for which all the crude that is sent to the Pointe-a-Pierre refinery is based, was much lower, averaging US$52 a barrel, but still over what Imbert had budgeted.

This is important because as crude prices continue to average above US$50 a barrel it means that the supplemental petroleum taxes—SPT—will kick in and allow government to collect a windfall tax it had not projected.

Importantly, crude production has remained steady at just over 70,000 barrels of oil per day. The energy sector which has, and continues to, drive the economy was already expected to grow in the next fiscal year.

Revenues from the sector as a percentage of the country’s gross domestic product are expected to increase by more than two percentage points according to the latest IMF 2017 Article IV consultation.

This increase is in part due to the imposition by the Finance Minister of a 12.5 per cent across the board royalty on oil and natural gas.

According to the IMF, fiscal energy revenues as a per cent of total GDP is expected to rise from 6.8 per cent in 2017, to 9.1 per cent in 2018 and 9.9 per cent in 2019, and start a process of gently tapering off to 9.5 per cent in 2022.

The IMF noted that the projected increase in revenues from the sector was predicated on improved output.

Already there are signs that the increased output from the natural gas sector is, in fact, happening.

Figures from the Ministry of Energy and Energy Industries show that in September, natural gas production had peaked for the year, averaging just under 3.6 billion standard cubic feet per day (bscf/d). This is a direct result of the start up of the Juniper project with bpTT’s production increasing by more than 200 million standard cubic feet per day (mmscf/d) to average 2.1bcf/d.

It is based on the projected expansion of the energy sector that the IMF is projecting that in 2018 the country’s economy is likely to expand by 1.7 per cent.

Lecturer at the University of the West Indies St Augustine Campus Dr Roger Hosein believes that while the sector is likely to grow—and with it lead economic expansion—in real terms the country’s economy will not be moving forward because, according to him, the growth is not to be driven by new sectors of production.

He told Business & Money, “The economic growth projections follow the old paradigm of extracting natural gas resources and in so doing stimulating economic growth in the energy sector, with growth in the non-energy sector following as a consequence of the spur to the energy part of the economy, mainly on account of the spending effect, associated with energy sector activity. This would include spending by the energy companies, the workers in the energy sector and the government on receiving the energy sector fiscal revenues.”

Hosein lamented that the IMF report and the Budget Speech have had little to say about diversifying the T&T economy.

He added, “As it stands, there is no coherent plan on the way forward. There is no real systematic strategy on how to diversify the production base. In this scenario the current account balance would continue to be negative and the fiscal balance would likely remain in deficit leading to a worsening debt dilemma which by 2022 according to the IMF will reach over $145 billion.”

Hosein argued that when one looked at the IMF forecasts for capital expenditure (no doubt based on its various conversations with the Ministry of Finance, the Central Bank and the Ministry of Planning) it is very dormant at or around three per cent for the period 2017 to 2022.

He said this shows that the State will not be aggressively widening the supply infrastructure of the economy and, as a consequence, other idiosyncratic shocks to exports and domestic investment would have to be relied upon to stimulate aggregate demand.

“The evidence for the last 17 years does not suggest we can have much confidence that this strategy will work, but maybe I am wrong and there is room for optimism.”


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