The Energy Chamber of T&T proposed several measures for the 2014/2015 budget linked to attracting investment, incentivising exploration and production, facilitating local energy service company growth as well as helping Government reduce its expenditure.The following is a summary of the major recommendations submitted by the Energy Chamber to the Ministry of Finance and the Economy and the Ministry of Energy and Energy Affairs.
Attracting investment
The Energy Chamber has concentrated its budget recommendations on attracting investment around a few objectives: developing new gas reserves and security of gas supply and reversing the decline in oil production. Some of these recommendations however are not proposals for one financial year but rather speak to shifts in policy, regulations and incentives over time.
Policy must therefore focus on ensuring that the structure of the energy market creates conditions in which continued investment takes place. The key to attracting investment dollars into the gas industry is to ensure that all operators along the gas value chain gain rewards which are commensurate with the risks taken to operate.
Under the current structure, upstream reward is at set prices and commodity price risk is not shared. Exposing the upstream producers to commodity price risk will enable them to share in the reward when prices are high.
Also, given the current issues with gas supply, we recommend a regular monthly forum, lead by NGC, where upstream and downstream operators share information on maintenance. The services sector must also be briefed on any planned or unscheduled maintenance issues. This forum must be a separate dialogue session from upcoming contract renegotiations between the NGC and its upstream suppliers or downstream clients.
The Energy Chamber is also eagerly awaiting the finalisation of the country's Gas Master Plan which will speak to policies for ensuring availability of supply (including the possibility of gas storage) as well as realignment of the risk-reward structure of the gas value chain, among other issues.
Reversing the decline in crude oil production
To arrest the decline in oil production, there are a number of solutions to choose from to incentivise investment in both new marginal fields and mature fields. For new marginal fields, we recommend targeted reductions in supplemental petroleum tax to incentivise new investment.
For mature fields, increasing the investment tax credit (ITC) rate from 20 per cent to 100 per cent should be allowed on all capital expenditure incurred (that is, infrastructure and development drilling capital expenditure). For development drilling, the proposed increase in the ITC rate from 20 per cent to 100 per cent not only allows for more resources for further drilling, but would also ensure resources are available for investment in ageing infrastructure, allowing for safer working conditions and easier access to reserves.
The Energy Chamber also recommends restructuring Petrotrin in a way which optimises resources and streamlines operations for both the upstream and refinery business units. For the upstream, getting the untapped and underdeveloped acreage into the hands of the right players is essential if we are to attract new investment.
ReducingGovernment expenditure
The Energy Chamber's focus for reducing Government expenditure revolves around reducing the fuel subsidy. We recommend the commissioning of a comprehensive study on the impact of subsidy reduction/removal on food and transport as well as creating a fuel subsidy reduction road map.
This roadmap should explore reducing subsidy levels incrementally on all fuels by the same percentage, developing CNG infrastructure to accommodate heavy goods vehicles, providing a window for accessing concessions for all heavy goods vehicles as incentive to convert fleets to CNG and ensuring that plans are in place to phase out the subsidy once uptake of CNG conversion and investment in CNG retail stations occur.
Creating national fuel efficiency standards and raising import taxes on less fuel efficient vehicles can also work in tandem with these actions.
We also recommend removing VAT on the wholesale price and retail margin for gas as VAT is charged on the value added at each stage. Currently, it is charged on the retail margin and on the wholesale price. However, this is counterintuitive given that on one hand VAT is paid to the Government, but on the other, the Government gives a subsidy.
Business development
Burdensome VAT administration practices and double taxation inhibit the growth of the energy services sector. The Energy Chamber recommends that Government negotiates double taxation agreements in countries where local service companies do business.The Energy Chamber also recommends the removal of VAT on all imports of oil field service equipment and smaller marine vessels. VAT was already removed on larger equipment items and larger vessels in previous budgets.
This will result in no net decrease in Government revenue (as VAT payments are subsequently reclaimed), but will help the cash flow of service companies.
Conclusion
Trinidad and Tobago is a mature energy province and has to be flexible to continuously attract new investment. So far we have been able to cope with the threat from US shale gas, but there are other new entrants to the gas market in East Africa we have to be aware of as well as competition for investment from countries such as Mexico and Colombia. Given the state of play globally, there are several priority areas we must focus on to ensure short- and long-term energy industry gains.
These priority areas revolve around developing new gas reservoirs and storage systems to ensure continued delivery of gas to LNG and Point Lisas plants, increasing oil production, strengthening local companies to ensure long-term sustainability and tackling the increasing costs of capital investments that erode project economics.
To maintain existing levels of production and to bring new production online the fiscal regime needs to be constantly revised for both "new" deepwater and existing marginal field development. To diversify through energy we have to facilitate energy services companies willing to export their skill abroad by cutting bureaucratic red tape.
Apart from this, we must also manage our revenue prudently and cut back on our subsidy and transfer expenditure. While the energy sector currently drives the local economy, the country has to maximise value from each molecule of our finite resources to ensure our development is sustainable.