Sher­win Long

Al­isa De­o­nanan

Ear­li­er this month, OPEC, led by Sau­di Ara­bia, cut oil pro­duc­tion by over 1 mil­lion bar­rels per day to dri­ve oil prices high­er. Last week, Brent crude oil prices rose to a three-month high at US$81 per bar­rel, a clear in­di­ca­tion that the sup­ply cuts have staved off price de­clines ex­pe­ri­enced in April and May 2023.

For T&T, there are sev­er­al fac­tors to con­sid­er while analysing the im­pact of these pro­duc­tion cuts on prices and the coun­try’s rev­enue out­look in the short to medi­um term.

Every­thing from the cost of im­port­ing trans­porta­tion fu­els to Gov­ern­ment’s abil­i­ty to spend on so­cial ser­vices and cap­i­tal projects is de­pen­dent on how oil prices in­ter­sects with our own do­mes­tic de­mands and oil and gas pro­duc­tion. There­fore, pay­ing at­ten­tion to these de­ci­sions by OPEC and their im­pacts is key.

The fun­da­men­tals of sup­ply and de­mand dri­ve prices and both OPEC and the In­ter­na­tion­al En­er­gy Agency (IEA) point to a short­fall in sup­ply to sa­ti­ate glob­al de­mand.

This short­fall is es­ti­mat­ed to grow by over two mil­lion bar­rels of oil per day in 2023. How­ev­er, de­spite this de­mand-sup­ply im­bal­ance, there are sev­er­al oth­er in­flu­ences which dri­ve un­cer­tain­ty over the tra­jec­to­ry of oil prices.

These in­flu­ences are be­com­ing more promi­nent. The war in Ukraine con­tin­ues to im­pact Eu­ro­pean and glob­al en­er­gy de­mand while fears over a glob­al re­ces­sion and risks of bank­ing sec­tor con­ta­gion has af­fect­ed mar­ket con­fi­dence.

The per­for­mance of the Chi­nese econ­o­my and whether its stim­u­lus pack­age dri­ves bet­ter eco­nom­ic per­for­mance will al­so im­pact the en­er­gy price out­look as well as the sum­mer dri­ving sea­son in the Unit­ed States and the ex­pect­ed in­crease in glob­al air trav­el.

A look at Sup­ple­men­tal

Pe­tro­le­um Tax

T&T earns more rev­enue from its nat­ur­al gas than oil, how­ev­er, in many mar­kets, gas prices are linked to (or are in­dexed to) oil prices. Any tur­bu­lence in the oil mar­kets im­pacts both oil and gas prices and, there­fore, the coun­try’s rev­enue out­look. The Trinidad and To­ba­go Ex­trac­tive In­dus­tries Trans­paren­cy Ini­tia­tive (TTEITI) re­ports in­de­pen­dent­ly ver­i­fy the en­er­gy sec­tor rev­enue earned by the coun­try.

Im­por­tant­ly, the re­ports al­so ver­i­fy Sup­ple­men­tal Pe­tro­le­um Tax (SPT) pay­ments. Based on EITI re­ports from 2011-2022, SPT ac­counts for ap­prox­i­mate­ly 16 per cent of to­tal rev­enue earned from the up­stream en­er­gy sec­tor and is linked di­rect­ly to the price of oil (see Chart 1).

It is im­por­tant to note that the cal­cu­la­tion is based on ma­jor pay­ments such as pe­tro­le­um prof­it tax­es (PPT), roy­al­ties, un­em­ploy­ment levy (UL), pro­duc­tion shar­ing con­tract share of prof­it and cor­po­ra­tion tax but there are oth­er tax­es which were not in­clud­ed in this com­par­i­son (eg Busi­ness Levy and Green Fund Levy).

The SPT is a wind­fall tax im­posed on in­come gen­er­at­ed from the dis­pos­al of crude oil, sep­a­rate and apart from roy­al­ty pay­ments, cor­po­ra­tion tax and oth­er tax oblig­a­tions.

The rates range from 0 per cent at crude prices at or be­low US$50 per bar­rel to the high­est rate of 33 per cent if prices land be­tween US$50-$90 per bar­rel. The spe­cif­ic rates, of course, are de­ter­mined by the clas­si­fi­ca­tion of the field and the weight­ed av­er­age price for crude oil for a giv­en quar­ter.

With prices trend­ing up­wards, these rates take on greater sig­nif­i­cance for Gov­ern­ment’s rev­enue po­si­tion and the coun­try’s eco­nom­ic per­for­mance.

This year’s bud­get was orig­i­nal­ly pegged to a US$92 oil price as­sump­tion.

How­ev­er, based on the mid-year re­view, crude oil prices av­er­aged US$81 and Gov­ern­ment pro­ject­ed its rev­enue will be TT $1 bil­lion less than es­ti­mat­ed. Notwith­stand­ing an an­nounce­ment by the

Fi­nance Min­is­ter of an TT$600 mil­lion sur­plus up to May, any fur­ther de­te­ri­o­ra­tion in oil prices will erode po­ten­tial rev­enue earn­ing from the en­er­gy sec­tor, es­pe­cial­ly from SPT.

The SPT regime ap­plies vary­ing rates of SPT to shal­low ma­rine, land, deep wa­ter and new fields (see ta­ble 1). Sim­ply put, de­pend­ing on their field lo­ca­tion or phase of de­vel­op­ment all up­stream ex­trac­tive com­pa­nies pay the Gov­ern­ment more SPT in times of high oil prices. Be­tween 2011 and 2022, Gov­ern­ment col­lect­ed just over TT$25 bil­lion in SPT (see Chart 2). The chart demon­strates the close cor­re­la­tion be­tween high oil prices and in­creased SPT pay­ments as in every year prices co­in­cid­ed with the lev­el of pay­ments.

Based on EITI re­port dis­clo­sures and a re­view of fi­nan­cial state­ments, be­tween 2017 and 2021, the five high­est pay­ers of SPT were Her­itage Pe­tro­le­um Com­pa­ny (and its pre­de­ces­sor com­pa­ny Petrotrin), bpTT, Peren­co T&T, The Na­tion­al Gas Com­pa­ny of T&T and Trin­i­ty Ex­plo­ration and Pro­duc­tion. For the five-year pe­ri­od, gov­ern­ment col­lect­ed $3.37 bil­lion. How­ev­er, it is im­por­tant to note that fig­ures for 2021 have not been au­dit­ed by the TTEITI au­di­tor/ad­min­is­tra­tor.

Her­itage Pe­tro­le­um re­port­ed the high­est pay­ments of Sup­ple­men­tal Pe­tro­le­um Tax (SPT) over the five-year pe­ri­od to­talling TT$1.79 bil­lion. Her­itage’s re­port­ed SPT pay­ments fluc­tu­at­ed and it was easy to per­ceive a trend. The com­pa­ny paid less than $1 mil­lion in SPT for 2017 and 2019 when Brent crude oil prices av­er­aged $54 and $64 per bar­rel re­spec­tive­ly.

BPTT re­port­ed the sec­ond high­est SPT pay­ment over the pe­ri­od with TT$1.5 bil­lion. Again, the close cor­re­la­tion be­tween glob­al oil prices and SPT pay­ments held as there was a sig­nif­i­cant de­cline in pay­ments from the com­pa­ny in 2019 and 2020. This trend al­so holds over the five-year pe­ri­od for the oth­er high pay­ers of SPT - Peren­co T&T , The Na­tion­al Gas Com­pa­ny of T&T and Trin­i­ty Ex­plo­ration and Pro­duc­tion.

From 2020 to 2023, the Gov­ern­ment has made sev­er­al changes to the fis­cal regime gov­ern­ing SPT in or­der to stim­u­late ex­plo­ration and pro­duc­tion.

The Fi­nance Act, 2020 amend­ed the Pe­tro­le­um Tax­es Act to change the SPT rates for small on­shore pro­duc­ers for 2021 and 2022. The new rates stip­u­lat­ed that small on­shore pro­duc­ers would on­ly pay SPT when oil prices were over US$75 per bar­rel.

In the 2023 bud­get, the Gov­ern­ment al­so in­creased the thresh­old de­f­i­n­i­tion of a small pro­duc­er from a com­pa­ny pro­duc­ing 2,000 bar­rels per day to 4,000. New oil wells in shal­low ma­rine ar­eas al­so re­ceived a spe­cial in­cen­tive. For these wells, an SPT rate of 15 per cent comes in­to ef­fect when prices av­er­age be­tween US$50 and US$70 and a 20 per cent rate comes in­to ef­fect when prices av­er­age be­tween US$70 and US$90.

It is too ear­ly to as­cer­tain how these in­cen­tives/fis­cal changes will im­pact pro­duc­tion and fu­ture SPT pay­ments. But it is worth keep­ing an eye on these de­vel­op­ments, es­pe­cial­ly with the Gov­ern­ment iden­ti­fy­ing the need to boost out­put with oil pro­duc­tion av­er­ag­ing 56,151 bar­rels per day up to March 2023, com­pared with 55,883 bar­rels per day in Feb­ru­ary and 58,057 bar­rels per day in March 2022.

Con­clu­sion

De­ci­sions tak­en by OPEC will have a ma­te­r­i­al im­pact on the eco­nom­ic for­tunes of T&T, es­pe­cial­ly as it re­lates to our oil and gas rev­enue. SPT is a ma­jor con­trib­u­tor to our tax base, which fluc­tu­ates with the rise or fall in glob­al oil prices. With a pro­ject­ed bud­get deficit of TT$6.36 bil­lion, the more en­er­gy sec­tor rev­enue earned can help re­store fis­cal bal­ance. While oil prices are es­ti­mat­ed to hov­er be­tween US$80 to US$85 be­tween the third quar­ter of 2023 and the first quar­ter of 2024, un­cer­tain­ty abides.

The glob­al fun­da­men­tals of sup­ply and de­mand will have a bear­ing on our eco­nom­ic per­for­mance. Trinidad and To­ba­go is a price tak­er and has lit­tle con­trol over price swings, weath­er pat­terns and geopo­lit­i­cal fric­tions/fis­sures. This calls for Trinidad and To­ba­go to fo­cus on con­trol­ling the ar­eas in our sphere of in­flu­ence such as pro­vid­ing fis­cal in­cen­tives, of­fer­ing more oil acreage to in­dus­try and en­sur­ing we con­sis­tent­ly save a por­tion of our earn­ings, how­ev­er small, to the Her­itage and Sta­bil­i­sa­tion Fund.