In 2022, global energy commodity prices have been buoyed by the global demand-supply imbalance caused by the war in Ukraine. And, as expected, T&T has benefited. Sustained high prices of oil, gas, methanol and ammonia, even as the country recovers from the negative effects of COVID-19, have provided a boost in revenue.
In last week’s mid-year budget review, the Finance Minister Colm Imbert confirmed improved GDP, cash flow and Government’s plans to use the spike in revenue to tackle debt, reduce the budget deficit and importantly to fund a deposit to the Heritage and Stabilisation Fund.
Given these plans, the T&T Extractive Industries Transparency Initiative (TTEITI) thinks it is important to provide the national community with an up to date snapshot on the trends in energy tax revenue. The following data outlines royalty collections, our earnings from production sharing contracts as well as our subsidy liability.
However, it is important to note that these provisional figures have not been audited by the TTEITI auditor/administrator and revenue for fiscal 2022 accounts for monies received up to April 30.
Open Oil, an extractive sector NGO, describes royalties as “a percentage share of production, or the value of the production which goes to the Government regardless of the rate of production or costs to the operator.”
This payment is made by petroleum companies directly to the Ministry of Energy and Energy Industries in exchange for the right to explore and produce from T&T’s oil and gas acreage. Simply put, if a particular oil well produces 100 barrels per day in May and oil prices average US $50 per barrel for that particular month, the cash flow would be $5,000 per day.
If the Government agreed to a 12.5 per cent royalty rate then it would receive $625 per day. Between fiscal 2011-2021, the royalty Government received totalled $22.3 billion and after changes to the royalty rate to 12.5 per cent spiked in 2019. Royalties increased by 53 per cent from $1.7 billion in 2021 to $2.5 billion in 2022. BPTT and Heritage were the two largest contributors, paying $1.7 billion and $474 million respectively in 2022.
PSC share of profit
The Government receives a split/share of the profits from its producing Production Sharing Contracts (PSCs) with oil and gas companies. From this share of profit, the Ministry of Energy and Energy Industries (MEEI) also pays the tax liability of its PSC partners to the Board of Inland Revenue (BIR).
For instance, if Government partners with two companies for a PSC, the State is entitled to pay taxes such as Petroleum Profits Tax, Supplemental Petroleum Tax, Unemployment Levy, Green Fund Levy etc on behalf of its two partners. Between 2014-2022, Government received $25 billion in PSC share of profit and paid $18billion in taxes from these profits on behalf of its PSC partners to the BIR.
For fiscal 2022, there has been a significant increase in PSC Share of Profit. The share of profit the grew by 27 per cent from $2.7 billion in 2021 to $3.4 billion in 2022.
This represents the third highest share of profit received in the past nine years and only accounts for eight months of the fiscal year thus far. If prices continue to trend upwards, this year could see share of profit reaching a nine-year high. NGC and Shell were the two largest contributors, paying $1.6 billion and $1.2 billion respectively in 2022.
Ramifications of increased
prices on HSF deposits
The Heritage and Stabilisation Fund (HSF) was established in 2007 for the purpose of saving and investing surplus petroleum revenues. According to the HSF Act, a minimum of 60 per cent of the total excess (difference between estimated and actual) revenues must be deposited to the fund during a financial year whereas withdrawal could be up to 60 per cent of shortfall but not exceeding 25 per cent of the fund and is permitted if annual tax revenue from oil and gas is at least tern per cent below budget projection.
For instance, if total excess revenues are $20 billion, then at least $12 billion must be deposited into the Fund in accordance with the law.
There has been a decrease in the value of the HSF from US$ 6.3 billion in 2019 to US$5.6 billion in 2021 as a result of the government turning to the HSF to finance fiscal deficits and to provide COVID relief.
The government has withdrawn US$900 million and a further US$600 million respectively for the fiscal years 2020 and 2021. Initially, a fiscal deficit of $9.095 billion was projected in the 2022 budget based on an oil price of US$65/bbl and gas at US$3.75/mmBtu.
However, with oil and gas prices currently hovering around US$112/bbl and US$8/mmBtu, the government has recorded a surplus of $654 million in the Mid-Year Budget Review for the period October 2021 to March 2022. According to Minister Imbert, a deposit is expected to be made into the HSF as per the law for the first time in 8 years. Given the swing in petrochemical prices as well, there has been suggestions by analysts that the HSF should also account for windfalls in petrochemical sector revenue.
The data presented above tells the story of energy sector revenue at a time when due to the Covid-19 fallout and changing global trends such as digitisation we need rethink how we manage and allocate what is earned from the sector. There are also structural issues to be addressed in the energy sector that will change the country’s energy landscape. These include the results of the deepwater and onshore bid rounds, the development of the Caribbean’s largest solar project, changes to the fiscal regime to incentivize more production, the restructuring of Atlantic LNG’s structure and a move towards liberalisation of retail fuel prices and reduction of the fuel subsidy.
While the fillip in prices can lead to short term gain, these issues must also be addressed over the medium to long term to provide the country with a platform for sustainable growth. The data provided can help inform legal and fiscal reforms, provide independently verified research for analysts, policymakers and commentators. Most importantly, it empowers citizens with information to strengthen their demands for sustainable spending of the earnings from the energy sector, the mainstay of the national economy. The latest Trinidad and Tobago EITI Report will be available in July.