Mitigating risk for Trinidad’s producers

Trinidad and Tobago

Jonathan Walker, head of dispute and risk management at M. Hamel-Smith and Company, talks to The Energy Year about trends in oil and gas investment relevant to risk assessment and changes to the Trinidadian tax system that would mitigate risk for producers. Hamel-Smith is a full-service corporate/commercial law firm based in Port-of-Spain.

What trends are you observing in investment from the oil and gas producers, with risk assessment in mind?
The main trend that we have observed is the diminishing oil and gas reserves and the impact that this has on the cost of doing business in Trinidad. Multinationals invest their capital where they get the best return. In this regard, Trinidad has lost the competitive advantage that it previously enjoyed when it was sitting on a significant amount of gas that was relatively inexpensive to bring ashore and monetise.
At present, producers are experiencing a greater number of unsuccessful fields, and are being forced to go into deeper waters to drill. This additional risk is not being reflected in the reward that they stand to gain. Moreover, unlike other jurisdictions where companies are being given incentives to drill, in Trinidad they are faced with greater uncertainty with regard to taxes. In some instances, they are presented with an unexpected tax bill several years after the income was earned.
These matters affect companies’ risk profiles and profit margins, and consequently make the potential investment less attractive compared to investing in other countries where the prospects are more encouraging and the incentives greater.
Even in times of higher oil prices, there remains a disincentive due to the tax that is imposed once the oil price crosses a certain threshold. Then, the tax is assessed on revenue as opposed to profit and makes the return on the risk profile even worse.
Another trend is that gas production has continued to be in decline. There are a number of petrochemical plants that are not being supplied with sufficient gas to operate at full capacity. This makes it unlikely that we will see new entrants in the industry locally.

What would be a more attractive way to reform the tax system that would mitigate the risk involved for oil producers?
It is understandable that the government wishes to ensure that some of the windfall that results from higher oil prices remains onshore in Trinidad. However, it needs to get the trigger point right. If the threshold is set too low, then it can have a crippling effect on a producer’s ability to generate a return on its capital investment. My suggestion would be to remove the SPT [Supplemental Petroleum Tax] entirely and replace it with a staggered rate for the Petroleum Profits Tax. This will allow the system to focus on the windfall profits of the company, as opposed to the company’s gross revenue.

With the SPT affecting how companies invest their capital, have you observed more mergers and acquisitions taking place as a result?
A number of mergers and acquisitions have taken place, but we need to look at how many of these were simply ancillary to international mergers and how many were driven by local factors. There have also been some transactions involving the sale of gasfields, though there remain quite a number of fields that are sitting idle and have not yet been explored, much less exploited. We would expect to see more of those types of transactions as we go forward, mostly regarding the marginal gasfields.

Have you observed any improvements in natural gas supply and any effect on petrochemicals activity?
Unfortunately, there has continued to be a decrease in the country’s overall gas production and, as a consequence, the gap between the volume of gas that is available to be supplied and the domestic capacity to use that gas to either produce petrochemicals or export LNG has grown. At present, there is a lot of uncertainty as to whether the projects that are earmarked to start up over the next couple of years will either come on stream or be sufficient to close that gap. The Loran-Manatee field is perhaps the best possibility to bring our production closer to the desired level.

What regulatory measures are currently affecting implementing solar power in domestic buildings?
The absence of regulatory measures that allow private companies or persons to tie into the grid and be credited for the electricity that they contribute is a disincentive to such persons making the level of investment that is required to implement solar power in a meaningful way.

Guyana is becoming a very attractive market for oil producers. What advice could Guyana benefit from in developing its industry?
We have been hearing anecdotally that there is dissatisfaction within the Guyanese government with some of the deals that have been made, and that they are looking for a way to reopen their agreements. Such an approach does not leave investors feeling secure. I believe that the government in Guyana would be better served by honouring the commercial agreements to which they committed, even if it was by a previous regime.
In addition, there are many lessons that can be shared by their Trinidadian counterparts, which will save them much time in discovering the most efficient and rewarding structure going forward.

What key factors need to be addressed by the Trinidadian government to improve the investment environment?
The ease of doing business in Trinidad needs to be improved. There are too many hurdles to overcome to get approvals from different entities. The fiscal regime needs to be adjusted to the right form, and with the right incentives. We are now competing with other jurisdictions within the region with more attractive incentives. We are no longer in a privileged position, where producers are flocking here to monetise our natural resources. There are now several other options, so we have to make the Trinidadian option one that is welcoming and as attractive as possible.
Certainty is also a feature that is welcomed by investors. In this regard, Trinidad would only benefit from having an articulated transfer pricing that established clear criteria. This would enable investors to make informed investment decisions and operate with a reasonable degree of certainty without being surprised by the creative application of vague principles by the fiscal authorities.

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