Kevin Ramnarine: Ending
the recession in 2018 (T&T)
Former Energy Minister Kevin Ramnarine, right, with
BP CEO Bob Dudley at an Energy Chamber function in October 2013
This week I could have written on CNG or on Moody's second downgrade. All these are important topics. Instead, I want to treat with a matter that has been the subject of a lot of misunderstanding. This is the issue of the fiscal incentives for the oil and gas industry that were put in place between 2010 and 2014 and more specifically the restructured capital allowances of 2014.
In 2014 the Government restructured the capital allowances for exploration and development drilling. The changes were put into law in the Finance Bill of 2014. This Bill was debated and passed in both houses of Parliament. This was done to further stimulate investment in exploration and developmental drilling (drilling into a known reservoir). It is without question that the incentives have worked. Indeed they may well be what will rescue this economy in 2017/2018.
It should be noted that oil and gas companies have always had the facility to claim 100 per cent of their capital expenditure against their taxable income. The restructured allowances contained in the Finance Act of 2014 allow oil and gas companies to recover their capital expenditure faster than before. This improves the economics of potential investments (net present value) and leads to projects such as BP Juniper receiving approval.
The former Minister of Finance also put a sunset clause on the restructured allowances. The changes fall away in 2017. After that it's up to the current Government to decide what their policy would be going forward. The restructured allowances are consistent with what obtains for example in the UK where terms are even more favourable.
In presenting his mid-year review the Minister of Finance said “the incentives did what they were supposed to do, they stimulated investment, but the flipside is that with depressed oil prices, these companies are now paying no income tax for 2016.” If this is the case it might be because the companies are investing in exploration and developmental drilling which is what we need them to do.
Capital allowances can only be applied if companies are investing. If you have no investment there is nothing for the companies to claim. We also keep hearing about companies being able to write off capital expenditure in one year.
This is only the case for capital expenditure related to exploration drilling. It is not the case for developmental drilling. Anyone in the oil business will tell you that the majority of drilling activity is developmental.
The Minister's statement was a relief for many in the leadership of the energy sector. However, few days later in the Senate, the Minister with responsibility for Local Government and Rural Development, speaking on matters of energy policy, said the incentives did not act to the benefit of T&T. In the space of four days we had two different policy perspectives from two ministers.
Amazingly the only view that came out in the entire debate in the Senate was the view that some companies had no taxable income in 2016. There was absolutely no appreciation for the flipside which was that it was absolutely essential that the country resuscitate exploration and development drilling to ensure future production. Listening to some I get the impression that they seriously believe the country will vanish at midnight on December 31, 2016 and 2017, 2018 etc, will not come.
Why is all this hugely important? The BP Juniper project is of critical importance to the economy of this country. If the capital allowances had not been restructured in 2014, the BP Juniper investment would not have happened. Why? We live in a competitive world that waits on no man, no Cabinet, no Parliament and no trade union. Capital flows to where it gets the best return. In the case of BP there are other options such as Angola and Azerbaijan.
Given how we measure real GDP and the fact that real GDP is measured “year on year” and at constant prices, it can be deduced with reasonable certainty that the Juniper project together with two other gas projects (Trinidad Regional Onshore Compression and the BP/EOG Sercan project) could end the recession in 2018. These three projects have all been in the making for a number of years.
The common thread in all three projects is BP. The most important economic relationship in the country is the relationship between the Government and BP. BP accounts for 20 per cent to 25 per cent of Government revenue and is the country's largest investor. In recent years T&T has accounted for as much as 17 per cent of BP's global production volume. The relationship is symbiotic.
It is good therefore that the Prime Minister is personally managing this relationship. He has visited BP's St James Square office in the past and will do so again next month. This is something that I used to do when I was Minister of Energy.
It is important that the Government understands BP and BP understands the Government. I am sure that BP and other companies in the oil and gas business will be eager to understand the policy position on the restructured capital allowances post 2017. This understanding will inform future investments.
Kevin Ramnarine is the former Energy Minister of T&T. Petroleumworld does not necessarily share these views.
This commentary was originally published by Trinidad & Tobago Guardian , on April 19, 2016. Petroleumworld reprint this article in the interest of our readers.
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Petroleumworld News 04/25/2016
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