By Luis
Araujo
The Trinidad Guardian
Port Spain
Petroleumworld.com 03 12 06
Is T&T
making the most of its current boom? Is the Government doing
its best to maximise the benefits of high energy prices?
An International
Monetary Fund Working Paper, published late late last year,
notes some of the dangers facing T&T and puts forward suggestions
for dealing with the current boom.
The authors
also note that T&T’s natural gas tax regime “extremely
low by international standards.”
The working
paper is based on the assumption that the current levels of
production should taper off by 2012 and looks at the conflicts
that often arise with countries that base their economies on
a depleting resource.
It also
suggests the means for success that should include fiscal restraint,
protection of competitiveness of non-energy sector and gradual
policy shifts to avoid macroeconomic instability and efficient
use of energy resources.
One of the
main issues countries like T&T face is the choice between
current priorities, such as social and capital development programmes
and long-term goals such as ensuring that the future generations’
standard of living is protected.
“In
practice, however, this balance can be difficult to achieve,
since the likely temptation during a boom is to embark on expensive
projects that permanently raise the level of government spending
while relying on a revenue stream that may be only temporary,”
the report states.
T&T
is not alone.
“Historical
and cross-country experience indicates that, more often than
not, resource wealth has been mismanaged,” the working
paper states.
“For
example, in the aftermath of the oil booms of the 1970s and
1980s, a number of countries, including T&T, experienced
the disruptive effects of overly expansionary and unsustainable
fiscal policies during the booms, which resulted in their non-energy
tradable sectors becoming uncompetitive and rendered their economies
vulnerable to shocks, such as the sharp drop in oil prices that
began in 1981 to 82.”
The exceptions
are Norway and Indonesia.
Norway’s
economy is widely diversified and its policies counter-cyclical
to energy boons.
Indonesia,
the authors note, pursued a flexible exchange rate and tight
fiscal policy. Both of these countries were able to maintain
macroeconomic stability after the oil booms of the 1970s and
1980s. T&T, on the other hand, suffered a sharp downturn
as oil prices fell.
The authors
note that during the last boom in the 1980s, the windfall was
initially used wisely and there was a move toward diversification.
They add, though, that growing political pressures led to rapid
growth of subsidies to consumers, labour and unprofitable firms.
“Eventually,
a host of subsidies, price controls and wage increases, together
with an appreciation of the real exchange rate and an expansion
of the public sector, undermined the non-oil sectors of the
economy,” they state.
As the working
paper points out, this time around there are two main differences.
The first is that the boom is driven by new discoveries rather
than simply higher prices. T&T economy is more diversified
now.
As measured
by the actual and expected increase in oil and gas production
between 2002 and 2006, estimated to be about 100 per cent, the
current boom is larger than those of 1974 to 1980, when energy
production increased by 66 per cent between 1973 and 1978.
“However,
owing to the currently more diversified structure of the economy
compared with that prevailing during 1970 to 1980, energy revenues
are projected to register, a more modest although significant
increase from about 31 per cent of total revenues in 2002 to
about 41 per cent of total revenues by 2009, as compared with
an increase from 22 per cent in 1973 to 67 per cent of total
revenues in 1974, and to about 64 per cent in 1980,” the
authors state.
While the
situations are different between the two time periods, the issues—and
dangers—remain the same.
There is
the need to ensure that energy revenue is transferred to other
parts of the economy.
As for dangers,
a drop in energy prices is always a possibility. There is also
the fact that growth in the energy sector is likely to hide
fiscal imbalances in the non-energy sector.
The authors
suggest a formula to set boundaries for government spending
and even non-energy deficits based on revenues from oil and
gas and real interest rates.
Based on
their calculations, the authors put forward a range for non-energy
deficit of around ten per cent.
T&T’s
current non-energy deficit is closer to 20 per cent.
Generally,
they call for expenditure to be gradually contained so that
drastic cuts are not needed when resources run scarce. They
also call for incentives to be put in place to encourage saving.
Part of
that saving should be some sort of heritage fund, which T&T
has in place, although it is not yet regulated by law.
The working
paper states that the fund should be properly regulated and
offer Norway’s heritage fund as an example.
What resource
funds can and cannot do
Resource
funds can:
Crystallise
public support for saving energy resources rather than spending
them;
Let the
public see how much petroleum revenue is being saved;
Allow political
justification for budgets that build up fund resources by referring
to the need to save for future generations;
Generate
substantial investment revenues for the future;
Protect
the competitiveness of the non-resource tradable sector, by
investing its assets abroad and thus preventing a real appreciation
of the exchange rate; and
Better insulate
the economy from resource price volatility and from macroeconomic
instability generated by volatile government expenditure.
However,
resource funds cannot:
Substitute
for good fiscal policy. If the government makes contributions
to the fund according to its set rules, but still borrows elsewhere
to finance expenditures, the assets in the savings fund, to
the extent that they are matched by other debts, do not represent
genuine net savings.
Deliver
benefits without government controls on expenditure and a counter-cyclical
fiscal policy.
Reform of
the energy tax regime
The Government
for some time has been considering a reform of its energy tax
regime, in particular pertaining to the gas sector.
The main
impetus for this move has been the realisation that the royalty
rate for gas production in T&T is extremely low by international
standards.
Most of
the gas production (about 70 per cent) is subject to a specific
royalty of only $0.015 per mcf if used domestically, and $0.02
per mcf if exported. In ad valorem terms, the royalty is less
than 0.3 per cent of the value of the natural gas.
Options
to adjust the gas royalty under the existing exploration and
production contract are somewhat limited, since royalty rates
are specified in the license agreements.
Altering
these long standing agreements could be viewed by the petroleum
companies as reneging on contractual commitments.
Moreover,
a significant volume of the natural gas produced is sold to
the state-owned National Gas Company (NGC) under long-term contracts
that contain pass-through arrangements.
As such,
any increase in the royalty rate would be passed on to NGC,
and thus would result in lower government revenue. These issues
have constrained the government’s ability to change policy
not only with respect to natural gas royalties, but also with
respect to other levies on the production of gas.
To pursue
the matter of reforming the gas tax regime, the government has
appointed a technical team to undertake a comprehensive review
of the current petroleum legislation.
The review,
to be done in consultation with the oil and gas companies, will
aim at formulating a fiscal regime that would increase the government’s
receipts from the sector while maintaining the incentives for
continued private investment.
Excerpt
from the International Monetary Fund Working Paper
on T&T’s
energy boom
Note:
In the 2006
Budget presentation, Prime Minister Patrick Manning introduced
a new gas tax regime. Manning did not give details on pricing
but explained that the Government had changed the mechanism
for calculating gas taxes.
Following
is an extract of Manning’s presentation:
The new
gas tax regime will have an even larger impact on our tax collections.
As I indicated earlier, previously our gas taxation was based
on transfer prices which were considerably lower than the actual
prices at which the gas was sold. With the new tax regime based
on the concept of fair market value, the increase in revenue
attributable to the new gas regime, is about $2 billion.
