Crossing Lines

Peter Inglefield, Managing Partner, PricewaterhouseCoo-pers,  at the recent energy conference, cautioned that while the fiscal energy regime needs reforming, it did not need new and increased taxes. If the tax is increased,  there is a risk of destroying the “goose that lays the golden egg,” he said, noting that the  country’s attraction as a favourable investment destination must be preserved. Try telling that to Junior Finance Minister Conrad Enill. “What is significant is that at the present time taxation from natural gas  represents only 49.0 percent of the total petroleum tax receipts even though its income contributes approximately 62.0 percent of petroleum revenue. It is quite clear to us that given the fact that the current tax regime focuses essentially on the development of crude oil the expected returns from the gas sector are not being realised,” said Enill at the conference. In additon, he said there will be separate regimes for crude oil and natural gas.

Now that Trinidad and Tobago has tied its fate to a gas-based economy, Government is moving to put the long overdue new tax legislation in place, putting money in the state’s coffers from the increasing sale of natural gas. With massive expansion planned in the gas-guzzling downstream petrochemical sector over the next five years, the new tax legislation which would be drafted by the end of June, would be in place to bring more earnings to the country. BpTT’s chairman and chief executive officer, Robert Riley said that energy companies have been actively engaged in discussions with the Government-appointed technical team which is reviewing the current Petroleum Tax Legislation. “We believe that the Government is acting to create an over-arching framework, which, together with creating incentives for further growth, maintains major foreign investor returns while providing maximum value to the country. We are confident about a great outcome that will be mutually beneficial,” said Riley.

Although Trinidad and Tobago has been engaged in oil production for over a century, the existing Petroleum Tax Legislation, amended several times to reflect new policies and initiatives, was only put in place in 1974. Before then, petroleum operators were taxed under the General Corporation Tax Act. Enill said in addition to an increase in exploration and development activities, the country was also witnessing the growth and expansion of activities in the down-stream petrochemical industry and increasing demand for LNG in export markets.

Gas production which averaged 150 million cubic feet per day in 1975 rose to 2,500 million cubic feet per day by the end of 2004 and is projected to increase much farther in 2005. While income from natural gas sales in 1995 was less than 10.0 percent of the total petroleum income, by 1999 income from natural gas sales had surpassed income from crude oil sales. Gas sales for the country also increased by 0.36 BCFD from the year 2003 figure to 2.76 BCFD in 2004. Enill said the existing legislation does not adequately address the expansion of the gas sector in Trinidad and Tobago or in the international gas markets.

With respect to gas production, Enill said companies are liable to pay royalties at differential rates for domestic and exported gas. “By international standards, these rates are extremely low - $0.015 per thousand cubic feet for domestic gas and $0.02 per million cubic feet for  exported gas. Additionally, these companies, including those in down-stream industries, also pay corporation tax at a standard rate of 35.0 percent on profits, as well as the petroleum impost,” he said. He said based on a preliminary report of the technical team, “we will move immediately to correct those anomalies,” he said.

Legislative amendments, he said would need to clarify many issues, among them, were  the conditions under which capital allowances can be claimed; the prevention of companies claiming, all in the first year, initial allowances of 20 percent on tangible cost or 10 percent on intangible cost, as well as annual allowances and first year allowances of 20 percent each and the definition of the differences between exploration wells and  exploration dry holes as well as between direct intangible drilling costs and direct costs of drilling. Inglefield noted that while Government was focusing on addressing “anomalies,” what is really needed is a comprehensive review of the legislation, a regime that is consistent with global trends, stable and transparent and attractive to foreign investors.