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Monday 18 February 2019
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The state of drilling in TT

DRILL more natural gas and earn more tax-dollars from energy companies, Finance Minister, Colm Imbert, urged the Ministry of Energy at a recent sitting of Parliament’s Joint Select Committee (JSC) on Energy Affairs at Tower D, Port-of-Spain.

The committee chaired by Imbert keenly probed Ministry officials headed by permanent secretary, Selwyn Lashley, to expose shortcomings in the exploration and extraction of natural gas and in the tax-beaks given to incenti vise oil/gas companies.

Imbert bemoaned a steep fall-off in the number of rig-days of drilling of exploration wells. This fell from 5,622 rig days in 2006, to 710 rig days in 2007. For successive years the rig days were 837 (in 2008), 113 (in 2009), 87 (in 2010), 142 (in 2011), 268 (in 2012), 227 (in 2013) and 270 rig days in 2014).

Imbert asked why the country does not have a consistent number of rig days year in and year out.

Lashley in reply blamed the inconsistencies on several factors, firstly a “clustering” of drilling done by several fi rms in a short space of ti me whenever they jointly import an off shore rig into the country to share.

However Imbert challenged that to say the figures showed companies doing no exploration drilling for many, many years.

Lashley retorted that exploration does not consist only of drilling but also carrying out seismic testing and then interpreting the results.

Independent Senator David Small asked if the Ministry has a target of say 200,000 feet or “X” number of wells, from which to work backwards to arrange the bid-rounds for various bits of acreage? He asked, “Do we have a structured plan for exploration in the country?” Lashley replied that the Ministry supports continuous exploration, and that drilling may fall early or late within a six year programme of developing a well.

Saying that the country’s depleting gas reserves must be replaced by new finds, and that for every fi ve exploratory wells drilled maybe only one or two yield any gas, Small asked if any analysis was being done on these figures? Lashley said the country needs to replace about one trillion cubic feet (tcf) per year, yet suggested that the licences held by companies such as BP contained no requirement to drill.

“They have acreage and there is no exploration programme in the licence to which they are committed by licence to execute,” he revealed. “So that is a conversation that has to take place in terms of, you know, what do they have in their inventory, what is the sort of prospectivity and their programme in terms of investment, capital investment, in order to support drilling”.

Imbert said that many fields see a rapid decline in production - such as a drop from 75,000 barrels per day (bpd) to 10,000 bpd in a BHP Biliton field off the East Coast. He declared, “Why would you not have a targetted drilling programme on an annual basis, since the only way you could increase production is by drilling? How else can we fi nd oil except by drilling?” Minister of Local Government, Franklin Khan, said while new licencees have a duty to meet a minimum amount of exploratory drilling, much of TT’s prospective acreage is held by two or three companies that are not so bound.

“So your core companies have gone past their minimum work obligations, but they still sit on the prime acreage of the country,” said Khan.

“As a country and as a Ministry, you have to engage them now to come up with a robust exploration programme because they are on the productive acreage, and we have to do something about that.

The issue here is not giving a new PSC (production sharing contract) with somebody getting a new company to drill two exploration wells, because the chances of finding there is significantly smaller than in the productive acreage under the control of the three companies of which I speak (Repsol, Petro Canada and Canadian Superior).” Lashley said the TT branch of any global oil/gas firm must compete with other branches of the firm abroad for capital to invest for exploration and production, and so a State can offer incentives/taxbreaks for fields deemed “marginal prospects”.

However Small lamented that this country has 200,000 hectares of productive acreage, yet the natural gas industry is stagnant and oil production is in steep decline.

“I think some urgent action is required,” he urged. Small urged the Ministry take “a firmer tone” towards companies, who must pointedly be asked their plans for activati ng TT’s prospective assets.

“And if your plan does not meet our requirements, then let us discuss a way in which we could get some other party in there to get our requirements met.” Small hoped that in these talks TT will be “very, very focused on delivering results”, just as the companies are for their stakeholders.

“They are laser focused on it, and when they come in the room they do not want to move unti l they get their stakeholders met. All I am saying is we should adopt a similar strategy. We have a situation where our gas industry is stagnant, our oil sector is also in sharp decline, and we need some of these assets to be performing for us, not on your schedule but rather on our schedule,” urged Small.

“But I have also been in a room with companies under contract, with fi rm hard commitments to the Government, which have come to the room and said, ‘Listen, we are not able to abide by these current terms, and we would like to have a discussion with you to change these terms’. I recall very well, one very large company decided that they were not going to drill a certain amount of wells, and opted to do some programme with Petrotrin and the Ministry accepted that. All I am saying is when these companies have their issues and they want terms changed or adjusted, they come knocking and they come knocking very, very hard and are very clear about what they want. All I am saying is, in your most diplomatic style, that we engage them with similar fervour.” Trade Minister, Paula Gopee- Scoon, asked about a shortage in gas-supply to downstream operators.

Lashley replied that potential marginal fields are smaller than usual, with less attractive characteristi cs that would need the use of technologies now under discussion with local universities.

Deputy permanent secretary, Heidi Wong, said this country must set a fiscal regime of tax-breaks for oil/ gas companies that are comparable to rival energy-producing nations, so as to attract investors. “If we are to remain in the market, we must be competi tive”. She spoke of a balancing act between giving taxbreaks and earning revenues.

Imbert retorted, “I understand, but then we reach present-day where they are writing off 100 per cent of the capital investment in the first year and you get zero income, and they are carrying forward their losses and you get zero income next year and the year after that. So do you have a scientific approach to this? Is it a hit and miss approach or is it that there is a particular point in the range of countries that you want to be?” Energy analyst, Ivor Superville, spelt out the country’s decline in energy production. Oil production fell from 140,000 barrels per day (BPD) in 2006 to 87,000 bpd in 2015, and to 75,000 bpd today according to Imbert. Likewise the proven gas reserves fell from 12.2 tcf to 11.5 tcf, all against the backdrop of an aging industry infrastructure.

Franklin Khan supported Imbert’s call, saying, “The governing principle of taxation of a wasting asset is that the State must maximize economic rent, because we are not producing oil just to say we are producing oil, because ‘when de oil finish, it finish’ and ‘when de gas finish, it finish’.

“In other words, if the State cannot extract economic rent from that asset that God has put here, it makes no sense producing it. That is point one. So there is a limit to where you could bring the incenti isati on.” Khan added, “Secondly, when you give 100 per cent write off on an exploration well, PPT (Petroleum Profits Tax) is 50 per cent, unemployment levy is fi ve per cent. What you are in fact doing, if the company is not tax liable, is the State is funding 55 per cent of that well once you can write it off on your petroleum profit and your unemployment levy. So understand it, you are actually funding that well half way!” Khan also warned against taxbreaks given to new exploration wells drilled in wider fields known to contain oil. “But what seems to be happening is that in known acreage, new fi eld extensions and fi ld extensions, if they are categorized as exploration you are shooting yourself in the foot, because in some of those old E&P licences it is difficult to classify a field extension prospect as a new fi eld wildcat,” he said. “I feel you have to make a further subdivision of your exploration wells to say “new field wildcat”, granted 100 per cent write-off of exploration costs. But you should have a sliding scale where those that fall in between cannot qualify for 100 per cent write-off .” Gopee-Scoon urged TT to heed those countries such as Chile, Germany and Saudi Arabia which put a limit of three to fi ve years on the ti me for which a company’s tax losses can be carried forward into successive years. “Why is it that we have driven ourselves to this extent where you (oil/gas companies) can just do what you want for as long as possible?” Told by Superville that this practice was due to provisions of the Finance Act 1988, Imbert mulled, “Is it ti me now to revisit it?” Getting a nod from Lashley, Imbert urged him to bring his own recommendations to the next JSC sitting a fortnight later.

Pointe-a-Pierre MP Dr David Lee highlighted a company which incurred no exploration expenditure in 2015 but sti ll got a $103 million tax-break due to an increased capital allowance. Superville denied this was any loss of State revenues, saying it is merely a deferral of payment. Imbert countered that a delay in payment consti tutes a loss in revenues to the Government.

He mulled the benefit of the 100 percent capital allowance as an incentive. “It worked, but it worked in one way. They (oil/gas companies) are coming in but we are getting no revenue, so it really hurts the country in terms of the bottom line.

So, we need to look at it again.” Chief Technical Officer, Richard Jeremy, in an update about on-shore drilling said the Ministry in 2014 had allocated three land blocks with sum 12 exploration wells committed and due to start by 2017, after some initial geological and geophysical work.

Minister of National Security, Edmund Dillon, noted a backlog of 385 audits of service-providers and contractors. Imbert said only 11 staff members are doing 385 audits, and asked how many persons are actually needed to do so? Wong said two extra persons were being sought, but clarified to Imbert that this was to handle ongoing work, but that the backlog should be done by more persons hired as service-providers.

Imbert hit, “I find that the two Ministries that should not be short staff ed is my Ministry and Energy.

What we want to know is how much, what is the extent of your shortage, or your resource constraints, and in which disciplines, and do you have is definite plan? Because I can assure you, I think I can speak for all members of this Committ ee, we will support any increase in staffing at the Ministry of Energy and Energy Industries that is required, so we ned to know. One of the things I want to tell you, by the way, I will keep pushing unti l all secrets are revealed. We are not going to allow any secrets in this Committee.” Imbert queried a rise in liquefied natural gas (LNG) sales to North America where prices are low and a drop in exports to Asia where prices are high. Jeremy blamed this on committed gas to North America and due to the inclusion of Mexico in the definition of North America.

He added that gas-prices in Asia have fallen, so making LNG exports fetch a better price in nearby South America due to lower freight costs.

Imbert asked if the Government has to just sit back and let Atlantic LNG send its exports wherever they choose, to be told by Jeremy yes.

Replying to Small, Ministry advisor, Frank Look Kin, revealed that the Ministry has no official policy on gas allocati on between the rival demands of Atlanti c LNG and downstream users, even in recent times of gas-supply shortages. He vowed to supply figures.

Imbert asked if there should be a policy, to which Lashley said yes.

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