By Andre Bagoo Thursday, July 5 2012

CAN reducing tax on oil companies make more money for the State in the long-run?

It might seem counter-intuitive, but according to findings of the University of the West Indies (UWI), discussed last month at a seminar, trimming taxes could also encourage more oil to be found in a situation where oil is expected to run out in about a decade’s time, according to some reports.

Oil stakeholders agree that even with recent smaller finds, such as the estimated 32-million barrel deposit discovered on March 13 at Galeota, the decline remains a problem. Energy experts say the Galeota find, by Bayfield, which was announced by Prime Minister Kamla Persad-Bissessar, earlier this year, is not the panacea to dwindling reserves. They say more needs to be done to increase production.

The University’s Petroleum Geoscience unit, based at St Augustine, estimates the State could earn as much as eight times its current revenue if it foregoes imposing one of five types of taxes oil companies pay: the Supplemental Petroleum Tax (SPT). “Trinidad is faced with declining production and an undiscovered resource base,” a team, including Allan Russell (a business adviser to oil company Repsol) and Wayne G Bertrand, argued in a presentation at a UWI revenue management conference at the Hyatt Regency on June 20.

They called for a fiscal tax regime which is more sensitive to production cycles of oil companies.

“Fiscal systems by design are inherently inflexible, therefore modifications over time to mirror changes in the production life cycle must be made. Resistance to changing fiscal systems is a restraint.”

They argued that taxation calculated via percentages of production creates a problem for companies that have fixed production costs. Over time, as the production from oil facilities decline, companies may be “overtaxed” giving the sliding scale of profits.

“Due to fixed cost constraints or operations, percentages adversely affect the ability of investors to re-inject required capital to go after smaller incremental production in the late field life,” they say, arguing that Government taxation amounts to almost 85 percent of surplus revenues in later, critical stages.

“In the mid-production and late stages of a field, Government takes in percentage terms is over 85 percent and this overtaxes investors, thereby curtailing surplus for investments and in turn curtailing new production and the possibilities to extend field life.”

“Fiscal adjustments are necessary for investors to develop incremental fields in order to maximise oil recovery economically,” they argued. “These adjustments are required over the distinctive periods during the life cycle of an oil-field.”

The University unit is calling for a new system that will make tax regimes more flexible and adaptable.

“There should be a mechanism to review fiscal systems regularly to adapt to changes in the environment or producing conditions and encourage further investments.”

But the removal of a tax, in a situation where oil is running out, would be a risky move which would not be a guarantee of further oil finds, which are key if the strategy is to be profitable in the long-run. Also, the tax removal could hurt revenue for the State in the short-term, a consideration which would, no doubt, engage political factors.

Minister of Energy Kevin Ramnarine could not be reached for comment, however, the Ministry’s Senior Energy Analyst Heidi Wong, who spoke at the UWI conference last month, said the issue of the fiscal regime is “under review.”

“There are mixed reactions depending on what you are looking at. Some aspects of the fiscal regime are competitive but there is always room for improvement depending on the trends that are happening worldwide,” she said.

The UWI team argue that taxes should be applied differently for the different phases of an oilfield production cycle: the cost recovery period; production phase; mid-production phase; and mature phase. Using a hypothetical example, Russell said one field could earn as much as $785million in revenue for the State in the long-run based on a tax regime of $10 million in royalty and $55 million in other tax and a charge of zero SPT.

“With the imposition of the SPT production tax, the government revenue will be zero since no investment will take place,” he said.