Energy Policies

Fiscal Regime

2010 New Fiscal Measures for Petroleum Upstream Sector

In 2005, the Government took a strategic decision to review its petroleum fiscal regime every three years. In keeping with this objective, the Government in February 2008 appointed a Committee comprising technocrats from the Ministries of Finance, Energy and Energy Industries and senior managers from state-owned petroleum companies to review and make recommendations on the petroleum fiscal regime. The Committee was chaired by Dr. Kenneth Julien and advised by an international petroleum tax consultant.

The terms of reference of the Petroleum Tax Review Committee included:

·          Review fiscal incentives for deep water

·          Review SPT on small petroleum operators

·          Review incentives for marginal or small fields, drilling activities, enhanced oil recovery and heavy oil

·          Review PSC structure

·          Develop a special regime for gas, and

·          Review of taxation regime for downstream, projects

The Committee also reviewed the Competitive Bid Process because of its potential impact on Trinidad and Tobago competitiveness.

The initial recommendations were presented in July 2009.  However given the financial crises, other energy developments and stakeholders’ comments the Committee again revisited the proposals with emphasis to the contractual arrangements that will be offered under future competitive bid rounds as well as the incentives offered under the concessionary (tax/royalty) arrangements. 

Essentially, it was agreed that the contractual arrangement to be used for future bid rounds should be the production sharing contract, however its form and terms and conditions would vary from the 2006 taxable “PSC”.  The new model PSC is intended to reduce some of the inherent risks associated with the Taxable PSC and seeks to encourage investment.  

With respect to the concessionary arrangements, emphasis was placed on those areas and activities where incentives for revitalization and sustainability were required, such as in the mature offshore oil acreages and on land where enhanced oil recovery projects are undertaken.  Specifically, the incentives will directly impact on the Supplemental Petroleum Tax rates that will be payable by companies.  In so doing, it will provide companies with additional cash flows to re-invest in the upstream sector.  This new regime is intended to encourage new investment while allowing current production levels to be sustained.

Further details of the fiscal recommendations that have been accepted by the Government are outlined below under the following headings:

·          The Competitive Bidding Process

·          Production Sharing Contract – Form, Terms and Conditions

·          Tax/Royalty Arrangement – Supplemental Profits Tax Proposals

A.         The Competitive Bidding Process

The competitive bid process has been redesigned to provide for simplicity and much shorter time-frame between the start of the bid process and the signing of the contract.  A major feature is the reduction of biddable items to two items, work programmes and Government’s Share of Profit Petroleum.  While it was originally intended that companies be able to self-assess their bids, the new process would only facilitate self-assessment of companies’ work programme. With respect to the Government’s Share of Profit Petroleum, given the competitive nature of this item, this could only be assessed upon evaluation of the bids.

Also included in the process will be a prequalification exercise to determine a company’s financial and technical competencies and most importantly, its status as a potential Operator for the acreage.  This will ensure that the most suitable and efficient companies are selected to operate this country’s acreage.

Another feature that would be introduced is the nomination of acreages by companies.  This feature provides an opportunity for companies to indicate the acreages they wish to be considered for the inclusion into the upcoming bid rounds.

It is planned that the entire process should take no more than nine months as compared to 1 - 2 years that currently pertains. 

B.         Production Sharing Contract – Form, Terms and Conditions

Instead of the Taxable production sharing contract that was used for the 2006 Competitive Bid Round,   a more conventional-styled PSC similar in some aspects to the 1995/1996 Competitive Bid Round is proposed for future bid rounds. This new PSC will be used for acreages in shallow water-depths of less than 400 metres; acreages in average water depths of more than 400 to 1000 metres and deep-water acreages with depths greater than 1000 metres. 

Under this new model PSC, the GORTT’s Share of Profit Petroleum will be taken in lieu of Petroleum Profits Tax, Unemployment Levy, Supplemental Petroleum Tax, Royalty, Oil Impost, Petroleum Production Levy, Green Fund and any new tax charged on revenues from petroleum operations with the exception of Withholding Taxes and Stamp Duty.  As a consequence, legislation amendments will be required, to the Petroleum Taxes Act, Unemployment Levy and Green Fund Levy etc

The Share of Profit Petroleum matrices will also be opened to allow companies to bid the GORTT’s Share of Profit Petroleum.  Further to this, the price bands and production bands for these matrices have been adjusted to reflect the expected pricing environment. The windfall feature first introduced under the taxable production sharing contract will be retained. 

Some other features of the model PSC include as follows:

1.         Ringfenced  (Non-consolidation)

Like the 1995/1996 models, these new PSCs will not provide for consolidation. As such costs and expenses incurred will only be recovered from the given production sharing contract; no consolidation of accounts between contracts or licences will be allowed.  This departs from the Taxable PSC that provided for some limited consolidation.

2.         Carried Participation

Carried Participation for the State will be no more than 20% and would be only considered for certain shallow water-depth acreages (400 metres and less). There would be no carried participation in acreages with average (above 400 but less than 1000 metres) or deep water-depths (above 1000 metres).  This measure forms part of Government’s overall policy for broadening accessibility to its resources and as an avenue for expanding capability and capacity within the state sector.

3.         Financial Obligations

Unlike the 1995/1996 styled production sharing contracts, financial obligations would be clearly fixed and stated in the contract and will no longer be biddable items.  This would allow emphasis to be placed on the work programmes and sharing of profit petroleum, the two critical areas for consideration in evaluating prospective bid offers.  In addition removal of this obligation reduces the upfront risk to investors thereby immediately improving the project economics.

For the deep water acreages, signature bonuses will only be used in the event that   two or more companies achieve equal points at the end of the bid process.  Consideration will also be given to having a signature bonus for shallow water-depth acreages that are considered to be highly prospective.

4.         Cost Recovery

 With respect to cost recovery, the limits will be increased and fixed at 50%, 55% & 60% for shallow, average and deep water-depth acreages, respectively.  In earlier production sharing contracts, these limits were biddable items.

5.         Fair Value Mechanism

A mechanism consistent with the previous taxable PSC and similar to the provisions of the Petroleum Taxes Act will be retained.

6.         New Administrative Mechanism

A new mechanism to facilitate the administration of the collection and payments of taxes that are to be paid out of the Government’s Share of Profit Petroleum, on behalf of the companies, as well as provide for foreign tax credit eligibility is currently being addressed. 

C.         Tax/Royalty Arrangements - Supplemental Petroleum Tax

The Supplemental Petroleum Tax was introduced in1981 and is regarded as a windfall tax that is charged on gross income.  Over the years, as economic and industry related factors warranted, several amendments were made to this tax.   The last change was made in 2007, when the allowances, with the exception of royalty, were removed and the rates adjusted accordingly.   This tax is applicable only to crude oil income.  

Oil production today stands just over a mere 100,000 barrel of oil per day, (bopd), a far contrast from five years ago when production levels were reported at 145,000 barrels of oil per day.  Notwithstanding the fact that energy sector is now predominately gas based, the Government is of the view that the crude oil sector can be resuscitated by offering incentives that would stimulate activities and encourage investment for crude oil development. The incentives to be offered under the SPT regime would target key areas.

Under the new SPT regime, the classification of differing rates for pre and post 1988 was maintained for marine operations. However with respect to of land produced crudes, due to several joint arrangements, new entrants and the new licences that were granted to Petrotrin in 2007, this concept was no longer applicable. 

It was further determined that the current schedule of rates were no also longer applicable.  Given the prevailing cost environment, companies would break–even or make marginal returns at around US$50.00 per barrel.  Therefore SPT rates at US$50.00/b and below will be set at zero percent.  For prices above $US50/bbl and up to $US90/bbl, a fixed SPT rate would be charged.  For prices above $US90/bbl but less than $200 a sliding scale would be used. These rates would be calculated using a formula. These rates would be capped at $US200/bbl, for Marine (pre 1988) at 64%; Marine (post 1988) at 55% and for Land at 40%.

Sustainability incentives would be offered to mature marine and small marine oil field. These incentives will provide for a 20% discount on SPT rates for both mature marine and small marine oil fields.  A mature oil field is defined as a field that is 25 years or more from the date of first commercial production, while a small marine oil field is defined as one with production levels of less than 1,500 barrels of oil per day, (bopd).  It should be noted that companies will only be allowed to qualify for one of these discounts.

An Investment Tax Credit of 20% on qualifying capital expenditure will also be offered for mature oil fields (either land or marine). With respect to enhanced recovery projects utilising either steam, carbon dioxide (CO₂₎, or water flood injection, a 20% tax credit on qualifying capital expenditure will also be granted. Under this provision, companies will only be eligible for one of these investment tax credits. Only income in respect of crude oil operations will be considered for this incentive.

The  investment tax credits could  be claimed only in the quarter in which the expenditure giving rise to the credit are incurred and are limited to the total SPT liability for a fiscal year.  At the end of a company’s fiscal year, any shortfall in claiming the credits could be addressed by requesting an amendment to any previous quarter in the same fiscal year. Excess credits in a fiscal year will not be allowed to be carried forward to offset in any succeeding fiscal year. Additionally in instances where the plant and machinery is disposed of within three years, credits will be recaptured.

Qualifying capital expenditure for investment tax credits will be defined as Direct tangible and intangible costs (exclusive of all dry holes) incurred in field development activity for both marine and land oil fields, and Capital expenditure incurred in the acquisition of plant and machinery as specified for EOR projects. Finance costs, administrative costs and other indirect costs are not to be included for the allowance.

These fiscal measures together with several others are geared towards improving this country’s investment climate and creating opportunities for enhanced activities in the petroleum sector. In so doing, these measures will promote this country’s economic recovery and long term sustainability.