How does TT derive revenue from oil and gas?
News day reporter
Courtesy of the Geological Society
Governments usually license the area (which can be land, sea or both) to operators (BP, ExxonMobil, Shell, etc.). Operators explore for oil and gas and, if successful, these fields can be developed and hydrocarbons produced.
Governments have put in place an oil tax regime to regulate how these companies are taxed, how their contracts are managed, and so on.
These tax regimes are designed to capture a “fair” share of economic rent, which is essentially the difference between oil and gas revenues and extraction costs, including an acceptable return on investment. What “equitable” means is most fiercely negotiated by governments and corporations.
Figure 1 illustrates how the government derives economic rent from petroleum operations. From the government’s perspective, the contractor’s share is considered a cost. Therefore, the government’s share or economic rent is the gross revenue less the total cost, which includes exploration costs, development costs, operating costs and the contractor’s share.
TT’s oil industry has been around for over a century, so it’s understandable that TT’s oil tax regime has undergone many changes to accommodate the volatile nature of the industry. Our fiscal regime consists of two types of arrangements: concessional – exploration and production (E&P) licenses and contractual – production sharing contracts (PSC).
The Petroleum and Petroleum Regulations Act, Cap 62:01 governs the industry in TT and provides the regulatory framework for awarding such contracts. It explicitly states that the government is responsible for granting E&P licenses and PSCs to oil companies interested in exploring and producing the country’s resources over a specified period in a contracted area through a competitive bidding process.
Currently, the Ministry of Energy and Energy Industries (MEEI) is bidding on two separate tenders for land and deep water offshore blocks. The Deepwater Tender 2021 contains 17 deepwater blocks and companies are invited to submit their bids before the deadline of June 2, 2022. Meanwhile, the Onshore Tender 2021 has not launched again at the invitation of the MEEI. companies to designate eligible areas from 11 blocks. This closed on November 5, 2021. Further information on these tenders is available on the MEEI website. (https://www.energy.gov.tt/)
The following section explains how the government derives revenue from E&P licenses and PSCs.
TT E&P Licenses
In TT, E&P licenses were the first type of contract granted to operators to exclusively explore and produce hydrocarbons in a specified area. Initially, the duration of the E&P license is six years and can be extended to 25 years in the event of a commercial discovery. In TT, E&P licenses are mainly offered onshore and in some shallow water areas.
So how does the government get revenue from E&P licensing? First, after a company acquires a license, it is required to pay premiums and financial obligations to the government. Bonuses are one-time payments to the government and can include a signing bonus, production bonus, environmental bonus, and technical equipment bonus. In addition, financial obligations are paid annually: contributions to scholarships, contributions to training, contributions to research and development as well as the rent of the domain. Bonuses and financial obligations may vary from license to license and are independent of production, with the exception of the production bonus which is paid when certain production levels are reached.
When production begins under an E&P license, the government transfers title to the resource to the company, after which the company pays royalties, taxes and levies to the government. In TT, these are Supplementary Petroleum Tax (SPT), Petroleum Profit Tax (PPT), Petroleum Production Tax (PPL), Unemployment Tax (UL), the tax on the Green Fund (GFL) and oil tax.
It is important to note that the SPT and PPL only apply to crude oil revenues. After deducting the royalty and applicable taxes, the remaining revenue is retained by the company. Table 1 provides a breakdown of current TT oil taxes and levies.
The government has also introduced various capital allowances, special allowances as well as investment tax credits to incentivize businesses and encourage continued investment in the oil industry. Although these incentives may reduce government revenue in the short term by reducing taxable income, it is expected that the state may benefit in the long term from continued investment in exploration, development and production.
The second type of tax system in TT is the production sharing contract (PSC). These are usually offered to marine areas which are then categorized as shallow, medium or deep waters. Under a PSC, the government grants an operator the right to explore and produce resources for a specified period in a contract area.
For shallow and medium water areas, the initial contract term is six years but can be extended to 25 years if a commercial discovery is made. On the other hand, the initial contract term for deepwater areas is nine years, but can be extended to 30 years if a commercial discovery is made.
With a PSC, the government retains ownership of the resources while the contractor bears the costs and risks of exploration in exchange for a share of the production. If the exploration phase fails and no oil or gas is produced, the contractor receives no compensation for their initial investment and the government remains risk-free.
If, however, the exploration phase is successful and a discovery is made, the entrepreneur is allowed to recover his capital and operating expenses from available oil revenues. This is called cost recovery. Typically, a limit is placed on cost recovery to ensure that the government receives an early share of revenue. In the TT, cost recovery limits are set at 50%, 55% and 80% respectively for shallow, medium and deep areas. All unrecovered costs are deferred and recovered in subsequent years. The remaining revenue is the oil profit which is then shared between the government and the contractor according to a percentage agreed during the bidding process.
Therefore, the government’s share of oil profit is the main source of economic rent from PSC TTs and it is one of the two items that can be tendered during the bidding process. . ; the other being the minimum work program (quantity of seismic work, wells and other technical work to be carried out). Moreover, as with E&P licenses, economic rent is also obtained from financial obligations and premiums.
A major incentive for PSC TTs is that the government pays the contractor’s taxes and royalties out of its share of the oil profits (the operator donates a share of the profits to the MEEI, which pays the Ministry of Finance for the tax and Royalties). This provides tax stability to investors by protecting them from any abrupt government changes to royalties or taxes during the term of the contract.
It should be noted that overall, CSPs are mostly used nowadays, and all contracts awarded in Guyana and Suriname are CSPs. Their mechanisms may be slightly different from those of TTs but are essentially the same.
In summary, the TT government has incorporated many fiscal instruments to derive revenue from the petroleum industry. Revenues from E&P licenses are primarily in the form of royalties, taxes, levies, bonuses and financial obligation payments, while PSC revenues are the government’s share of oil profits, bonuses and payments of financial obligations.