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April 25, 2019

Trinidad and Tobago upstream industry faces short-term uncertainty

The restructuring of Petrotrin - the state-owned oil company - although likely to prove beneficial in the longer term may increase uncertainty in the shorter term.

By GlobalData

In the short-to-medium term, it is likely that Trinidad and Tobago will experience a boost in upstream-sector activity with the launch of several licensing rounds and the start-up of several projects.

Trinidad and Tobago energy

However, incomplete policy reforms implemented so far have reduced the attractiveness of the sector, and more investor-friendly amendments for oil projects specifically, appear to be of lesser priority.

Further delays to these reforms may create a barrier to investment and increase uncertainty. In addition, the restructuring of the Petroleum Company of Trinidad and Tobago Ltd (Petrotrin) – the state-owned oil and gas company – although likely to prove beneficial in the longer term may increase uncertainty in the shorter term.

Bidding fortunes and investor appetite

To reverse the projected production decline, the government has launched the 2018 shallow-water biding round under a modified fiscal framework, with the round offering six blocks relatively close to existing infrastructure, in areas with perceived gas potential.

There has been speculation that this round has already received significant interest, although the fiscal framework modifications, including changes to royalty payments, may limit the volume of bids received.

The level of bidding in May 2019 will provide a clearer picture of investor’s appetite for the new framework, and it is possible that the government may make further changes for future rounds depending on the level of interest received.

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Although some gas sector policy reforms have been implemented, other modifications to improve the oil sector have been delayed but may be required to encourage greater investment.

Taxation reform and investor confidence

Specifically, revisions to the Supplemental Petroleum Tax (SPT) would help increase investor confidence. In the current climate, companies are making final investment decisions based on a break-even price of $50/bbl.

However, at crude oil prices above $49.50/bbl or higher, the SPT is levied at its maximum rate of 35% on oil produced. This significantly reduces an oil project’s profitability around this threshold until higher oil prices improve the rates of return for investors.

Unless changes are made to reduce the SPT’s impact on oil projects and flexibility is brought in around this threshold, Trinidad and Tobago may face difficulties in attracting investment. This change has been under consideration for some time although it appears to be of lower priority than the gas sector reforms. If the changes continue to be delayed the prolonged uncertainty may serve as an additional barrier to investment.

Trinidad and Tobago, regime flow chart – royalty/tax

Source: GlobalData

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