By Kevin Ramnarine
I hate to be the bearer of bad news but the economic drought will continue into 2018 and maybe beyond. While the recession will end, thanks to increased gas production from the Juniper project, Government revenue in 2018 will not be vastly different from 2016 and 2017.
Our “energy experts” should know that oil and gas revenue is not only a function of production. It is also a function of price and the prevailing tax regime.
Government revenue was down in 2016 and 2017 because of lower oil and gas prices and production. The accelerated capital allowances for exploration and production introduced in April 2014 has had no major impact on Government revenue as was the once popular myth. They however did their job and stimulated drilling the results of which will be realized in 2017 and beyond.
As a consequence, the economy will grow in fiscal 2017 by about 0.5% due mainly to new natural gas production from three projects that were initiated in 2014-2015. Juniper should take BPTT back to a production level it last enjoyed in January 2011. Sustaining that is the challenge. That increase in production will benefit both Atlantic and the NGC. This is good news but the impact on revenue in fiscal 2018 is debatable when you consider – carry forward losses, low LNG prices and low ammonia prices.
Lower revenue means lower expenditure. Demand is down because there is less money for the Government to spend. In fact, the forecasted $48 billion in revenue for fiscal 2017 will not be realized by some distance and the actual figure may be closer to $TT 40 billion. Lower demand is reflected in sales of foreign exchange by commercial banks to the public. This decreased from $US 7.4 billion in 2015 to $US 5.8 billion in 2016 and is $US 2.6 billion for the first six months of 2017.
This fall in demand for forex is driven by two variables. The first is the persistent problem of access by the public to forex and the second is overall lower demand. Even with lower demand for forex, the overall net foreign reserve position has continued to slide. From $US 10.7 billion in June 2015, it fell to $US 8.7 billion in June 2017.
The construction sector has been hit hard as reflected in cement sales which for the first six months of 2017 were 6% lower than in the first six months of 2016. New vehicle sales were 20% lower for the same period. At the Port of Point Lisas, there has been a 24.9% reduction in the volume of containerized cargo when we compare 2015 to 2016. Most of that contraction is related to imports. Restaurants, fast food outlets etc are all seeing lower sales.
Attention will now turn to the 2018 budget. Regarding the budget assumptions for price, the natural gas price remains a mystery to most. For purposes of demystification, the natural gas price used in the budget is not the “Henry Hub” price that we see on the TV. It is the weighted average “net back price” for all the natural gas sales contracts in T&T. That means sales by the upstream companies (BP, Shell, EOG and BHP) to the NGC and Atlantic. The budgeted $US 2.25 per million British thermal unit for natural gas in fiscal 2017 will not be realized because of low LNG and ammonia prices.
With respect to the oil price, for fiscal 2017, the West Texas Intermediate (WTI) oil price averaged $US 49.40 per barrel. The 2017 national budget was based on an oil price of $US 48 to $US 50 per barrel. What this means is the country collected very little supplemental petroleum tax (SPT) for most of 2017 because this tax only kicks in when prices average above a $US50 per barrel. The other major taxes are Petroleum Profits Tax (PPT) and Unemployment Levy (UL). These are taxes on profits. Since company profits have been low, PPT and UL will be low.
What about oil prices in 2018? PIRA a leading international consultancy sees the WTI price for crude oil averaging $US 48.70 in 2018. The U.S. Energy Intelligence Agency sees WTI averaging $US 50 per barrel in 2018. Prices seem set to remain low despite hurricanes and threats of nuclear war. This is because of the continued impact of the shale revolution in America. In 2018, Government should not bank on collecting much SPT and PPT/ UL collections might be small due to carry forward losses and low commodity prices. Royalty payments will also be low and there are serious questions about how much royalty Petrotrin owes the Government.
What is the plan? Firstly, a budget must not only be an exercise in bean counting. A budget speech must speak to an overarching economic philosophy. Secondly, that philosophy should inform an economic strategy to take the country forward. Without this, we are in for a long economic drought. It’s one thing to be broke and it’s another thing to be broke without a plan. The only thing worse than a lack of money is a lack of ideas. After two years we have not heard of any coherent plan to transform the economy or to navigate us out of this economic funk.
Express September 8 2017