Kevin Ramnarine
This week’s column is adapted from a speech I gave to the Port-of-Spain Rotary club last Tuesday titled “the bad news and the good news.” The bad news on the economy is self-evident. Government’s revenue position is significantly down and that’s the message we will hear on Friday when the budget is delivered.
In the face of falling revenue, the Government has sought to reduce expenditure, borrow money locally and internationally (about TT$11.3 billion), dip into the Heritage and Stabilization Fund and shift a part of the economic burden onto the middle class and the business community. Some of the adjustments include the reduction of the subsidisation of transportation fuels, the widening of the VAT net and changes to the GATE programme.
The economic slowdown is reflected around us. The construction sector has slowed as is evidenced by the decline in cement sales. Cement sales for the first seven months of 2016 was 318,000 tonnes. This compares to 407,000 tonnes for the first seven months of 2015 or a 22 per cent decline. New car sales have also declined by four per cent when you consider the same time period. Demand in the economy is therefore down mainly because Government spending is lower and because consumers and businessmen are being conservative.
The key macro economic issues facing the economy as we head into Friday’s budget are:
• negative economic growth;
• a persistent fiscal deficit (now into its eight year);
• a current account deficit (due mainly to lower oil and gas prices);
• increasing public debt;
• an over-valued currency;
• rising unemployment.
In these economic doldrums the Minister of Finance must plan his revenue forecast against the forecast for international oil and gas prices. With regard to oil price, IHS Energy forecasts oil prices to average US$56 per barrel in 2017 while PIRA forecasts US$59.30 per barrel. The US Energy Intelligence Agency’s oil price forecast for 2017 is US$50.58 per barrel. The consensus therefore is for oil prices to improve in 2017, but not by much.
It’s however not all bad news. Our revenue crunch is related to both price and falling production of both oil and natural gas. Natural gas production has been sliding for the last six years. That trend will be reversed in 2017 when we will have a 30 per cent increase in natural gas production. This increase does not come all at the same time but throughout the year.
Apart from the increments from the well-known projects such as BP Juniper, BP Onshore Compression and EOG Sercan, BP has also been drilling new wells to get more natural gas out of mature fields such as Mango, Mahogany and Amherstia. BHP Billiton has also recently completed the Angostura Phase III project which will maintain that company’s current production rates for a longer period and may even give us an increase in 2017. All this activity should see T&T’s natural gas supply in a better place come the end of 2017 and 2018.
These projects are a direct response to the fiscal incentives that were put in place between 2011 and 2014. Two weeks ago Spencer Dale, the Chief Economist of BP, said his company was investing in T&T because we were a competitive jurisdiction. The question is how did we become viewed as “competitive” and can that suddenly change?
It could change rapidly if companies don’t have certainty around natural gas price and around the fiscal regime. The restructured capital allowances that were put in place in 2014 and which have stimulated investment, expire in December 2017. The Government needs to tell the industry what it plans to do beyond December 2017 with the restructured capital allowances. Will these allowances be rolled over? Will they be amended or will the Government revert to the old status quo? BP’s contract with the NGC also expires in 2018 and the Atlantic Train I contract expires in 2019. The “soon to happen” expiration of these two contracts adds to an uncertainty factor which is now snowballing.
New gas development projects beyond BP Juniper and EOG Sercan will find it difficult to receive sanction in this environment of uncertainty. 2016 is perhaps the low point for the economy in this decade. Beyond 2016 things will improve as more natural gas is produced. The challenge is sustaining that increase beyond 2018. That means keeping the investment dollar flowing towards T&T.
To keep the investments in exploration and production flowing we need to always stay in that competitive space that Spencer Dale spoke about. The companies operating here need to have a clear understanding of Government’s position on the future of the energy sector. They currently don’t have that.
To compound the level of uncertainty the rhetoric coming out the Parliamentary Joint Select Committees and from Government ministers in the last year has already “spooked” the oil and gas companies operating here. Investment decisions for the multi-nationals operating in T&T are not made in Port-of-Spain. They are made in London, New York and Houston (and now Tokyo) where bad news travels at the speed of light.
Kevin Ramnarine is the former Minister of Energy of Trinidad and Tobago
