Latest update November 28th, 2024 3:00 AM
Oct 23, 2023 News
Kaieteur News – It is common knowledge that the oil and gas industry generates huge amounts of revenue. Upstream multinational investors in developing countries demand a rate of return of no less than 20 percent, so the industry is also very profitable. It is the most significant single source of revenue and foreign exchange to T&T.
Most know the industry to be a high tax-rated one, so we tend to believe that we get a large portion of the value generated by oil and natural gas. The headline figures of 50 percent Petroleum Profits Tax + 5 percent Unemployment Levy may have led us into a sense of magnanimity wherein we tend not to pay attention to the “nickels and dimes.” We intuitively believe that this high rate means we must certainly be getting a fair and equitable share for our input. After all, the raw materials that are sold and processed to generate the revenue actually belons to us, as do the rights we give to investors to take them out of T&T.
Given the windfall we seem to be getting, it is easy to forget that taxes derive from profits, which only accrue after costs are recovered. Few of us are aware that over 80 percent of the revenue made from selling our oil, gas and products derived from them, is spent by the operators on third-party suppliers. The vast majority of the spend is made outside of T&T, so that the government may not even capture the tax due from these entities, particularly those who are hidden behind “global contracts” or Barbados or St. Lucia-registered “parent companies” and so don’t even pay withholding tax because of a loophole in the CARICOM tax treaty in the latter case.
Value/Revenue Distribution from Oil & Gas – BP 2021, 2022 and Average 2011 to 2022 (BP’s Sustainability Reports)
The graphics are meant to give an illustration of how revenue from oil and gas is distributed, using BP’s latest published numbers and the cumulative distribution of value for the period 2011 to 2022. Through taxes, Governments along the chain get less than 3 percent of the total value generated from oil and gas, while third-party providers of goods and services retain over 80 percent.If a producing country like T&T were toprovide 10 percent of the goods and services, it wouldretain 8 percent of the entire value, whichwould more than double the revenue staying in the country. Most of the value from the sector could then be in the hands of the private sector!
Some have argued that since T&T took Royalty at 12.5 percent and Supplemental Petroleum Tax (SPT, also known as a Windfall Tax) off the top line, the government’s share in T&T far exceeds that global figure of 3 percent. What must be factored in is the reality that, the companies are allowed to recover this Royalty and SPT as operating expenses, before paying taxes. Bye, Bye windfall!
There has never been an SPT for natural gas, even though this has been the major source of production and revenue for more than 2 decades in T&T. Among the many tax loopholes that continue to haemorrhage T&T, companies are also allowed to recover any bonuses, signature or production,which their contracts require them to pay to the State. So a bonus isn’t really a bonus, but a short term loan!
Those managing the sector on our behalf seem too “innocent” to tackle this multitude of revenue loopholes, to the charitable term that Lloyd Best favoured when describing an action that could have been driven by any of ignorance, fear or greed, but of which he may have been uncertain.
Noble Philip, in another one of his outstanding online articles (“Sugar and a cuppa tea—understanding colonialism” https://tinyurl.com/32j9k5sb) recently reminded T&T of the principled start to our independence journey, which laid the foundation for the prosperity that followed:
At the time of our Independence, the practice was that Britain would give a ‘golden handshake’—a gift, to the new nation as a goodwill gesture and to help them deal with the economic challenges that lay ahead.
Britain’s offer was minuscule compared to what Williams had documented as the country’s needs. Williams summed it up: “start off your independence understanding Britain is not going to help you. They have no interest in the West Indies.”
In the bitter negotiations, Britain included a clause that required Trinidad and Tobago to purchase British goods with the funds on loan. Williams perceived the offer in these terms:
“If aid fails to create employment in the country to which it is given, then it is a trap… Economic aid limited to the purchase of the goods and services of other people is nothing more than a perpetuation of colonialism.”
Dr. Williams was savvy enough to embed his understanding of the inter-relationships of labour and resources with the capital and knowledge that foreign investors brought into the governance model which was developed for our petroleum industry. With the support of leading international experts, the 1963-64 Mostofi Commission of Enquiry (COE) provided the template for linking the industry to national development through equitable participation of our nationals and in-country value addition to our resources.
The landmark legal and regulatory framework that was then developed aligned the industry to our aspirations as a newly independent, democratic nation, on the path to prosperity. The recommendations of the Mostofi enquiry spawned the Ministry of Petroleum and Mines (as it was then called) as Regulator as well as The Petroleum Act of 1969 and Petroleum Regulations of 1971. These legal instruments prioritised equity between investor and resource owner and people of T&T, no doubt heavily influenced by the watershed events of 1970, the :Black Power Revolution.” These were followed, in the same vein, by the Petroleum Taxes Act of 1974 and its subsequent Regulations.
These laws and regulations were ahead of their time and have provided inspiration to many new producers around the world. They make strong provisions for what is today referred to as “local content.” A concept that wasn’t even defined when its implementation and oversight were enshrined into T&T’s laws.
But they went beyond local content, widening the net of activities to be done in T&T which in turn increased employment and the tax base. Sadly, several of these very significant provisions that could easily double, triple or quadruple the revenue and foreign exchange earned from the sector, have either been unimplemented or avoided.
The 2004 Local Content Policy built on that founding philosophy and the existing law, making specific provisions to allow T&T to capture the benefits of the booming natural gas industry. In keeping with the spirit of the Independence Project, the local content policy was interwoven into the Vision 2020 national development strategies for both the Energy sector and the nation. The Vision 2020 strategy for the sector had as its main goal to build a resilient, world class supply chain for the oil and gas sector, with priority given to those goods and services that can enhance other sectors of our economic activity and add new ones, especially in the areas of digital technology, engineering, fabrication, construction and maritime services. Diversification and sustainability were enshrined and possible!
Even so, there are those who have been preaching that T&T has no laws for local content, but have been regulating that aspect of the industry through “suasion.” Given that the Ministry of Energy, as regulator, has failed to enforce these provisions, it is easy to see why this narrative has become popular with both the multinationals and the Ministry itself, with the consequence that many capable young people, trained at great expense to the taxpayer, remain unemployed while we pay (through cost recovery) for foreigners to do work in far-away lands that can be done here in T&T by our own people.
Two small examples might illustrate the nature of the change from T&T behaving as owners of our resources and destiny, to servants to foreign masters.
As soon as operations of the American owned AMOCO were taken over, a slew of British companies flooded into Galeota and Port of Spain, contracts in hand. T&T’s well-established, indigenous service companies who had invested enormous amounts into facilities, equipment, technology and training of their people and who had been supporting the main operators onshore and off- for decades, including AMOCO, with safe, sound and cost-effective operations, were suddenly replaced by these companies. Locals lost their businesses and jobs.
Companies were paid millions in “mobilization” costs just so that they could come and take away our jobs and livelihoods and charge T&T more for the privilege. T&T even had to pay those mobilization costs as they would have been “cost-recovered.”
Some newcomers conveniently had a local partner, who had no prior experience in the sphere, but may have been “well connected”. Others simply displaced the existing local suppliers because they were not “certified to work in North Sea conditions” which suddenly became the standard for T&T. Not that this was required, but the multinationals were now being allowed to set national standards for their advantage and that of their own nationals.
While the law and policy emphasize the value of locally-owned businesses and seek to give them preference, neither the policy nor the law requires any company to give up or share its technology or intellectual property rights with a local, nor do they require an international company to have a local partner or for ownership of any good, asset or service by a T&T company or individual. In subsequent years, the Ministry came to define local content as the value of expenditure that stayed in the local economy, measured in a monetary sense.
The law and policy were framed to ensure that T&T captures and retains value from the industry in a fair and pragmatic manner. Companies coming into T&T understand our laws and contracts, often better than our regulators. They factor these into their investment and operational decision-making. They also anticipate that at any moment an astute regulator might call in its chips, but they don’t need to do the government’s job for it.
With the recent decline in activities and production the questions that come to mind are:
What T&T does will be determined by the nature of the leadership of its energy sector. Decision-making is influenced by circumstances, but ultimately shaped by character. Dr. Williams’ character and decision-making delivered an outcome that was appropriate for T&T’s circumstances during the independence era.
Does T&T still have the character of leadership to declare that “Foreign Direct Investment limited to the purchase of the goods and services of other people is nothing more than a perpetuation of colonialism?”
A lesson for Guyana is that, necessary as they are policies, laws and regulations are, they are not sufficient and certainly will fail to deliver the desired outcomes of local participation or any other facet of its oil and natural gas industry. Capable, empowered, transparent and accountable regulators, continuously overseen and kept up to date, are essential for success.
Nov 28, 2024
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