Trinidad and Tobago's Current Deepwater Campaign: Implications of the Contractual Obligations and Taxation Regime

Abstract

Trinidad and Tobago is exploring 9 frontier blocks in water depths 1800 to 2200m. 3D seismic was completed in 2015 and the first well is to be spudded by mid-2016. As per the contracts, a minimum of 8 exploration wells are to be drilled. This paper aims to determine how small an oil or gas field could be and still generate economic rent. The taxation system and contractual obligations for two blocks were used to model oil fields of reserves 150 and 300 mmbbl and gas fields of reserves 2400 and 4800 Bcf. The production rates and oil/gas prices were varied to determine their impacts on investment criteria like NPV, IRR, payback time and government take. The models were used to project the minimum field sizes at different oil and gas prices that would be commercial. At $60/bbl, the minimum economic size for a standalone oil field is approximately 300 mmbbl reserves. Economic means that the field must attain a positive after tax NPV @10%. None of the gas models were economic at $3/mcf. It was projected that at this price, a single field with at least 12 Tcf reserves must be discovered to be commercially viable. Further, the minimum obligatory spend on the 9 blocks is approximately $765M in 2012 dollars. To breakeven with this expenditure, (that is, post-tax NPV = $765M) the largest field modelled (300 mmbbl) requires an oil price of $100/bbl. First tax revenues are forecasted as 2026 for oil and 2029 for gas. The first PSCs were executed in 2012, so first production is modelled 14 to 17 years later. Government take ranges 55 – 60%. While the PSC mechanism of taking taxes out of the government’s share reflects long term stability from the investor’s point of view, changing individual tax rates may be irrelevant as the full taxes owed are never paid over the field life. These models are dependent on a myriad of assumptions. Variations in reservoir characteristics, new technology, market availability and global prices can have dramatic effects on the results. The deepwater is widely considered to be the last frontier for T&T’s hydrocarbon industry. Therefore, it is critical that we understand how the contracts and taxation regime affect the commerciality of any potential fields, and make any necessary changes.