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MAXIMUM EXTRACTION: SELF DEFEATING POLICY By David Walker

posted 26 Jul 2017, 03:46 by Gerry Kangalee   [ updated 26 Jul 2017, 03:49 ]

David Walker
For as long as I can remember, successive administrations have boasted about their ability to increase the rate of extraction and monetisation of our oil and gas reserves. Minister after minister boasts to Parliament that he/she was responsible for extraction of more reserves than the predecessor. Each one tells us about the clever tax changes that they made in order to make that happen.

We are not alone. A similar policy was implemented by the Conservative government led by Margaret Thatcher in the UK during the eighties and nineties. Every effort was made to maximise the returns from this arbitrarily given bounty in the shortest possible time.

No government possesses the latest technology, expertise or other resources needed to pursue such a policy. They must therefore offer ever increasing inducements to those companies that did have those resources. Once a decision is made to maximise short term exploitation of energy reserves, any nation is then in a bidding war with other nations for the attentions of the large energy companies.

The reality in that situation is that energy rich nations have embarked on a competitive spiral of inducements to the world’s major energy corporations. Listen to the speeches of our leaders and you hear of the never ending tax breaks on offer. Where will it end? Can we ever satisfy their desire to avoid taxation? And exactly how much of the value of the extracted material does the country retain?

I wish to suggest that this policy is self defeating and makes no financial sense. Consider an analogy. You have inherited the family quarries that the family has owned for generations. Would you simply increase production to the maximum possible, or would your extraction rates be influenced by other factors?

Would you not be concerned with what you leave for future generations? Would your present needs not help to determine the optimum rate of extraction? Would you not be concerned that you retain the maximum proportion of the selling price?

By competing so aggressively for the attention of the energy majors, we and other like minded nations strengthen the hand of those companies. When they know that we are desperate for their services, they can progressively reduce the proportion of the revenue that we retain. It would be instructive to tabulate the percentage of the sales value retained by us over the past thirty years or so.

It is not as if this short term politically driven policy is unavoidable. The USA for example, has clearly made strategic decisions about the use of its energy reserves. None of us is privy to their considerations but they have clearly determined that it is in their interest to exhaust other nations’ supplies before resorting to their own. That is why the USA is presently a net importer of energy products.

In this way, they leave a rich inheritance for future generations. While that might be the major benefit of their policy of restraint, there are other benefits as well. We know for example that energy prices are notoriously volatile, but rising inexorably over time. That is inevitable with commodities in limited supply. The result is that the USA is likely to benefit from sharply higher prices when they eventually turn to domestic supplies. In the same vein, they have reversed roles with the energy majors where it is the companies that try to make a case for more rapid extraction.

In that scenario, the companies have to be prepared to accept less favourable tax regimes than would otherwise be the case. And of course, there will be a huge strategic benefit to having a domestic supply of energy resources when they are in even shorter supply worldwide than they are now.

Can we in Trinidad and Tobago change our habits with regard to extraction policy? Should we not be giving prominent consideration to these two key issues? What do we leave for future generations and can we extract maximum benefit through timely extraction and sale of our energy resources?

I submit that we need a new debate, a debate that starts with a rejection of current policy, if it could be described as that. The notion of extracting as much as we can as soon as we can at any cost must be repudiated. It is not in the interests of either this, or future generations.

Let us begin by collating the data about the percentage of the proceeds of sale of our resources that accrues to our Treasury. We should look at that not only over time, but also in relation to comparative figures for other exporters of energy products

We must discuss how we begin to wean ourselves off a dependence on ever increasing energy related income. Should we for example, decide to extract resources at a rate aimed at complete depletion in fifty years, what would it mean for forward planning in the economy? Can we, and should we manage our affairs so that our expenditure patterns are brought more in line with a sustainable extraction policy?

Given a reduced demand for services from the energy majors, we can then desist from the never ending tax breaks that have cost us dearly. We should even start thinking about rolling back some of the giveaways, resulting in greater returns from any given level of activity.

The simple approach of extracting as much as we can as quickly as we can is neither sustainable nor financially prudent. It results in a less than optimum return to the Treasury measured in tens of billions of dollars. The route I am suggesting breaks new ground and requires radical new thinking. I am of the view however, that such thinking is essential if we are to avoid what I now describe as the second curse of oil riches.

I truly believe that we have the intellectual and financial management capabilities to chart a bold, new, productive and sustainable course with regard to our extraction policy. It will put Trinidad and Tobago at the forefront of thinking on this matter. We can lead the developing world in policy development. We will also save ourselves billions of dollars.
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