Budget
2007 gives... Worrying signs on production
STCIC
The Trinidad Guardian
Port
Spain
Petroleumworldtt.com
10 22 06
The 2006/2007 Budget was presented against the backdrop
of public concerns about inflation, traffic congestion,
crime and other social ills. Unlike the previous
four budgets presented by the Minister of Finance,
which were expansionary, this budget sought to consolidate
the country’s economic position while focusing
attempting to focus attention on supply side policies.
Oil
price
The
budget was based on assumptions of an oil price
of $US45 and a natural gas price of an estimated
US$3.50 netback Henry Hub. In arriving at his choice
of US$45 per barrel, the minister cited international
experts who have forecasted that oil prices would
remain above US$60 for the next three to five years.
Interestingly,
on the very day the budget was delivered the price
of oil slipped below US$59 per barrel and has ranged
between US$58 and US$60 for the past two weeks and
has been moving between US$58 and US$60 all week.
The
price of oil (West Texas Intermediate) has fallen
by some 25 per cent in the past two months. The
fall in oil prices is due mainly to comfortable
inventory levels in the US for crude oil and distillates
and a thus far mild hurricane season. For these
reasons the basing of the budget on an oil price
of US$45 is conservative.
The
STCIC notes that in the 2005/2006 Budget, the minister
had given an indication of the price that was used
to estimate revenue as well as the price that was
used for estimating expenditure levels. This approach
is preferable as it makes the budgeting exercise
more transparent.
Natural
gas price
The
other major assumption on which the budget was based
was an estimated netback Henry Hub gas price of
US$3.50 per MMBtu.
The
decision to disclose the natural gas price is in
recognition of the dominant role of natural gas
in terms of revenue generation.
T&T
produces four times more natural gas than oil on
an equivalency basis. Like oil prices, natural gas
prices at Henry Hub have also fallen. From a high
of over US$15 per mmbtu in December, 2005 prices
were at US$4.36 Henry Hub on the day the budget
was read.
Given
the downward trend in both oil and natural gas prices,
the conservative approach to the selection of an
oil and gas price is welcomed.
Lack
of details on energy
While
the minister gave an indication of the prices of
oil and gas no indication was given as to the levels
of production expected in fiscal 2007 for both oil
and gas.
There
are concerns that average daily oil production in
T&T is on the decline with production averaging
about 141,000 barrels of oil per day in July. This
figure falls short of the 165,000 barrels of oil
per day anticipated by the minister in the 2005
Budget speech. No information was given on anticipated
levels of natural gas production in 2006/2007.
Given
the current natural gas supply constraints, the
budget gave no details of incentives to allow companies
to pursue drilling more aggressively. Reserves can
only be increased if companies explore and drill.
It
is expected that more details on natural gas reserves
and levels of oil and gas production will be given
in the contribution to the budget debate in the
Senate by the Minister of Energy in his contribution
to the budget debate in the Senate. The issue of
oil and gas reserves is all the more important given
the recent setbacks in oil production and exploration.
Oil
and gas revenue
The
total estimated revenue for fiscal 2007 is $35.1
billion which is $3.6 billion less than the estimated
revenue collections in fiscal 2006. The minister
attributes this shortfall to lower oil and gas prices
used in calculating revenue in 2007. However, in
the last budget the price of oil used to estimate
revenue was the same US$45 used in the present.
The
shortfall in revenue may therefore be due to either
low levels of oil production or lower returns on
gas produced due to the substantial declines in
gas prices and not necessarily low oil prices used
in calculations.
Energy
revenue collections in fiscal 2007 are estimated
to be $15.2 billion which is $2.5 billion lower
than actual collections last year. Energy sector
revenue is therefore estimated to account for 43
per cent of total revenue in fiscal 2007. This is
a decline from the 53 per cent it constituted in
fiscal 2006.
Unemployment
The
minister noted that unemployment had fallen to 6.9
per cent with this figure expected to move to six
per cent by the end of 2006. The STCIC notes that
there is an ambitious construction agenda for the
energy sector in the next 18 months. These projects
will create some 30,000 construction jobs.
Given
that the economy is almost at full employment it
is not sure where the labour for these energy sector
and other projects will come from. In this context
the decision to reduce allocations to both Cepep
and URP is welcomed as it will reduce tightness
in the labour market.
Combined
cycle
The
decision to convert all power generation capacity
in T&T to combined cycle gas turbines is is
a positive step. This is in keeping with best practice
in developed countries and will lead to a more efficient
utilisation of natural gas in the power generation
sector. The combined cycle gas turbine has higher
efficiencies and is cleaner than the traditional
single cycle turbine.
Alcohol
and tobacco taxes
With
respect to the increase in duties on alcohol and
tobacco products, it is well known that these products
are essentially “inelastic” which means
that demand is generally unresponsive to increases
in price.
In
this regard it is not clear whether the objective
of the Government is to increase revenue or to decrease
consumption of these products.
The
prevailing school of thought is that the so-called
“sin taxes” does little to curb consumption
of habit forming substances.
Infrastructure
The
budget proposed a number of initiatives to deal
with transportation problems in the country. Among
these are a water taxi service and highways linking
San Fernando to Point Fortin and Princes Town.
While
these initiatives are welcomed, it must be noted
that the Government has for some time now been talking
about these two highways. To date both projects
are yet to go beyond the planning stage.
In
the meantime, the pace of industrial development
in the South West continues with an inadequate road
network. The traffic congestion in Port-of-Spain,
Chaguanas and San Fernando also need to be urgently
addressed.
Financial
sector reform
The
minister noted the Government’s vision for
making T&T an international financial centre.
He also stated that there were plans for the reform
of legislation governing pension funds as it relates
to restrictions of their holdings of equities. The
STCIC fully supports the move to relax the restriction
on pension funds.
The
STCIC also supports plans to increase the presence
of the energy sector on the local stock exchange
as this would allow for greater local private equity
participation in the country’s most important
sector.
Overall
the 2006/2007 Budget lacked details as to how the
Government plans to operationalise many of its policies
particularly in light of the fact that many of the
initiatives mentioned in the 2005/2006 budgets are
have yet to be implemented. It is a source of concern
that the minister did not present figures for oil
and gas production.
Added
to this the Government must also take note of the
current decline in both oil and gas prices as these
may affect revenue projections and transfers to
the Heritage and Stabilisation Fund in fiscal 2007.
What
is critical at this stage is the timely implementation
of these projects and policies contained in the
2006/2007 budget.
Further
commentary by the STCIC on the 2006/2007 Budget
will be published in future columns.
The
Trinidad Guardian
Thursday, October 19th 2006
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