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Trinidad and Tobago pins hopes on deep waters

After years of frustration, new fiscal incentives and the latest licensing rounds has sparked fresh interest in deep-water exploration

In June this year, executives from Australia’s BHP Billiton gathered with officials from the Trinidad and Tobago government in the capital Port of Spain to sign a series of deep-water exploration deals that will see the company spend around $1 billion in the Caribbean country over the next few years.

For Trinidad and Tobago, the event marked a high point after nearly a decade spent struggling to lure international companies into its deep waters, and energy minister Kevin Ramnarine hopes it is the start of a new deep-water drilling boom.

The country will launch another deep-water bid round this year, putting six blocks up for auction sometime in the second half of the year in a bid to build on the success of the 2012 deep-water round. That round saw five of the six blocks up for bidding draw a total of 12 bids, with BHP Billiton winning all four blocks that were awarded. This year’s licensing round is expected to include acreage adjacent to those blocks won by BHP Billiton.

Ramnarine put the success of the round down to changes in recent years to the country’s fiscal regime that has made the country more attractive to explorers. “In each successive budget for the last three years we have reduced taxation and that has led to a mini-drilling boom in Trinidad and Tobago,” Ramnarine told a packed room at the country’s embassy in London during a June road show event. “We are in a very competitive environment. We are competing for capital in Trinidad in the BP universe with Azerbaijan, we are competing for capital with the Gulf of Mexico. If you come from the BG world, we are competing for capital with Brazil... so we have to compete for capital.”

The country was criticised in its initial deep-water round for harsh fiscal terms that kept most companies away. But under Ramnarine, who was an economist at BG’s Trinidad and Tobago subsidiary before becoming energy minister in 2010, the deep-water fiscal regime has been overhauled.  The petroleum profits tax for deep-water blocks has been lowered from 50% to 35%. Cost recovery for operators has been increased from 60% to 80%. Mandatory signature bonuses have scrapped, as has the requirement to carry the costs for state-run Petrotrin. And production sharing contracts have been changed so that taxes are paid from the ministry’s share of profit oil, meaning any future change in the tax code will be borne by the ministry.

Ramnarine credits the changes with the success of last year’s round. “BHP has made a big move in Trinidad, and we are very happy about it.” He hopes that the new wave of deep-water drilling will shift the focus of exploration in the country from gas to oil. The focus on exploration of development of gas in recent years has made Trinidiad and Tobago a major regional LNG exporter and provided a foundation for the country’s industrial base. But oil production has suffered. Output fell by nearly 14% last year to just 121,000 barrels a day (b/d), the lowest level in at least 50 years and about half the peak reached in the late 1970s, according to BP data.

“The four BHP blocks have unrisked upside potential of 4bn barrels [of oil]. If we were to find a quarter of that in Trinidad it would transform the economy of the country,” Ramnarine said. The company will invest around $565m and drill at least six wells across its four blocks in the initial mandatory exploration phase and spend a further $459m in a subsequent optional phase of exploration. If a commercial discovery is made, it will spend many billions of dollars more on development.

Not that Ramnarine sees the country turning away from gas. Questions have been raised over the future of the gas industry and the flagship four-train 14.8m tonnes per year Atlantic LNG export project. The shale gas boom in the US has forced Trinidad and Tobago seek out new markets at a time in which the global liquefied natural gas (LNG) market is becoming increasingly competitive.

The country has also seen a worrying decline in reserves. Reserves have fallen by nearly half from 25.89 trillion cubic feet (cf) in 2005 to 13.26 trillion cf this year, giving it a reserves to production ratio of around 12 years at the current production level of 4.1bn cubic feet a day. If that trend is not reversed it could make it difficult for Atlantic LNG to negotiate new long-term contracts when its initial agreements start to expire in 2018. If prospective buyers are not convinced that Trinidad and Tobago has the reserves to underpin a 20-year contract, they will likely look elsewhere.

Ramnarine, though, points to a recent deal that saw Shell acquire Repsol’s stake in Atlantic LNG as part of a larger $4.4bn gas deal as a vote of confidence in the future of the industry. “Why would Shell make such a large investment in an asset that expires in five years? It must be that they have a view of gas reserves in Trinidad and Tobago, which is in alignment with the ministry’s view, and that is that there is still a lot of gas left in Trinidad... Shell is not a company that makes a decision like that lightly.” 

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