PSCs in Trinidad and Tobago for the development of petroluem resources - Free Essay Example

DEDUCTION OF GRADES FOR PENALTIES: LATE SUBMISSION/PLAGIARISM ETC. (office staff only) Table of Contents Abstract Word Count Table of Abbreviations Table of Figures. 1Introduction 2Investor State Relationships: An Outline.. 2.1Types of Contracts: An Overview 2.2Investor State Relations in Trinidad and Tobago 3The Local Content Policy: Impact on the PSCs in Trinidad and Tobago 3.1Overview of Local content in Trinidad and Tobago. 3.2Comparison of terms in the Model PSCs 2000 and 2012 3.3The Effect of the Local Content Provisions in the PSC 4The Future of Investor-State Relations in Trinidad and Tobago.. 4.1How will Local Content Shape Investor-State Relations by 2020? 4.2Is There a Need for a Change in the Agreements? 5Conclusions 6List of References. Abstract Word Count ABSTRACT:Trinidad and Tobago has been involved in oil and gas exploration and production for over a century allowing it to become a global stalwart in the industry. Since conception, the country has employed various methods for governing investor-state relationships within the sector, with the most popular being the Production Sharing Contract (PSC) currently in use for over 35 years. This paper examines the use of PSCs in Trinidad and Tobago for the development of petroleum resources. It will explore the historic journey of the terms and conditions that the international investor is required to abide by under the PSC and the change of the structure of those terms with respect to the implementation of the Local Content and Local Participation Policy and Framework for the Energy Sector of Trinidad and Tobago. It will conclude with an analysis of the PSC and determine if it is still the best method for awarding rights in Trinidad and Tobago in light of the new legislation. WORD CO UNT:2221 Table of Abbreviations EP Exploration and Production GDP Gross Domestic Product GORTT Government of the Republic of Trinidad and Tobago IOC/FOC International/Foreign Oil Company LCP Local Content and Local Participation Policy and Framework for the Energy Sector of Trinidad and Tobago MEEA Ministry of Energy and Energy Affairs NGC National Gas Company of Trinidad and Tobago Limited NOC National Oil Company Petroleum Act Petroleum Act and Petroleum Regulation (1969) 62:01 PSC Production Sharing Contract TT Trinidad and Tobago UTT University of Trinidad and Tobago Table of Figures Figure 1: Comparison of Different Types of Investor-State Contracts for Petroleum Development 8 Figure 2 Comparison of Terms and Conditions in the 2000 and 2012 Model PSCs in Trinidad and Tobago 10 Figure 3: Comparison of Trinidad and Tobagos Labour Force Distribution in 2000 and 2012 11 1 Introduction For over a century, Trinidad and Tobago (TT) has been involved in the Exploration and Production (EP) of petroleum resources. In 1993, the Government of the Republic of Trinidad and Tobago (GORTT) established Petrotrin[1] charged with the consolidation and operations of petroleum production, refinement and asset marketing of the previous state-run enterprises (Petrotrin, 2012). In addition to the success of its oil endeavours, TT has also been prosperous in its gas initiatives, promoting the industrialization of gas in 1953 and incorporating the National Gas Company of Trinidad and Tobago Limited (NGC) in 1975. During the 1900à ¢Ã¢â€š ¬Ã¢â€ž ¢s, TT utilized EP Licenses for international investment activity in the petroleum sector. The GORTT, subsequently established the Petroleum Act and Petroleum Regulations 62.01 (1969) (Petroleum Act) to govern the activities of industry. Due to the rapid increase of oil production and the improvements to the administrative functions, TT iss ued its first Production Sharing Contract (PSC) in 1974. In 2004, the GORTT implemented the Local Content and Local Participation Policy and Framework for the Energy Sector of Trinidad and Tobago (LCP). The aim of the policy is to improve sustainable development in TT by ensuring that the citizens of the country are equipped and able to participate in the sector responsible for over 40% of annual Gross Domestic Product (GDP) and 80% of exports. Currently, the sector employs just over 5% of the labour force (Ministry of Finance and the Economy, 2013). This paper examines the effect of the LCP on the terms and conditions within PSCs issued to International Oil Companies (IOC) in TT for the development of petroleum resources. Chapter 2 contains a brief overview of the different types of contracts and the history of investor state relations in TT. The LCP is evaluated in Chapter 3 along with a comparison of terms in the PSC that have been affected due to the implementation of the policy and its impact on the country. Chapter 4 provides an assessment of the outlook for TTà ¢Ã¢â€š ¬Ã¢â€ž ¢s investor relations and determines if there should be a change in the main contract type to facilitate the LCP. 2 Investor State Relationships: An Outline 2.1 Types of Contracts: An Overview To reap the benefits of the petroleum sector resource rich nations often rely on international companies to conduct EP activities as they are more experienced and have access to more capital funding. They have developed a symbiotic relationship, as host countries and IOCs depend on each other to obtain income. The negative consequences of allowing foreign companies to develop local resources, such as exploitation and pollution, have led to the development of contracts to govern the relationship (Katz, 1992). There are four main types of contracts currently in use today. These are the PSCs, concessions, risk service agreements and joint ventures. An overview of these contracts is presented in Figure 1. 2.2 Investor State Relations in Trinidad and Tobago In TT, EP licences[2] were originally issued during the 1900à ¢Ã¢â€š ¬Ã¢â€ž ¢s allowing the country to gain income through royalties (10%-12.5%) and taxes. The GORTT subsequently developed the Petroleum Act in 1969, which currently serves as the main legislation governing EP activities in the energy sector. In the 1970à ¢Ã¢â€š ¬Ã¢â€ž ¢s the GORTT discovered that EP licenses were inefficiently monetizing the countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s energy resources. This resulted in the issue of the first PSC in 1974 based on the Indonesian model. During the 1980à ¢Ã¢â€š ¬Ã¢â€ž ¢s the petroleum fields issued under the concessions began approaching maturity, leading to the introduction of sub-licenses such as farm-out agreements to encourage lower cost production. This led to the decrease in the popularity of the licences and in 1990 PSCs became the main type of investor-state agreement governing EP activities in TT. The model for the PSC has been modified twice since its first issuance, during the 1995/1996 fiscal period and again in 2010. In addition to the change in structure, the terms and conditions within the PSCs have also been altered and updated since first issuance in an attempt to justly distribute benefits and risks between the GORTT and the IOC. These changes were due mainly to the volatility in the market and changes in legislation affecting the energy sector. In TT, a private investor is required apply to the Ministry of Energy and Energy Affairs (MEEA) to conduct any type of EP activity within the borders of the country. Currently, an investor can be offered one of four types of agreements (GORTT, 2012): Exploration (Public Petroleum Rights) Licence grants the licensee the non-exclusive right to carry out the petroleum operations provided by the licence. Exploration and Production (Public Petroleum Rights) Licence grants the licensee the exclusive right to explore for, produce and dispose of petroleum in accordance with the terms of the licence. Exploration and Production (Private Petroleum Rights) Licence PSC conduct of petroleum operations relating to the operations relating to the exploration, production and disposition of petroleum within a prescribed area. According to the Petroleum Act, the award of a PSC in TT involves a bidding process which requires, the payment of a pre-bid application fee and a full examination of the most recent model PSC. Bidders are also obligated to make an oral presentation demonstrating their technical and operational competence. The successful bidder is awarded a PSC based on the model examined. Where a discovery is not achieved within nine years of being awarded the contract, it will automatically be terminated. If, on the other hand, a discovery is made, the contract will be extended for a minimum of thirty years. 3 The Local Content Policy: Impact on the PSCs in Trinidad and Tobago 3.1 Overview of Local content in Trinidad and Tobago The LCP aims to promote sustainability by utilizing the capabilities of international companies to build local businesses, people, technology and capital markets (GORTT, 2004) via fiscal[3] and non-fiscal[4] methods. The traditional concept of à ¢Ã¢â€š ¬Ã…“giving preferenceà ¢Ã¢â€š ¬Ã‚  to local suppliers based on internationally comparable cost, quality and timeliness of delivery has not improved TTà ¢Ã¢â€š ¬Ã¢â€ž ¢s stance as only a globally competitive firm succeeds (GORTT, 2004) . Therefore, the LCP aims to promote local ownership, control and decision making, as well as local preferential project financing. This is in addition to the adequate and appropriate training of the local labour force to prevent IOCs from employing foreign personnel where the local market is able to satisfy the requirements. The policy also aims to take advantage of the countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s small population of approximately 1.3 million people (Central Bank of Trinidad and Tobago, 2012) and create a diverse and well trained labour force. This policy requires IOCs to give preferential treatment to local suppliers and enterprises by guaranteeing that they are given assertions from the principal operator which relate to access, treatment and re-imbursement for goods and services actually provided. The IOC is also required to address barriers that are currently preventing this from happening. 3.2 Comparison of terms in the Model PSCs 2000 and 2012 Due to the implementation of the LCP, the MEEA has updated the terms and conditions of the PSC to better reflect the objectives of the GORTT. Figure 2 provides a synopsis of the terms and conditions in both the 2000 (MEEA, 2000) and the 2012 (MEEA, 2012) model contract for Deep Water Blocks off the coast of Trinidad with regard to local content. 3.3 The Effect of the Local Content Provisions in the PSC Based on the comparison of the terms and conditions in the model PSCs (Figure 2), it is clear that since the policy implementation, there have been positive changes affect the local landscape. The 2000 Model failed to adequately provide for local development mentioning local content requirements 75% less than the 2012 Model. The shift into a more stringent and detailed PSC with regard to local content, holds the IOC and by extension the energy sector responsible for the development of the local labour force. It acts as a mechanism by which the GORTT protects its citizens from the adverse repercussions of FDI and reduces the instances of repatriation of funds (Global Business Reports, 2012). Figure 3 shows a comparison of the labour force contribution to the energy sector in 2000 and 2012. In 2012 the energy sector represented 5.4%[5] of the total labour force in TT increasing from 3.3% in 2000. The graph therefore insinuates that since the adoption of the LCP and the new terms and conditions in the PSC, more local labour has been geared towards the energy service sector for upstream, midstream and downstream activities. The 2012 Model not only helps the local labour force through employment and training and development opportunities, but also helps nurture the entrepreneurial[6] spirit by allowing small business owners to participate and reap the benefits of the countryà ¢Ã¢â€š ¬Ã¢â€ž ¢s largest sector. The provisions in the 2012 Model also attempt to reduce the imports and promote local manufacturing to control the trade balance and improve the current and capital accounts of the country. Despite the introduction of the policy and the changes to the new PSCs, several IOCs are still operating in TT under long-term pre-2004 contracts. This means that it may take several years before any substantial changes are seen in the sector with regard to the labour force and import reduction. 4 The Future of Investor-State Relations in Trinidad and Tobago 4.1 How will Local Content Shape Investor-State Relations by 2020? The GORTT (2012) suggests that the initiatives imposed on the IOCs via the shift in terms and conditions in the 2012 Model PSC will contribute to a significantly higher percentage of skilled, local personnel employed within the energy sector of TT by 2020. The MEEA (2013) has indicated that the intention of the LCP is not for IOCà ¢Ã¢â€š ¬Ã¢â€ž ¢s to be solely responsible for the progress of the local labour force and development of the economy, but rather to improve the working relationship between the GORTT and the IOCs. Since the policy was implemented, the GORTT has embarked on several projects aimed at assisting the IOCs with a labour force comparable to international standards. One of these projects was the establishment of the University of Trinidad and Tobago (UTT) which aids in the education of nationals with regard to petroleum development and other useful energy related subjects. It is plausible that this assistance in providing an educated workforce will maintain and i mprove the status of the investor-state relationships by 2020. The IOCs may initially resist the local content requirements especially where they have pre-2004 contracts with the GORTT. It is suggested, however, that they will ultimately abide as they require the resources of TT for income generation allowing a negotiation advantage which will ensure better treatment of the labour force (MEEA, 2013). Additionally, more countries are employing the use of local content policies, resulting in IOCs themselves highlighting plans for local content projects in the country during the bid round process. The adaptability of the IOC will also promote its standing in the country and compliance with the new PSC Model will allow them participate actively in future bid rounds held by the MEEA and GORTT. 4.2 Is There a Need for a Change in the Agreements? TT already offers other forms of investor-state contracts, such as the concession, although in lesser quantities than the PSC. Based on the PSC developments in TTà ¢Ã¢â€š ¬Ã¢â€ž ¢s 2012 Model, it appears that the GORTT and the MEEA are able to implement the requirements of the LCP effectively. This is clearly shown by the introduction of Article 39 in the 2012 Model which deals specifically and solely with local content and the investor. This means that there is currently no need for a shift in the main contract type used to govern investor-state relationships. The current PSC model successfully merges the requirement for an improved energy labour force and the incentives for foreign investors while not infringing on the sovereign right of IOCs. Considering that it has been less than a decade since the implementation of the LCP, it may be several years before the changes and benefits are observed in TT on a large scale. Therefore, the introduction of a new contract type may act ually dampen relationships with existing and potential investors. It is not recommended that TT change its main method of petroleum contracts to comply with LCP initiatives as the current methods employed will potentially see an increase in the local labour force participation in the energy sector within the next decade. 5 Conclusions In the energy world, there a various types of investor-state contracts that govern the relationship between a host country and an IOC. TT has been actively involved in oil and gas production for over a century, making them a substantial force in the Western Hemisphere. Since conception, IOCs have entered the country for EP activities under a variety of agreements with the PSC being the most popular. The citizens of the country, however, were placed in a disadvantageous position as the IOCs brought their own employees and imported goods and services from international companies rather than local firms. To protect the residents, the GORTT introduced the LCP in 2004 that would govern the activities in the local energy sector. The true extent of this policy was seen via an examination of the terms and conditions of the PSCs between 2000 and 2012. This paper highlighted the fact that the LCP allowed an update of the PSC model that better reflects the objectives of the GORTT with rega rd to local content. While several IOCs are still under contracts that do not include these changes, the energy sector will observe future improvement in local participation as new contracts are awarded. Based on the differences in the 2000 and 2012 Model PSCs, it is obvious that the GORTT have improved the terms and conditions to better reflect the implementation of the LCP. As a result of this, the recommendation is that TT maintain its main form of investor-state contract as the new terms will eventually benefit the citizens of the country in the form of improved labour and marketability as new contracts are awarded. 6 List of References Central Bank of Trinidad and Tobago. (2012). Annual Report 2012. Port-of-Spain: Central Bank of Trinidad and Tobgao Limited. Global Business Reports. (2012). Trinidad and Tobagos oil and gas Industry. Oil and Gas Investigator. GORTT. (2004). Local Content and Local Participation Policy and Framework for the Energy Sector of Trinidad and Tobago. Port-of-Spain: Government Printery. GORTT. (2012). Current Fiscal Measure for the Upstream Petroleum Sector. Retrieved from Minstry of Energy and Energy Affairs: https://www.energy.gov.tt/investors.php?mid=159 Katz, S. B. (1992). Types of International Petroleum Contracts: Their History and Development. In R. Steinmetz, The Business of Petroleum Exploration (pp. 297-323). MEEA. (2000). Model Production Sharing Contract (2000). Port-of-Spain: Government Printery. MEEA. (2012). Model Production Sharing Contract (2012). Port-of-Spain: Government Printery. MEEA. (2013). Energy Policies. Retrieved from Ministry of Energy and Energy Affairs: https://www.energy.gov.tt/investors.php?mid=34 Ministry of Finance and the Economy. (2013). Review of the Economy. Petrotrin. (2012). About Us. Retrieved from Petroleum Company of Trinidad and Tobago: https://www.petrotrin.com/Petrotrin2007/AboutUs.htm [1] The state-owned oil company [2] Also referred to as concessionary agreements [3] Taxation and royalty policies as well as government expenditure to build capabilities [4] Promotion of Local Content, Local Participation and Local Capability Development [5] This is approximately 33,426 people employed in the energy sector in 2012 compared with 20,582 people in 2000. [6] Figure 3 shows a 4.8% increase in entrepreneurial activity.