The 2020 budget will be read on Monday. It will be the fifth budget of the current Minister of Finance.
There has never been an easy time to be the Minister of Finance of Trinidad and Tobago. Whoever occupies that chair of Minister of Finance after the 2020 general election will have a massive and monumental task on their hands that will include the transformation of the economy while meeting the expectations of a population that is growing impatient with our obvious inertia.
Oil production – 27% decline in last four years
The last four years have witnessed a decline in Government revenue of the order of 20% to 25% compared to “peak revenue” in 2014.
In 2014, Government revenue was $TT58.4 billion a figure which may not be realised again for a long time.
Lower revenue is largely a function of lower prices and lower levels of production. Oil production has plummeted by 27% in the last four years. That decline is not for a lack of oil in the ground, but it is directly related to policy stagnation and “ease of doing business” factors.
For the past four years, the oil industry has been saying that the Supplemental Petroleum Tax (SPT) as currently constituted does not facilitate investment. The Minister in his earlier budget speeches had promised to deal with the SPT matter.
At one point we are told an IMF team was looking at it. Four years later nothing has happened. The result of inaction is predictable, oil production is now at historic lows and we have lost billions in revenue because the Government failed to amend the SPT regime.
Oil prices – Staying low thanks to Shale
Oil prices will continue to be depressed thanks in no small part to the unprecedented shale revolution in the United States and particularly in the Permian Basin of West Texas.
The US EIA has forecasted $US 56.50 for West Texas Intermediate in 2020 and $62.00 for Brent North Sea crude oil. The Saudis for their part, have largely recovered from the drone strikes to their largest oil processing facility. These low prices are not conducive to investment in new projects in TT and the situation is made much worse by the current SPT regime.
Natural Gas production – Some recovery but no cigar
As for natural gas production, in August 2017, the BP Juniper project started production. The level of production ramped up slowly to around 590 million cubic feet of gas per day. In 2018 we had a full year of production from Juniper. As a result, natural gas production grew by 9% year on year.
In 2019 we had the start of the Angelin project which was expected to bring on 350 million cubic feet of gas per day. As a corollary we forecasted economic growth in 2018 of 1.9% and 2% in 2019.
The reality is however that while these new natural gas projects are coming into production, there are two variables at play which counter their positive impact.
The first is planned shutdowns of major natural gas producing platforms and the second is the natural decline in production of mature natural gas reservoirs.
In his budget speech of October 1, 2018, the Minister of Finance presented an optimistic forecast for natural gas production that saw it recovering to 4.05 billion cubic feet per day in 2020.
Unfortunately, that forecast will not be realised.
The Minster’s forecasts for 2018, 2019 and 2020 are all wrong and by extension the growth rates of 1.9% for 2018 and 2% for 2020 will not be realised.
It should be recalled that the IMF’s view of these growth rates is a lot lower (0.3% for 2018 and 0% for 2019).
This might be why the IMF has been absent from T&T in 2019 and we have been deprived of their independent assessment.
2020 outlook – Bad News from BPTT
To compound the bad natural gas news, there was the announcement in May 2019 by BPTT that its infill drilling programmes related to Cashima and Cannonball were not as successful as planned.
This will put a further damper on natural gas production in 2020.
I expect overall national production in 2020 to be roughly the same as 2019 or slightly less.
To put that into numbers it looks like 3.5 to 3.6 billion cubic feet per day. This mean continued shortages at Point Lisas and a cloud over the future of Train 1. We cannot therefore expect natural gas to drive economic growth in 2020. If anything, the current situation with natural gas may precipitate recessionary conditions in 2020.
Natural Gas Prices – In decline thanks to global glut
Prices are also headed in the wrong direction.
In the last 12 months natural gas prices for all markets have come down due to a glut of natural gas which is driven by increased LNG exports from the United States and Australia.
In Asia, prices that were around $12 / mmbtu in September 2018 came down to just above $4 / mmbtu in July 2019 (a 67% decline). In Europe prices have also come down.
In September 2018 the European natural gas price (NBP) averaged $8.10 per mmbtu. This compared with $4.70 per mmbtu in September 2019 (a 42% decline). In the United States, Henry Hub prices that were $2.96 / mmbtu in August 2018 were $2.22 / mmbtu in August 2019 (a 25% decline).
This means that BP and Shell will be getting less money for the sale of their T&T LNG cargoes and by extension the Government will be getting less tax revenue. The outlook for natural gas prices continues to be depressed.
Conclusion – Stagnation continues
The internal and external conditions as they relate to production and prices are either flat or trending down.
We can therefore expect that revenue for 2020 will continue to be along the lines of what obtained in 2018 and 2019.
We however must take into consideration possible “one off’s” such as the proceeds of the sale of CLICO to Sagicor which will be realised in fiscal 2020. The economy will therefore continue to be stagnant in 2020 and possibly into 2021 with little or no investment in the non-energy sector and subdued domestic demand.
The need for transformation and diversification is critical.