THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

Oil & Gas Contracts in the

Upstream Petroleum Sector in

Trinidad and Tobago

EITI Forum, 26th Sept 2011

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

A. Oil & Gas Contracts: An EITI PerspecBve B. IntroducBon C. LegislaBve Framework D. Contractual Framework E. Current Fiscal framework F. Access to Resources

i. CompeBBve Bid Rounds ii. Its Benets and ObjecBves

G. Development of Contractual Arrangements H. Fiscal/Tax Arrangements I. Conclusion

Agenda

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

qThe enBre chain of managing extracBve industry resources is importantfrom how access to those resources is granted, to monitoring opera5ons, to collec5ng taxes, to sound macroeconomic management and distribu5on of revenues, and to spending resources eec5vely for sustainable growth and poverty reduc5on.

qOne of EITIs major steps is expanding the scope of the iniBaBve to achieve transparency in contracts and licences for producBon and exploraBon.

Oil & Gas Contracts: An EITI PerspecHve

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

q Governing the operations and management of upstream oil and gas sector in Trinidad and Tobago are as follows:

qLegislative (Regulatory) Arrangements qContractual /Licensing Arrangements qFiscal Arrangements

Introduction

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vPetroleum Act and Regulations Chap. 62:01 Regulations effective from 1969 and Act enacted in 1970 to monitor and regulate the oil industry

vPetroleum Production Levy and Subsidy Act Chap. 62:02

Payment made by oil producers to offset subsidy of petroleum products in T&T

vEnvironmental Management Act (EMA) 2000 Responsible for the management of the environment Certificate of Environmental Clearance

vOccupational, Safety and Health Act (OSHA) Monitor and regulate health and safety standards within organizations

Legislative Framework

Exploration and Production Licences - Exploration Licence; E & P (Public Petroleum or Private Petroleum Rights)

Production Sharing Contracts - 1974 Model - 1995 Model (Developed by World Bank) - 2005/6 Taxable Model PSC Model

Farmout Agreements - introduced for the exploration and exploitation of small inactive blocks - full acreage is leased to the farmee

Lease Operatorship Agreements - Introduced for the reactivation of idle wells - Lessor derives an over-riding royalty from the crude oil sold - oil and gas reserves are booked by Lessor

Contractual/Licensing Framework

vPetroleum Taxes Act Chap. 75:04 Petroleum Profits Tax (50% of Chargeable Profits) Supplemental Petroleum Tax

vIncome Tax in Aid of Industry Act Chap. 85:04 Capital Allowances

vUnemployment Levy Act Chap 75:03 (5% of Chargeable Profits before loss offset)

vIncome Tax Act Chap 75:01 Withholding Tax

vGreen Fund Levy (0.1% on gross sales or receipts)

vForeign Investments Act Chap. 70:07

Current Fiscal Framework

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

CompeHHve Bid Rounds EvaluaHon Process

& NegoHaHon Process

Of Bids

How Is Access Granted to the Resources

CBO clearly outlines the terms and condiHons under which companies are to submit bids for such categories:

Work Programmes, Share of Prot Petroleum and Technical & Financial Ability The point allocaHon for the respecHve areas Time frame for submission and approvals Model ProducHon Sharing Contract

Prior to the closure of a bid round, Cabinet approves the establishment of the establishment of two commiQees:

Technical CommiQee (Technocrats from the Ministries of Energy, Finance, and Central Tenders Board)

Overview CommiQee (Ministers and Advisors)

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CompeHHve Bid Order, CBO

Benets of 2010 Bid Process

CompeHHve environment Greater transparency and clarity, so that potenHal

investors will be able to evaluate themselves

Shorter process Hme.

Less complexity. ReducHon of biddable items to two/three with other items being xed in the contract

PrequalicaHon of bidders, so that companies are aware to their status either as PotenHal Operators or not

NominaHon of blocks, so that companies can indicate their areas of interest (Final decisions rest with MEEA)

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ObjecHves

A. To determine the bidder that presents the best proposal that:

1. Oers an opHmal work programme with respect to 1. Amount and quality of seismic data and other

geophysical data 2. Drilling programme i.e. the number of wells and depth of

each well

2. Maximizes the revenues to the Government via its proposals with respect to GORTTs Share of Prot Petroleum (Crude Oil and Natural Gas)

3. Is technically experienced and nancially equipped to undertake the required exploraHon programmes

FuncHons of Technical CommiQee

Detailed Point AllocaHon system Bids are opened Formal presentaHons of bid proposals are made by

companies ClaricaHon on some maQers, if required, is requested of

bidders Evaluate and analyze bids Final Report prepared and sent to Overview CommiQee

FuncHons of Overview CommiQee

Overview CommiWee considers the Technical EvaluaBons Report and makes recommendaBons

Its recommendaBons together with the report from the Technical CommiWee are forwarded to Cabinet

FuncHons of Cabinet

Final decisions with respect to successful or unsuccessful bidders are taken by Cabinet.

Ministry of Energy noBes companies of their status, whether successful, unsuccessful or given an opportunity to improve its bid oer to GORTT

Development of Petroleum Contractual Arrangements

In Trinidad and Tobago

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History of Contractual/Licensing Regime

Concession / (Tax/Royalty) / E&P Type Agreement The concession agreement is the direct descendent, in the international arena, of the original Drake Lease in Pennsylvania. It is the first type of contract used internationally and still persists today. In the early concessions, the contractor undertakes exploration, drilling and development at its sole risk and cost Title to the mineral rights is held by the contractor under a concessionary system Revenue to the host government is paid via rentals, taxes and royalties seldom in oil Lost popularity as nationalism grew or countries sought to take charge of their natural resources

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

History of the Production Sharing Contract

q In 1960, Indonesia Law No. 44 promulgated the Production Sharing Contract (PSC). The first PSC was signed in Indonesia with Mobil in 1966. Amoco followed shortly after in Egypt.

q PSCs differ from concessions in that the state retains title to the minerals throughout exploration development and production.

q The company contracts with the government for a share of production of oil and gas, as payment for costs incurred, a return on its investment and/or services provided

q PSCs vary widely as these are negotiated between the companies and

governments.

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Oil Mining Leases / E&P Licences Limited or no management by host governments Royalties Depreciation Consolidation Long concession periods (Option to renew for further 30 years) Large contract areas granted No relinquishment

1900 1970s

E&P Licences v Petroleum Profits Taxes Act v Supplemental Petroleum Taxes v Petroleum Production Levy &

Subsidy Act v Unemployment Levy Act

amended (oil & gas companies) v Royalties v Capital Allowances v Consolidation v Fiscal Incentives (Downstream

Plants) v No relinquishment

PSCs vFirst signed in 1974 vNo Cost Recovery v Govt took % share based

on production v Ring-fenced vContractors Taxes paid out

of Govt Share

1970s Mid 1990s

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1995 PSC Model

v Cost Recovery introduced v GORTT Shares in Prot

Petroleum v Contractors taxes paid out of

GORTTs Share v Minimum Work ObligaHons v Holding Fee v Clear Provisions for Natural Gas v Financial ObligaHons- Signature

Bonus, R&D, Training, Technical Equipment

vNew Model E&P Licences- 2005

vRelinquishment Provisions vMinimum Work

Programmes vTighter Abandonment

Financing Provision v Local Content Policy v Financial ObligaHons and

Bonuses.

Mid 1990s Mid 2000s

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2005/6 Taxable PSC

vCost Recovery vGORTT Shares in Profit Petroleum oil (in lieu of royalty, SPT, oil impost, Petroleum Levy) v Contractor pays taxes (PPT, UL, & GF) v Consolidation 2 regimes: land/shallow marine and deepwater v Assignment/Transfer Fees v Financial Obligations v Windfall Profit Feature introduced v 40% uplift for exploration expenses in deep water projects

Mid 1990s Mid 2000s

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

2010 -2011 for PSCs

qConvenHonal styled PSCs, for Shallow (< 400 m), Average (400

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

q EecHve management, monitoring and regulatory control of the operaHons of these licences and PSCs are undertaken by the MEEA in accordance with the respecHve terms and condiHons

Management of Licences and PSCs

Fiscal/Tax Arrangements

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THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

Fiscal Features qAll companies operating under E&P as well as

PSCs are required to file their tax returns and meet all fiscal obligations in respect of SPT, PPT UL, Royalty, Green Fund Levy and Withholding Tax.

qIn the case of the majority of PSCs, the

companies tax obligations are met from GORTTs Share of Profit Petroleum.

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THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

Taxes/Levies Administered by Ministry of Finance

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Taxes applicableCrude Income

Gas Income Rate

Supplemental Petroleum Tax Sliding ScalePetroleum Profits Tax 50% / 35%Unemployment Levy 5%Green Fund Levy 0.10%Withholding Tax 5%

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO Taxes/Levies Administered

by Ministry of Energy

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Taxes applicableCrude Income

Gas Income Rate

Petroleum ImpostPetroleum Levy 4%Royalty - Crude 10% - 12.5%Royalty - Gas (Current) 0% - 15%Royalty - Gas (New) 10% - 15%

Basic Structure

Gross Revenues: Total Revenues Less

Costs: (As dened under the Accoun0ng Procedure of the PSC)

(OperaBng, ExploraBon, DepreciaBon AdministraBve costs, Unrecovered costs (C/F))

(Costs limited as % of Revenues)

Profit Petroleum

Gross Revenues: Total Revenues Less

Costs: (As dened under the PTA and Income In Aid)

(OperaBng, SPT, Royalty, ExploraBon, Levy, Depr, AdministraBve costs, Unrecovered costs (C/F))

Net Taxable Profits

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PPT &UL 55%

45% As per Prot Share Matrix

PSC Concessionary

GORTT Take

Gross Take from PSCs

Share of Profit

Petroleum Financial Obligations Withholding Tax*

* (Where excluded in some PSCs)

Gross Take from Concessionary Arrangements

Royalty SPT UL Petroleum Levy Oil Impost Green Fund Levy Withholding Taxes

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< = >

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

q All scal arrangements of companies are audited for accuracy, compliance and revenue generaBon:

q In the case of E&P operaBons this is undertaken by the Ministry of Finance

qIn the case of PSCs, this is undertaken by the Audit Unit within the Ministry of Energy & Energy Aairs

q The Ministry of Finance through, the Permanent

Petroleum Pricing CommiWee can review and determine fair market values in respect of non-arms length transacBons.

Audit Provisions

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

qOil & Gas contracts for the upstream sector are managed under legislaBve, contractual and scal frameworks that provide for transparency and clarity.

qConBnuous review and revision of these frameworks

ensure that current and industry best pracBces are adopted to improve the overall management and sustainability of the sector

Conclusion

THE GOVERNMENT OF THE REPUBLIC OF

TRINIDAD AND TOBAGO

THANK YOU

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