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Oil and Natural Gas depletion in Trinidad & Tobago:
Revenue Capture, Investment and Equity
Justin Ram
What I will cover
• Basic ideas around sustainability
• User costs / depletion and its measurement
• Depletion estimates for Trinidad & Tobago
• Modification to depletion estimates
What is Sustainable Development
• The notion of having growth without compromising or impoverishing future generations?
• The problem is really one of intergenerational equity.
Sustainability
• The level of consumption of future generations ≥ the consumption levels of current generations.
• This can be assured if the total stock of capital is sufficient to provide this; natural, man-made, human, social and financial.
What does this mean for an oil & gas economy?
• Hicks’ theory of wealth and income, assumes that income is a rate of return on comprehensive wealth/capital within society.
• If we are depleting one form of national capital (oil and gas), it needs to be replaced by other forms of capital if the welfare of future generations is to be maintained or improved.
Do we know what the level of depletion is or how it should be measured?
• Should it be a physical measure or monetary measure?
• What is it that oil and gas provides to current welfare, that if it was depleted it would not provide to future generations?
e.g.
Foreign exchange provision, consumption possibilities, poverty reduction, infrastructure spending and education.
Adjusted net savings (ANS) for T&T in 2008
-40
-30
-20
-10
0
10
20
30
40
Pe
rce
nt
of
GN
I
- Depreciation
of Fixed
Capital
+ Educational
expenditures
- Depletion
of natural
resources
- Pollution
Damages
Gross Savings Genuine SavingsDepletion Adjusted
Savings
Net Savings plus
Educational
Expenditures
Net Savings
ANS over time as a % of GNI
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
AN
S R
ate
s e
x P
M10
po
llu
tio
n
Adjusted Net Savings (ANS)
Average ANS 1970-2008
What’s driving this?
-
10
20
30
40
50
60
70
80
90
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Millio
n b
arrels
of o
il p
er a
nn
um
-
5
10
15
20
25
30
35
40
45
BC
M o
f G
as p
er a
nn
um
Oil Production
Gas Production
-
50
100
150
200
250
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Ye
ars
Oil Time to Exhaustion
Gas time to Exhaustion
Why is T&T in this predicament and what does this mean?
Price/Costs
P2
Pure Rent
Other Rent
Cb Quasi rent
Government's share of rent
Minimum possible variable costs
0
Mine Capacity
Insufficient rent capture as well.
User costs/depletion is also important.
• Accounting for user costs is an important economic factor in determining the sustainability of current resource extraction patterns.
• The fiscal regime associated with the resource and the use of the revenue emanating from the exploitation of the resource are also important.
Accounting for user costs
Many methodologies that give different estimates:
• Total rent approach
• Marginal rent approach
• El Serafy / simple present value approach
• Quasi Optimal approach
• Real asset value approach
Six primary methods:
Method Formula Assumptions
Total Rent UCt = pqt – c*qt
Constant unit extraction
cost c*, Hotelling rule:
Δp/(pt – c*t) = r
Marginal Rent UCt = pqt – c’(qt)qt
Constant price,
increasing marginal
extraction cost,
Hotelling Rule
Exhaustion
)1( rN
pqtUCt
Constant price,
increasing marginal
extraction cost,
Hotelling Rule
Simple Present
Value (El Serafy
method) )1( r
N
cpqUCt
Constant total rent
Quasi-Optimal
(Vincent method) )1)(1(1
)(
rN
cpqUC
Constant price,
isoelastic cost function
with increasing
marginal costs, ‘near-
optimal’ path for
extraction and marginal
rents
Real Asset Value
tT
N
rtT
RnRpSp e
tTr
)1(
1 )(
Accounting prices,
constant unit rent
Strengths and weaknesses
Method Strengths Weakness
Total Rent Simple to calculate Estimates tend to be very high and
are unrealistic
Marginal Rent Simple to calculate, theoretically
correct
Marginal costs are difficult to
estimate
Exhaustion Simple to calculate, theoretically
correct
Marginal costs are difficult to
estimate
Simple Present Value (El Serafy
method)
Simple to calculate and avoids the
need to forecast prices
Provides low estimates
Quasi-Optimal (Vincent method) Theoretically refined approach that
uses a good proxy for cost increases
Assumes optimality, which is
unlikely in the real world
Real Asset Value Has some relation to prevailing
welfare conditions of country
Determining the accounting or
shadow prices could lead to some
ambiguity.
Estimates for T&T
-
2,000
4,000
6,000
8,000
10,000
12,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
US
$ M
illio
n
Total Rent
El Serafy (Simple PV)
Quasi Optimal
Real Asset Value
0%
10%
20%
30%
40%
50%
60%
70%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Dep
letio
n as %
o
f G
NI
Total Rent Method
El Serafy (Simple PV) Method
Quasi Optimal Method
Real Asset Value Method
El Serafy comparisons with other countries
0%
20%
40%
60%
80%
100%
120%
140%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
% o
f G
CF
Trinidad and Tobago
Barbados
Venezuela
Indonesia
Real Asset Value comparisons with other countries
0%
50%
100%
150%
200%
250%
300%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
% G
CF
Trinidad and Tobago
Barbados
Venezuela
Indonesia
What are the implications?
• T&T should be saving or investing considerably more of its oil and gas revenue?
• Are sufficient rents being captured?
• Is depletion occurring too fast, who is benefitting from this opportunity cost?
However, what about current consumption
Critique:
• User costs do not account for prevailing social conditions and consumption needs.
• …this could be the reason why it has little resonance with policy makers.
Accounting for poverty
• Therefore, it seems appropriate that the method used to estimate depletion should have a connection with level of ‘wants or needs’ within the society ideally measured by the poverty rate as a measure of societal deprivation.
• Depending on the level of poverty within a country, it makes sense for that country to exploit its natural resources for immediate consumption and not be overly penalised by wealth accountants.
Suggestion
• The suggestion is for depletion estimate purposes, that user costs be adjusted based on the needs within society. These needs specifically refer to the needs of those individuals living below the poverty threshold.
Depletion and poverty • Depletion = UCt - PTCt
• UCt – user costs in period t
• PTC – Poverty Threshold Consumption rate in period t
With:
• PTC = Ppov * (WPov – Ypov)
• Ppov – Total population living on less than poverty threshold income.
• Wpov – Per capita 60% median income wage.
• Ypov – Average per capita income of individual living in poverty i.e. below 60 % of median income.
Poverty adjusted user costs for T&T
Poverty User Cost calculations 2007
Median income per month 7,427
60% of median per month 4,456
Consumption gap per annum 35652
Total households 384,879
Households below 60 % median income (27 %) 103,917
Consumption user cost component TT$ million 3,705
Consumption user cost component US$ million 588
Poverty adjusted user costs for T&T
• This represents about 9% of total user costs (US$6311 million) if the real asset value estimate of depletion for 2007 is used.
Conclusion
• User cost estimates are integral for measuring sustainability.
• T&T has an insufficient savings and investment rate – the reduction in the total capital stock will lead to welfare reductions in the future – (West Indies cricket team effect).
Conclusion
• There are many reasons why policy makers do not account sufficiently for user costs – political economy, ‘anticipation of better times’.
• Also due to consumption needs.
• User cost estimates should therefore account for prevailing social conditions.
Conclusion
• User costs must first of all be captured.
• Then invested.
• T&T should invest or save total user costs less amount to eradicate poverty.
Thank You – the end
Questions
Justin Ram
011 44 77 99 601 046