Introduction
Last week’s column, sought to reinforce the critical importance of two features of the fiscal regime embedded in Guyana’s 2016 Production Sharing Agreement (PSA). One is the synergistic relation of the fiscal package’s individual components (deductions/taxes/allowances/credits/other terms & conditions). The second, is that the fiscal package embodies both written (tangible) and unwritten (intangible) components. The latter include items such as trust and goodwill amongst Parties to the Agreement. These two dimensions of the fiscal package also apply to the PSA as a whole.
There is a third complementary feature however, which is not readily recognized. That is, the PSA represents what economists term an “incomplete contract”. (Of note, this is an area of rapid theoretical development in economics and significantly was the subject area for the winners of the 2016 Nobel Prize in Economics.) Put simply, incomplete contract theorists argue oil contracts are incapable of specifying what is to be done for every possible contingent development during their legal lives. Indeed, “at the time of contracting, future contingencies may not even be describable”. Therefore, if Parties to a contract are rational and have independent interests to serve, they would never truly “commit themselves never to engage in mutually beneficial renegotiation later on in their relationship.” Such notions relate to my earlier introduction of the concepts of “known- unknown risks” and “unknown-unknown risks”. Incomplete contract theory suggests that, despite public declarations to the contrary by Parties to the Guyana 2016 PSA indicating “no re-negotiation”, this cannot be ruled out as a future rational option.
Prelude
The observations made above were prelude to my advancing the proposition that, in its broadest and most fundamental sense, the 2016 PSA neutralizes significantly the greatest existentialist threat facing Guyana’s petroleum sector ̶ the Venezuelan territorial claim. As indicated in the previous column, the two global economic powerhouses, the USA and China, have significant national economic interests invested in Guyana’s petroleum sector. Therefore, despite the disproportionate size of economic, military and international influence of Venezuela compared to Guyana, it would not be easy for Venezuela in this situation to seek to exploit these advantages by provoking energy conflicts, or worse. In this sense therefore, the present ownership and operating structure of the PSA gives Guyana considerable geo-strategic protection.