With ExxonMobil having found 12 operable wells in the offshore Stabroek Block, the Guyana government is concerned that the absence of a ring-fencing arrangement could negatively affect revenue earned from its explorations.
According to the Concluding Statement of the 2019 International Monetary Fund (IMF) Article IV Mission issued yesterday “authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement (PSA) could potentially affect the projected flow of government oil revenues.”
The absence of a ring-fencing arrangement in the 2016 PSA has for years been discussed as a possible liability of Guyana’s developing oil sector. Such an arrangement would’ve put “a limitation on consolidation of income and deductions for tax purposes across different activities or different projects undertaken by the same taxpayer.”
It is unclear who in the government signalled this to the IMF mission which visited Guyana from June 3-14 though it is likely to be the Department of Energy (DoE) which took over responsibility for the petroleum sector from the Ministry of Natural Resources.
The admission of the ring-fencing lacuna would be a further indictment of Minister of Natural Resources, Raphael Trotman who presided over the renegotiation of the PSA with ExxonMobil’s subsidiary, EEPGL without addressing a range of key issues. Trotman had at one time described the new PSA as a tweaking of the earlier one but his handling of the process has come under severe criticism for not addressing matters such as ring-fencing, relinquishment of oil blocks, higher royalties and a bigger signing bonus. His being relieved of responsibility for the sector was seen in some quarters as a response to the various problems with the renegotiated PSA. Critics had said that the renegotiation was done without a single recognized expert on the Guyanese side capable of matching wits with ExxonMobil.
In a February 2018 column published in the Sunday Stabroek, economist Dr Clive Thomas noted that in the absence of a ring-fencing arrangement contractors such as Exxon are able to deduct exploration and development expenditures from each new project/well against income from those projects/wells already generating taxable income.
Further, he stated, as petroleum areas mature (because they are mined out), this discourages new investors entering the sector. Particularly, if those investors do not have income against which they can deduct their exploration and development expenditure.
According to the IMF yesterday, Government has specifically noted that the rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field.
In response, the IMF yesterday said that the authorities are developing strategies to mitigate such a possibility, including a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.
Analyst Christopher Ram had argued that the Stability Clause contained in the renegotiated 2016 PSA would prevent Guyana from making substantial changes to the agreement.
At a February 11, 2019 press conference, the DoE’s Oil and gas Adviser Matthew Wilks had said that a new PSA template will improve the government’s take overall by instituting elements such as ring-fencing and a more progressive regime as it relates to oil price increases. The template, he said, will also look at closing off potential taxation and value-loss loopholes and “…A general tightening up that will give the government more opportunities to have a say as the investment proceeds from exploration to development and production and the give the government more of a seat at the table.”
The Stabroek Block which is being explored by ExxonMobil’s local subsidiary Esso Exploration and Production Guyana Limited (EEPGL) has a current production estimate of more than 5.5 billion oil equivalent barrels from several wells including Liza , Payara, Liza Deep, Snoek, Turbot, Ranger, Pacora, Longtail, Hammerhead, Pluma, Tilapia, Haimara and Yellowtail.
The company has already begun work on Liza Phase 1 which is expected to produce its first barrels in 2020 while the Environmental Protection Agency (EPA) has provided approval for the development of Liza Phase 2.
Allocation of income
In a November 2017 report, the Fiscal Affairs Department (FAD) of the IMF had pointed out that ring-fencing in a PSA framework can limit the allocation of income and expenditure for profit oil sharing and tax purposes. With such a ring fence, the scope to consolidate income and expenditure across multiple fields is circumscribed.
“In the PSA framework in Guyana, the sharing of profit oil between the contractors and the government is done on a field by field basis. In principle, this ensures that the government revenue from the contract area is calculated based on each field separately. However, this is undone by the PSA framework also allowing the contractor to allocate cost oil to any field within the contract area.
“While Guyana does not place any restriction on the deductibility of interest under the ITA (Income Tax Act), it does impose a withholding tax on interest payments of 20 percent subject to double taxation treaties. Profit oil sharing linked to the cumulative rate of return in contrast would take into account the time value of money, although it is inherently difficult to determine the appropriate rate of return”, the report said.
It cautioned that this asymmetrical treatment of profit and cost oil is likely to benefit contractors with a number of fields within their contract areas at the expense of delaying government revenue. For example, it said that a contractor with multiple fields can significantly lower the amount of profit oil to be shared from a producing field by assigning cost oil from various fields under development to the producing field. This could have “significant implications” in terms of delaying government revenue, particularly if a large, multi-field project is launched in phases.
“Given the size of the contract area thus far awarded in Guyana, there is merit in applying a tighter ring-fencing arrangement as part of the general PSA framework. An option could be to apply this at the level of individual fields, perhaps only allowing failed exploration expenditures to be deducted against producing fields”, the FAD report stated.
Based on yesterday’s IMF statement, the government here now seems to be adopting the concerns raised by the FAD in November of 2017.
