The government can easily control the impact of the absence of ring-fencing provisions in the agreement with ExxonMobil’s subsidiary by attaching conditions in each Petroleum Production Licence issued, according to commentator Christopher Ram.
The government recently expressed concerns about the lack of ring-fencing to the International Monetary Fund (IMF)
According to the Concluding Statement of the 2019 IMF Article IV Mission “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 government has been pilloried for poor negotiation of the 2016 PSA when critics say that ring-fencing and other matters should have been addressed.
In his oil and gas column in Friday’s edition, Ram said: “My view is that the Government can easily control the adverse impact of ring-fencing by imposing conditions in each Petroleum Production Licence issued by the Minister under section 35 of the Petroleum Exploration and Production Act. I say each because in my view, the Operators cannot use the single, secret licence issued by Minister (Raphael) Trotman to carry out production in the entirety of the 6.6 million acres in the Stabroek Block. In further support of my contention, there is nothing in the Petroleum Agreement, no matter how liberally construed, which requires Government’s funds to be applied to Exploration Activities. That would be the effect if the Oil Companies were to seek to divert such funds and would be in violation of the Act and the Agreement. Hopefully Trotman has not closed off that avenue in relation to the Production Lic-ences”.
Ram, as he has done before, called for the release by the government of the production licence.
“While there is nothing about Trotman’s competence that can shock the public any further, that can be no excuse for the Government hiding the Production Licence. Not only must this Licence be released immediately but Trotman ought to tell the public whether it was the GGMC that advised on the Production Licence. The Petroleum Exploration and Production Act and Regulations allow for conditions to be imposed on both exploration and production licences, conditions such as local content and activities permitted to be undertaken by the Oil Companies. In my view, there should be far more intensive efforts and pressure on (President) David Granger who seems to have abdicated all responsibility for the give-away of the Millennium by his Administration.
“Those who seek to protect Granger from this crippling Agreement are doing a disservice to this country and generations to come. If the Granger Administration were to spend a quarter of the time and effort on rectifying the weaknesses of this Agreement as they have spent on frustrating the National Assembly and the Courts on the question of elections, our country would have been in a stronger position by now in relation to (ExxonMobil subsidiary) Esso (Exploration and Production Guyana Limited).
In his column, Ram said he believed a more serious issue was the tax exemption granted to Esso.
He noted that ring-fencing is neither a legal nor a technical term and various bodies have sought to define it in their own way. He said that the Natural Resource Governance Institute describes it broadly to mean a “limitation on consolidation of income and deductions for tax purposes across different activities, or different projects, undertaken by the same taxpayer.”
Ram said that in practice this means that in calculating the profits of an enterprise in oil activity, only the expenses directly attributable to that enterprise or oil activity can be deducted from the income earned from that field. Where there is no ring-fencing, the fear he said is that the oil operator can use the profit/surplus from a profitable operation to carry out exploration activities elsewhere thus lowering the distributable profit/surplus.
“I believe the IMF is worried about the wrong issue. The more serious and dangerous problem is that Trotman has given complete tax exemption to Esso and its partners for the eternity of Esso’s operation in the Stabroek Block. What Trotman has done is that he has crippled succeeding Parliaments and generations by a stability clause which will take expensive and heavyweight legal action to unshackle. Like Trotman sought to do with the 2016 Agreement he signed but which the Government hid from the public until the embarrassment of the paltry Signing Bonus he and the Government have again failed to share with the people of this country the Production Licence under which First Oil will flow early next year”, Ram stated.
