Introduction
As previously indicated, today’s column wraps-up my reflections on the national debates that have so far centered on the birth of Guyana’s infant petroleum industry. As national and regional elections rapidly approach, the “noise and nonsense” elements participating in these debates have grown manic. They disregard the unjustifiable harm they do to the standing of the owners (Government), operators (oil companies), governance (Authorities, private and public) and even the broad mass of potential Guyanese beneficiaries of its new found oil wealth.
There has been a relentless and “organized” onslaught on all the above stakeholders, which has been led by manipulating measures of Guyana’s Government Take from the sector. Analysis/modelling of Government Take is routinely portrayed, as providing a definitive exposure of ineptitude, negligence and corrupt endeavour! The “noise and nonsense” elements seem unaware that there is a Financial Modelers Manifesto, in which many Members of that professional group, subscribe to a Modelers Hippocratic Oath. This Oath requires that their modelling is professional and fully cautioned by advisories on its limitations. In the Oath, modellers, vow “to do no harm”.
Debates on Guyana’s Government Take reveal that, given the data required to guarantee accurate measurement, only audited calculations of Government Take, jointly undertaken by the Owners and operating Contractors in the petroleum industry, are going to be accurate. All other estimates remain just that, estimates. Such estimates though, are fraught with data limitations. And, for researchers/analysts who estimate Guyana Government Take, to present these without fully expressed cautions concerning their predictive reliability, is downright deceptive, dishonest, and very unprofessional.
Taxes and Thievery
Related to the above observation is a similar manipulation of tax compliance in the national debates on corruption in Guyana’s emerging petroleum sector. Worldwide, all too frequently oil majors have corrupted national tax compliance processes, thereby leading to the enrichment of a few and the defeat of the expectations of the many. It is important, however, to recognize the distinction between tax avoidance and tax evasion, when considering debates about tax compliance. Tax avoidance does not involve breaking any laws. Tax evasion, does however, break laws. It is illegal.
Indeed, I believe it is fair comment to state that, all economic agents (from the individual to the largest corporation) can be expected to avoid paying taxes; as this does not entail breaking laws. However, the national debates have deliberately fudged the distinction between illegal tax evasion, (corrupt behaviour), and tax avoidance (which involves no corrupt behaviour). One can posit the argument that, tax avoidance is the rational choice for economic agents seeking to be “efficient, optimizing and maximizing”. Treating tax avoidance as “illegal thievery”, serves to promote the argument of those who deem, all officials, qua officials in Guyana’s petroleum sector, as part of a thieving corrupt network, when what they do are the very things their critics routinely do — avoid paying taxes!
Deceptive Headlines
I recall in an earlier column (May 6, 2018), I had occasion to call out OpenOil’s provocative and contentious titling of one of the first efforts to estimate Guyana’s Government Take. The reporting headline, read: “Guyana’s oil deal is outlier low government takes just over half”. The local media further pumped this up and blared out: “Analyst says … Oil deal with ExxonMobil could cost Guyana $5 billion”! (Kaieteur News, March 20, 2018). In an extended series of articles over the period, May 20, 2018 to June 24, 2018 I had analyzed the conceptual, logical, analytical foundations of this Report and its utter disrespect for Guyanese’ appreciation and sophistication in regard to its content.
I have already addressed the “informational deficit” facing all efforts to calculate Guyana Government Take independent of audited data provided by the Owner (Government) and Contactors (operating oil companies). There are other conceptual limitations attendant to efforts to model Government Take ratio. Before turning to that, recall also Government Take is a fiscal metric and therefore of greater concern to Government. To the oil and gas companies, more relevant performance based ratios, like the Internal Rate of Return, IRR, and Profitability Ratio (PR), are of leading concern.
Responsibility
Because of the serious limitations that apply to all “outside measures” of Government Take, I believe it is incumbent on all responsible professional analysts/modelers/researchers to declare upfront, appropriate cautions when publicizing their results (estimates). This expectation becomes even more stringent, the more general and non-specialist is the public for which the publication is intended.
Modeling Government Take seeks to capture the essence of the reality that is being modeled; which in this case is a petroleum project. However, petroleum projects are notorious for the vastness of their detail and the centrality of risks and uncertainty in their execution. I have previously noted the wide range of these risks (geological, financial-economic and geo-political). The uncertainties are equally wide-ranging (price, cost, quantity and quality). Given all this, the pressure is on modelers to caution non-specialist readers about the predictive reliability, which should apply to their published results.
Advisory
Presently, measuring Government Take through financial/economic modeling is standard practice. However, the “noise and nonsense” elements of the national debate assert an unwarranted precision to these estimates. The precision of a model of a complex petroleum project is a deliberate simplification, for the modeler’s convenience. The risk thereafter arises when the modeler is less than professional and uses the results “to do harm”.
Back in June 10, 2018, I had informed readers that, “passionate as I might appear to be when highlighting the limitations of the predictive power of financial/economic models, I remain a firm believer of their usefulness”. As I had also indicated in that column, Wikipedia reminds us that financial modeling consists of “building an abstract representation … of a real world financial situation”; a petroleum project in the case of Government Take estimation. The model is typically a mathematical model deliberately designed to simplify the performance of a petroleum project. That project may represent: 1) a single reservoir or field; 2) an incremental development in an already producing field or reservoir; and 3) the integrated development of a group of fields or reservoirs.
Conclusion
Next week I consider Government’s First Report on our infant petroleum industry as I shift gears and address empirical outcomes in preference to theoretical (speculative) concerns.
