Introduction
Today’s column addresses the second topic I had identified for consideration in this ongoing evaluation of Guyana’s proposed public auctions of its crude oil blocks. That is, a comparison between the key fiscal metrics in the ruling Stabroek block Production Sharing Agreement, PSA, with the model template intended for the proposed oil blocks auctions. Such comparison is done in order to gauge the likely difference in the Average Effective Tax Rate, AETR, or Government Take or share of net cash flow from the project[s] in play. These fiscal metrics are, by themselves, incomplete measures of the economic value yielded by the crude oil operations
Both mis- and dis-information concerning Guyana’s PSA have created a communication bubble of noise and nonsense in sections of the social and print media; and, as well an insanely repetitive echo chamber that leaves little or no room for reasoned exchange of differences. As I have repeatedly noted in these columns, outside its fiscal metrics the Stabroek PSA both incentivizes and dis-incentivizes economic activities. Indeed, as a manifest example of this occurrence the Stabroek PSA has Local Content requirements, LCRs; which are clearly a potential source of considerable economic benefits for all to observe.
Fiscal metrics of ruling Stabroek PSA
To avoid futile engagement, I rely on the Guyana Revenue Authority, GRA, which is responsible for implementing the tax code in this presentation [See GRA Press Release June 2022]. As the GRA states there ” over the past few days there has been conflicting reports and calculations in the press related to royalty payments to the Guyana Government, and the recoverability thereof. As such, it is behooving of the Revenue Authority to address some instances of misinformation.”
The GRA further noted in the Release that, “notwithstanding the several contracts signed, the emphasis is on the one entered into between Esso Exploration and Production Guyana Limited, CNOOC Nexen Petroleum Guyana Limited, and Hess Exploration Guyana Limited (hereinafter collectively referred to as the Contractor) and the Guyana Government, and apparently so since presently Stabroek is the sole producing block in Guyana”.
The key fiscal metrics of the ruling Stabroek PSA are:
1. Signature Levy, US$ 18 mln. [A single non-recoverable lump sum payment to the Government on granting the licence for oil exploration].
2. Royalty, 2 percent. The GRA has declared that under Article 15.6 of the PSA the Contractor pays a Royalty of two percent to the Guyana Government on the value of all petroleum produced and sold.
3. Cost Recovery. The GRA has declared that Articles 11.2 to 11.4 delineate the sharing of Profit Oil between the Contractor and the GoG, with costs limited to 75 percent of total revenue from the sale of petroleum each month. Provision is made for costs exceeding the 75% ‘cap’ to be carried forward. This allows for 12.5 percent profit share being allocated to the Government until all costs carried forward are recovered.
The GRA also observes that Guyana would eventually benefit from a much greater share of Profit Oil when the recoverable costs are lower than the ceiling.
4. Royalties paid to the GoG is an Expense incurred in the production of income for the Contractor(s), but is not allowable in the calculation of Cost Oil
5. Profit Sharing. Articles 11.2 to 11.4 delineate the methodology for the sharing of Profit Oil between the Contractor and the Government, with costs being limited to 75% of total revenue from the sale of petroleum each month. Provision is made for costs exceeding the 75% ‘cap’ to be carried forward to successive months until recouped. This allows for the present 12.5% profit share being allocated to the Government in the interim until all costs carried forward are recovered. This also means that Guyana would eventually benefit from a much greater share of Profit Oil when the cost share is lower than the stipulated 75% ceiling.
Since royalties are an expense for the Contractor(s), and is not allowable in calculation of cost oil it therefore follows that the 2% Royalty payment currently adds to the Government’s take. Hence the Guyana Government presently receives a total of 14.5% in Royalty and Profit Oil.
More generally, the GRA notes that the parties that constitute the contracting consortium, like other companies in Guyana are subject to the Income Tax Act and are required to file returns, pay taxes and maintain books and records. The Government of Guyana, however, based on Article 15.4 of the Petroleum Contract, opted to institute the ‘Pay on Behalf System’ whereby the Government’s share of Profit Oil includes the income taxes payable by the contractor. Therefore, the Minister with responsibility for Petroleum is required to pay the relevant taxes on behalf of the Contractor.
The parties comprising the Contractor would thereafter be issued with Tax Certificates which would essentially allow them to claim Tax Credits or Tax Deductions in other jurisdictions in which they are liable to pay taxes.
Conclusion
In next week’s column I will begin consideration of the fiscal metrics, which appear in the Authorities template for the public auctions under their new model PSA. I shall also treat with a few related considerations; for example, the Authorities’ declaration of pursuing accompanying bilateral contracts with selective States. I shall also recognize in the advisements of the public auctions that the Authorities provide an independent public estimation of Guyana’s recoverable crude oil resources.
