Introduction
For clarity, my re-cap this week juxtaposes the ruling Stabroek Production Sharing Agreement, PSA alongside the proposed template by the authorities that has been designed to replace it, as and when the public auctions take place. I begin with re-stating the ruling PSA.
Stabroek PSA
Basically, the key fiscal metrics of the ruling Stabroek PSA were represented as follows:
Signature Levy, US$ 18 mln. [A single non-recoverable lump sum payment to the Government of Guyana, GoG, on granting the licence for oil exploration].
Royalty, 2 percent. The Guyana Revenue Authority, GRA has declared that under Article15.6 of the PSA the Contractor pays a Royalty of two percent to the GoG on the value of all petroleum produced and sold.
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 GoG 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
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 GoG presently receives a total of 14.5% in Royalty and Profit Oil.
More generally, the GRA notes 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 GoG, 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.
In the next section I consider the fiscal metrics, which currently 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 selected states. I shall also recognize the authorities’ independent public estimation of Guyana’s recoverable crude oil resources.
Public auctions proposed template
The announced template for the public auction of oil blocks is speculative, as it is likely to be sensitive to the dynamic interactive of bid and offer during the public auction process. In preparation for the auction the authorities have produced a template that shows significant upward-biased adjustments in revenue terms to: 1] the size and location of exploration zones. Thus, 14 new blocks are to be placed on offer; 11 of these in shallow water and three in deep water. These blocks vary in size from 1000 to 3000 square kilometers; while clustering around 2000. While there is no limit to the number of fields investors can bid for, only three will be awarded to any one investor.
2] The signature bonus. This is adjusted to US$10 million for shallow water blocks and US$20 million for offshore deep water blocks 3] The royalty rate. This is raised to 10 percent 4] Cost recovery terms. The new limit is capped at 65 percent, with profit split ratio of 50/50 maintained; 6] the introduction of ring-fencing provisions; 7] corporation taxes. This is now set at 10 percent.
In addition, the new PSA template situates itself in a universe where discoveries are already proven and the auction items are no longer faced with frontier zone risks making the timing of the auctions propitious. Emphases are also placed on the work programmes, financial offers, and local content proposals of bidders.
Although no auction has taken place as yet, on simple inspection one notes that, overall, the fiscal metrics in the new PSA template trend upward; displaying the intended increase in the price required by the Authorities for future oil blocks contracted for extraction by investors. From business and economics, we know an increase in supply cost/price leads to reduced incentives or dis-incentivization for normal investors. Such dis-incentivization reduces investors’ willingness to invest. At the heart of every PSA on offer, the authorities face this trade-off; finding the right balance between Government Take and investment flows.
Conclusion
Next week I address the fourth and final topic in this re-visit of my presentation on the prevailing condition of key parameters on the eve of Guyana’s public auction of oil blocks rights, going forward.
