In his seminal series ‘The road to first oil’ in this newspaper, commentator Christopher Ram has underlined again the grave shortcomings of the 2016 Production Sharing Agreement (PSA), this tIme by comparing it with what exists in fellow CARICOM country, Belize.
In the 115th instalment of his yeoman’s work, Mr Ram pointed out that Belize is a tiny producer – 5,000 barrels per day compared to the roughly 600,000 barrels per day that Guyana is expected to attain when its third platform hits its stride.
It’s all the more remarkable that with such small production, Belize has been able to lock down far more attractive terms than Guyana.
Under Belize law, the first charge on oil revenue is royalty of a minimum of 7.5% for oil and 5% for natural gas. The APNU+AFC government has saddled the country with a mere 2%.
The next charge is the government’s total share of petroleum and then followed by allowable petroleum operation expenditures. Belize also has a petroleum surcharge fixed to rising oil prices, and then, after all the above, the profit left is subject to tax at 40%. In Guyana, the oil companies can sequester up to 75% of oil production each year for expenses and do not pay any taxes. Guyana foots that bill.
On the crucial question of ring fencing, in Guyana’s case, preventing ExxonMobil from charging expenses from failed explorations in other blocks to the producing Stabroek block, Belizean jurisprudence has been able protect the interests of the state and its people.
When an oil company sought to charge against the income earned under one agreement the exploration expenditure under another such agreements, the court set down a marker, according to Mr Ram’s column.
“When a contractor enters into a contract, he is taking a risk as there may not be any production. The expenses incurred for taking such risk cannot be imposed on other Production Sharing Agreements where there is Initial Commercial Production without specific provisions in the Act”, the court ruled.
The Court added: The Legislature would have been specific if it had intended for Contractors to recover expenses from Production Sharing Agreement where there was no ….Production”.
Mr Ram noted that the appeal had been brought by the oil company, Chx Belize Lp against the Commissioner of Income Tax against a demand by the Commissioner for quarterly instalments before including expenses for exploration on other wells, was rejected and thrown out. The company accepted the decision and paid the amount demanded.
Almost six years ago, on December 24, 2017, Stabroek News published the findings of the IMF’s Fiscal Affairs Division as its related to Guyana’s 2016 PSA. The FAD team had visited from July 10-21, 2017 and a report dated November 2017 was presented to the government. Up to the point that Stabroek News published the findings, it had not been released by the APNU+AFC government.
The headline finding was that after assessing similar PSAs from around the world, the Stabroek PSA had the lowest Average Effective Tax Rate (AETR) of “government take”.
“This result confirms that the terms offered in the agreement are generous to the investor…”, the report said.
It also addressed the question of ring fencing.
“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.
The FAD report also addressed other weaknesses in the 2016 PSA. In the intervening period, neither the government that signed the treacherous 2016 PSA nor the current government made the slightest effort to right the vulgar imbalances of the agreement. Instead, both governments feted ExxonMobil and its fellow oil companies. ExxonMobil is treated like royalty and has a prominent position at all government functions and celebrations even though it was exposed just months ago engaged in an illicit transaction with the Ministry of Natural Resources that could have cost this country US$106m in profits.
Neither government will be credited by posterity with staunchly defending the interests of this country and its people in relation to this agreement. We reiterate again that the abominable 2016 PSA must be renegotiated and there must be a Commission of Inquiry into its construction and approval at which former President Granger and former minister Trotman will be prime witnesses.
