Understanding, or not understanding ringfencing
Introduction
Today’s column returns to the very popular topic of ringfencing in petroleum operations. Column 115 appearing in the Stabroek News of November 24 addressed how Belize, a mini-petroleum state, used the industry’s regulator, the legislation and the courts to enforce the principle, to that country’s great credit, quite the reverse in the case of Guyana. Ringfencing is not new to this column, having been the single issue addressed in Column 68 Why ringfencing matters, and why it does not.
Not that our oil czars are particularly interested in such esoteric, finer point of the petroleum sector, or its administration. Even though they should. The Natural Resource Governance Institute, a non-profit independent organisation describes ringfencing 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.”
To put the concept of ring-fencing in a commonsensical context, it simply means that the revenue from one field, or such revenue earned under one production licence, cannot be used to finance exploration in other fields, even under the same agreement. In applying for a Petroleum Agreement, the oil company – in this case Exxon, Hess and CNOOC – gives an undertaking that it has the resources to explore for petroleum resources and uses this not only to magnify and inflate its risks, but to justify a range of concessions.
Government now investing in Exxon’s exploration activities
Guyana’s forgoing of profit oil necessarily adds to the windfall of the oil companies, allowing them the use of what is properly Guyana’s funds to finance petroleum activities. In other words, the government is putting up 50% of the exploration investment – equal to the combined investment of Exxon, Hess and CNOOC – in the exploration, but has no seat at the table, and no say in decision making. And guess what? The Government cannot extract in return, a single change in the concessions available to the oil companies.
I am not sure that Raphael Trotman and Vickram Bharrat were alert to this, but Vice-President Jagdeo must hopefully understand the implications of the practice, beyond its superficiality. Now, if he does understand this but allows it to happen, then he is either reckless of the consequences or could not care less. Yes, we care about our whole country and as a nation are prepared to confront Maduro the Bully. Indeed, five of our finest gave their lives in the protection and defence of this country. This column thanks and salutes them and hopes that their dependents are properly cared for by the state.
Ceding sovereignty
Now, with all our love and respect for our country, its sovereignty and territorial integrity, we have stripped Parliament, the essence of our statehood and sovereignty of its most essential power and function, and that is the power to “make laws for the peace, order and good government of Guyana.” (Article 65 of the Constitution). And how do we do it? By the burdensome stability clause contained in Article 32 of the 2016 Petroleum Agreement.
Here is what that Article states in sub-Article .1 and .2:
“Except as may be expressly provided herein, the Government shall not amend, modify, rescind, terminate, declare invalid or unenforceable, require renegotiation of, compel replacement or substitution, or otherwise seek to avoid, alter, or limit this Agreement without the prior written consent of Contractor.
“After the signing of this Agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted thereunder any increase of or any new petroleum related fiscal obligation, including, but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imports.”
Note, not for one year, five years or ten years but for a minimum of forty years, or more than a generation of Guyanese. And that is without all the force majeure which Exxon will request and the Government will grant.
Conclusion
The Vice President might not have intended it, but every time he allows a variation of relinquishment, unjustified force majeure, or the use of government share of profit oil for exploration, he is effectively changing the spirit and provisions of the Agreement – practically renegotiating it. Yet the Government parrots the subterfuge about the sanctity of contract.
There is simply no plausible excuse for the Government’s adamant refusal to have a Commission of Inquiry into the circumstances of the 2016 Agreement, especially in the light of the Clyde & Co. Report, Granger’s granting to Exxon permission to charge the costs of its Head Office to the Contract, the commingling of petroleum operations and the gas to shore project and the granting of a Licence under the Companies Act to hold land in Guyana, in violation of the Companies Act. With nothing gained in return.
The inevitable conclusion is that in standing up to Maduro, the Government has been commendably courageous, demonstrating fortitude and spine. But when it comes to Exxon, this Government is totally supine.
