Introduction
This is the wrap-up column treating with a retrospective and prospective reflection and review of the ruling Stabroek PSA and its Model PSA variant arising from the recent public auctions. The column details the fiscal metrics of both contracts, as stated by the authorities. Following that there is a comment on ring-fencing, which is one of the most widely discussed reforms to the Stabroek PSA. It was adapted by the Model PSA public auctions.
PSA now and then
Due to controversy, the Guyana Revenue Authority, GRA, has pronounced formally on the key fiscal metrics of the ruling Stabroek PSA, used before the Model PSA devised for the public auctions. These metrics are,
Signature Levy, US$ 18 mln. [ A single non-recoverable lump sum payment to the Government on granting the licence for oil exploration].
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 Government of Guyana 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 in the PSA 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. 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.
.Model PSA Public Auction Template
The Authorities’ template for the recent public auction of oil blocks shows significant upward-biased adjustments in revenue terms. Thus:
1] the size and location of exploration zones; 14 new blocks were on offer, 11 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] signature bonus; adjusted to US$ 10 million for shallow water blocks and US$ 20 million for off shore deep-water blocks
3] royalty rate; raised to 10 percent
4] cost recovery terms; limit now capped at 65 percent, with
5] profit split ratio of 50/50 retained
6] the introduction of ring-fencing provisions; and
7] corporation taxes; now set at 10 percent.
In addition, the new PSA template situates itself in a universe where discoveries are proven before the auction so frontier zone risks are somewhat reduced, thereby making the timing of the auctions propitious. Emphases are also placed on the work programmes, financial offers, and local content
Ring-Fencing
Over the years I have insisted that ring-fencing in a PSA can constrain the allocation of income and spending for profit sharing and taxes Thus, with a tight ring-fence, the capacity to consolidate income and spending across multiple fields is restricted in Guyana. Since the sharing of profit oil between the contractors and the government is done on a field-by-field basis. In principle, this ensures that government revenue from the contract area is calculated based on each field separately.
Regrettably, this is negated by the PSA if it also allows the Contractor to allocate cost oil to any field within the contract area. This asymmetrical treatment of profit and cost oil benefits those Contractors with multiple fields within their contract areas at the expense of delaying government revenue. For example, a contractor with multiple fields can reduce the amount of profit oil to be shared from a producing field by allocating cost oil from various fields under development to the producing field. This could have implications, like delaying government revenue, particularly if a large, multi-field project is developed in phases [Stabroek Block]
Conclusion
This completes my treatment of the topic.
