Earlier this month, after extreme pressure on the A Partnership for National Unity/Alliance For Change coalition Government by a wide range of organisations representing citizens’ interests, we were informed by the former that they will finally release the oil contract that was renegotiated with the Exxon syndicate.
The Government had thrown up several, sometimes contradictory reasons for stonewalling on the requested information, including the now ubiquitous “confidentiality clause” of contracts. In February of this year, this newspaper was the first to call for the release of the terms of the contract in this space on February 13, under the caption “Oil Fiscal Regime”. Unfortunately, the only other detail released subsequently was that the royalty would be “doubled” to an underwhelming two per cent. We republish our request for details.
“…the concern of most citizens is not just when the oil and its revenues will be flowing but what will be the quantum of the latter. The answer to that question does not only depend on the price of oil on the world market – important as that is, even to the Overseas Oil Companies (OICs) to make their FID – but also on the fiscal regime our government will apply to the oil revenues. Presently, all the Guyanese people have been told is we will be receiving “50 per cent of the profits”. While on its surface this may appear adequate, there needs to be a much more granular fiscal regime to ensure Guyana receives its fair share of revenues.
Typically, Government’s taxation policies, in the words of one French Finance Minister, is “to pluck the goose with the least amount of hissing”. In other words, to encourage the OICs to invest in exploration, development and production which necessitate huge up-front costs, which can only be recovered if they strike oil and are then allow them to recover those costs – which would now be capitalised – along with a decent rate of return (RoI) on their investments.
As we have pointed out before, it was very surprising when our Government renegotiated the contract with ExxonMobil after the massive 1.4 billion barrel field had been confirmed; it reverted to the 50/50 profit split the People’s Progressive Party had agreed to back in 1999, when Lisa was not even a gleam in anyone’s eye. With the goose in the hand, at a minimum, it was expected a royalty would have been imposed on gross revenues. Typically, this is between 7-15 per cent and guarantees revenues for our resource that would be exhausted. In an oil market that is very volatile and hovering around production costs – and made more so with US President Trump’s encouragement of US shale oil production – 50 per cent of profits may not amount to much. It is hoped that in the contracts for the exploitation of new blocs, royalties would be imposed.
We have not been told whether Additional Oil Entitlements (AOE) have been made part of the contract. This standard clause in the contracts of most oil producing countries adds an element of progressivity to the fiscal regime in that the state collects additional revenues if the after-royalty, after-tax, inflation-adjusted Rate of Return (RoR) to the OICs exceed a stipulated level. The base RoI, for instance could be set at seven per cent, which is par for the industry, and would allow Guyana to share in windfall profits if the price of oil spikes for some reason.
We also need to know what is the rule on the carrying forward of losses and capping of exploration and development costs recovery. This must be balanced between encouraging the OICs to invest and discouraging them from reducing the profits that must be shared with Guyana since these are only calculated after those costs are deducted. Similarly, were interest expense capped? If not, this would encourage thin capitalisation so that the OIC, in effect would be siphoning away funds in the guise of interest payments and again reducing declared profits.
There are several other features such as “ring fencing” and “transfer pricing” that we hoped were addressed in the present fiscal regime.
