New oil contract template will have better terms – Energy Dept claims
– to close tax loopholes, feature ring fencing provisions
By Jarryl Bryan
In the wake of public criticism over the contractual terms it negotiated with the oil contracts based on a model Production Sharing Agreement (PSA), Government said it has taken steps towards rectifying this issue.
At a press conference on Monday at the Ministry of the Presidency, Head of the Department of Energy Dr Mark Bynoe revealed that a new PSA template has been developed. Even though ExxonMobil’s contract insulates it from changes in Guyana’s laws and policies, this template will be used for future contracts.
“The new template will definitely have more favourable terms for Guyana,” Bynoe said. “When that (old) PSA started, the risks of investing in Guyana were significantly higher… the greater the risk, the greater the returns.”
“Going forward, because we have a lot more knowledge now, we’ve been able to
have conditions that are a lot more favourable. So from that perspective, there will be improvements.
Meanwhile, Department of Energy Advisor, Matthew Wilks gave some details about what was changed about the templates. He explained that ring-fencing is catered for in the improvements.
“We’re looking at improving the overall Government take, in terms of the amount the Government will get, by instituting elements like ring-fencing. We’ll also look at making it more of a progressive regime, so as the oil price increases the Government gets more of the share.”
“There are a number of techniques for doing that in PSA’s. We’ll also be looking at closing off potential taxation and value-loss loopholes. There are many in all PSA’s around the world. What you try to do is mitigate avenues by which companies can reduce their taxes. And there will be a tightening up to ensure Government has more of a say.”
However, Wilks cautioned against too much tweaking of the model to the point where the terms repel rather than attract investors. The advisor stressed that the right balance has to be found, otherwise investors will take their money elsewhere.
In terms of royalties, which in Guyana’s case is two per cent, Wilks noted that this should be subject to a competitive process.
“In constructing these PSA’s, we’re trying to evaluate what’s best for that critical point where the Government gets what it wants and the investor will still invest. That’s what we’re working on throughout the year.”
“Royalty is often a biddable term. In many countries where there is a PSA, that is sort of a square box to be filled in by companies. And they compete. So rather than stipulating royalty levels, you let them compete against each other to offer royalty levels.”
The current PSA between the coalition Government, ExxonMobil and its partners in the Stabroek block was finalised on October 7, 2016. ExxonMobil and its partners were able to secure a number of exemptions.
Article 15.4 of the renegotiated contract also provides for the Government itself to pay the company’s income tax. To facilitate this, the oil company has to submit tax returns to the Government.
Article 32 stipulates that Government cannot modify the contract or increase any fiscal obligation the company has. This, therefore, puts a cap on the taxes, royalties, duties, fees or charges outlined in the contract.
Government also has to compensate the operator if a change to existing laws causes loss of revenue for the company.