Earlier this month, the Government and the Opposition were briefed by ExxonMobil on the state of its oil play. Even though it has not made its final investment decision (FID), the company still projected production to start flowing by 2020. With the oil syndicate’s decision to utilise a Floating Production Storage and Offloading (FPSO) facility, to exploit the reserves, it is pushing the boundaries of its timeline in an oil environment where the supply chain for FPSOs has been broken. Even in the best of times, it takes between two to three years to design and construct these complex structures, which have to be customised to the idiosyncrasies of each field.
Be as it may, 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 the 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 allowed 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 PPP 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 seven per cent and 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 Donald 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 hope were addressed in the present fiscal regime.
