Back in June 14, 1999, Exxon Corp signed what purported to be a “Production Sharing Contract” (PSC) with the Government of Guyana (GoG) for petroleum exploration in the Stabroek Bloc. However, it now appears the contract was actually a “prospecting license” since, according to the GoInvest site, a “petroleum production license is issued if a commercial petroleum discovery is made.”
Sixteen years later, in May 2015 oil was struck by what had now become ExxonMobil, along with its two partners, at their Lisa 1 well. After three other wells confirmed the existence of a field containing at least 1.1Billion barrels of oil, on June 29, 2016 the GoG and the consortium signed what Finance Minister Jordan announced was a “Production Share Agreement.” He averred there were no alterations from the original terms of the PSC and his government simply wanted to assure the investors the agreement would be respected in its “entirety”. However, it was only on Nov 16 that ExxonMobil partnership (hereafter the “IOC” – International Oil Company) officially gave notice of its find of commercial quantities of petroleum in the Stabroek Field and brought Guyana to the threshold of its “oil age”.
But Guyana has to wait until Exxon is satisfied with the ongoing appraisal and completes the “Development Planning Stage”, which is critical especially in a period where oil prices have plummeted to historic lows. In this phase, the IOC weighs options involving factors such as net present value of the oil reserves, oil recovery, operational flexibility and scalability, capital versus operating costs profiles and risks – technical, operational, political and financial.
In the end, the OIC will decide if it will make money for its shareholders and it is at this state that governments have to weigh and balance their legitimate interest in getting the best value for an exhaustible resource versus their recognition that they need the expertise and capital of the IOC. Once this is done, the IOC will make its Final Investment Decision (FID) before the oilfield is actually physically “developed” for actual production. From then on, until the reserves are exhausted, which may take decades, the IOC will seek to improve efficiencies in production.
The GoG has advised the people of Guyana it is looking to the experience of Uganda, which has a head start on Guyana in having oil discovered offshore and working out the modalities for production. The Ugandans, for instance, have stipulated that within two years after notice of commercial quantities is given the development of the field must begin. In terms of the fiscal regime, Uganda combines a royalty with a share-of-profits package.
This serves to ensure Uganda obtains funding regardless of the profitability of the operations since royalties – ranging from 5-12.5% – come off the gross. Guyana will not impose the payment of royalties on oil production. Additionally and unlike Guyana, a corporate tax of 30% is assessed by Uganda on the profits of the IOC, while an annual charge is paid by the IOC once the production licence is granted. Guyana has not required this payment.
In skeletal form the Guyana fiscal regime consists of a “Production Sharing Agreement” where the IOC “shall be allowed to share the profit oil with Government so that Government shall have no less than fifty percent (50%) on a “per field” basis. Being “ring fenced”, losses from one field cannot be transferred to other fields. But while this “50% share” sounds generous, since the IOC “can enjoy a maximum or a ceiling of seventy-five percent (75%) of recoverable costs per month”, Guyana will receive 50% of very little after all those exploration and other costs are deducted – especially in a depressed oil market.
Finally, in a remarkably generous gesture, unlike the Tanzanian 30% income tax on the IOC’s profits, in Guyana, “the tax obligations of the contractor under the Income Tax, Corporation Tax, and Property Tax shall be satisfied through the Government’s share of profit oil.”
In effect, Guyana will pay the IOC’s taxes.
