Home Letters Ring-fencing is a double-edged sword Guyana can well do without
Governments have a number of competing priorities when they sit down to negotiate contracts with companies. This is driven first and foremost by the need to maximise revenues to the State. But at the same time, authorities have to also ensure that there are incentives that would allow companies to invest, in the case of oil and gas, billions of US dollars upfront.
According to the Natural Resource Governance Institute (NRGI), by introducing ring-fencing rules, governments must be aware of the need to balance the objectives of early revenues versus future revenues.
To quote the NRGI directly, “By preventing investors from obtaining a deduction against current income, governments speed up income tax collection, but they may also delay further investment and exploration, reducing the future tax base”.
In the absence of ring-fencing rules, countries such as Guyana can encourage companies to explore larger areas and develop more wells, which ultimately leads to more revenue and more production. So far for Guyana, this seems to be working. We now have four approved offshore developments with two producing oil. Last year revenues from Liza Phase 1 totalled more than US$600 million since production started in 2019. The Government is projecting almost US$1 billion this year with Liza Phase 2 now online. These projects have only been made possible by hundreds of millions of US dollars being invested in exploration and development work over the years by the oil companies operating offshore.
There is also the flawed argument that has been made that the absence of ring-fencing means Guyana has to pay for wells that come up dry outside of the Stabroek Block, such as at Kaieteur and Canje. This is as far from the truth as one can get. The cost to drill those wells is being carried entirely by the licence holders/partners. In the absence of a commercial discovery that leads to oil production, which turns a profit, Guyana does not pay a cent.
As a country, we certainly want to get as much revenue as possible. But getting more in the short term might not be worth sacrificing long-term revenues and the overall pace of development.