Stabroek PSA royalties not recovered as expenses under PPP Govt – GRA

…despite APNU/AFC contract with EEPGL providing that option

Despite the contract signed by the former A Partnership for National Unity/Alliance For Change (APNU/AFC) Government containing a loophole to allow for royalties in the Stabroek Block to be cost recoverable, the Guyana Revenue Authority (GRA) said the current Government has not allowed royalties to be recovered in cost oil.
GRA Commissioner General Godfrey Statia in a missive over the weekend, sought to put to bed the misinformation that has been swirling regarding the Stabroek Production Sharing Agreement (PSA) under which oil giant ExxonMobil, through subsidiary Esso Exploration and Production Guyana Limited (EEPGL) is producing oil in Guyana’s waters.
One such piece of misinformation is that under cost oil, Exxon is recovering the 2 per cent royalties it pays to Guyana. Statia explained that while the PSA signed by the then APNU/AFC Government in 2016, contains a loophole that allows that to happen, the current People’s Progressive Party/Civic (PPP/C) Government has not allowed this to happen.
“Under Article 15.6 of the PSA under review, the contractor pays a royalty of two percent to the Guyana Government on the value of all petroleum produced and sold. This item (royalty) is not explicitly mentioned as Cost recoverable under Annex C, Section 3.1 (without further approval of the Minister) or 3.2 (with approval of the Minister),” Statia explained.
“Further, it is not mentioned under Section 3.3 of Annex C as a cost not recoverable under the Agreement. Even though Section 3.4 of Annex C, vests the power in the Minister to determine the recoverability of an expense not covered under the provisions of Section 3, such discretion has not been exercised by the Minister relative to royalty,” he added.

Statia, meanwhile, explained that based on Articles 11.2 to 11.4 of the PSA, Guyana is able to benefit from a greater share of profit oil when recoverable costs are lower than the stipulated 75 per cent ceiling.
“Provision is made for costs exceeding the 75 per cent ‘cap’ to be carried forward to successive months until recouped. This allows for the present 12.5 per cent profit share being allocated to the Government in the interim until all costs carried forward are recovered. This also means that Guyana would eventually benefit from a much greater share of profit oil,” he said.
“Royalties paid to the Guyana Government is an expense incurred in the production of income for the contractor(s), but is not allowable in the calculation of Cost Oil. It, therefore, follows that the 2 per cent royalty payment currently adds to the Government’s take,” the Commissioner General added.
Statia also gave some insight into the “pay on behalf system”, explaining that the Government’s share of profit oil includes the income taxes payable by the contractor. While this is so, however, Statia stressed that there is no net effect on the consolidated fund.
“The Minister with responsibility for petroleum is required to pay the relevant taxes on behalf of the contractor. The parties comprising the contractor would thereafter be issued with tax certificates which would essentially allow them to claim Tax Credits or Tax Deductions in other jurisdictions in which they are liable to pay taxes.”
“Due to the elected “pay on behalf system”, additional expenses/deductions result in lower amounts being reflected on the tax certificates due to a decrease in the tax liability of the company. Expenses are not tax credits. A tax credit reduces taxes on a dollar-for-dollar basis, while a tax deduction will lower your taxable income, thereby allowing for the payment of lesser taxes,” Statia said.
The Commissioner General explained that consequently, no taxes are required to be paid until the contractor has taxable income. Instead, taxes are deferred until the company’s taxable position changes.
The PPP/C Government is meanwhile looking to start work on a model PSA this year, which will be different to the PSA ExxonMobil signed with the former Government and ensure that Guyana can get increased benefits from future oil deals.
Part of the money for developing this model PSA comes from a $200 million allocation from a World Bank project. Natural Resources Minister Vickram Bharrat had said during the 2022 budget debates that $22.4 million was allocated to hiring a law firm to provide regulatory and legislative support that includes the PSA.