When in mid-2016 Natural Resources Minister Raphael Trotman indicated he was going to “renegotiate” the oil contract signed in 1999 with ExxonMobil, as became necessary with the expiration of the latter, this newspaper expressed great scepticism about the ability of the Minister to competently undertake that mission. Subsequent events have unfortunately proven us correct in our assessment.
After the Government then remained mum on the details of the renegotiated contract, we asked in this space for specifics on behalf of the people of Guyana. In the editorial “Oil Share” of 12-18-16 – more than one year ago – we wrote:
“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. 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.”
Six months later Trotman announced his renegotiation had actually resulted in royalties of two per cent to be paid on gross revenues/production – which he boasted “doubled” this revenue stream from the one per cent negotiated in 1999. This newspaper expressed great shock and disappointment that while a one per cent royalty in 1999 might have been reasonable because of the high risk involved with no inkling oil was actually present under the more than one mile of the Atlantic Ocean to be drilled, when Trotman was “renegotiating” in 2016, one field was already confirmed with over one billion barrels of petroleum.
We continued: “In skeletal form, the Guyana fiscal regime consists of a “Production Sharing Agreement” in which the [International Oil Company] IOC “shall be allowed to share the profit oil with Government so that Government shall have no less than 50 per cent on a “per field” basis. Being “ring fenced”, losses from one field cannot be transferred to other fields. But while this “50 per cent share” sounds generous, since the IOC “can enjoy a maximum or a ceiling of 75 per cent of recoverable costs per month”, Guyana will receive 50 per cent 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 per cent 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 income taxes.
On February 13, 2017, in our Editorial “Oil Fiscal Regime”, we noted: “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 IOC’s 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.
Similarly, were interest expense capped? If not, this would encourage thin capitalisation so that the IOC, in effect would be siphoning away funds in the guise of interest payments and again reducing declared profits.”
The International Monetary Fund (IMF) has since issued a Technical Assistance Report, “A Reform Agenda for Petroleum Taxation and Revenue Management”, commissioned by the Ministry of Finance, which evidently echoes most of our concerns expressed earlier. The details of the contract were promised to be released by the end of this year. We hope that the IMF’s Report will also be released. It might be useful to know how valuable the horse that has bolted was.
