Jan 26, 2016 News
As Guyana continues to receive attention from drilling companies interested in working out an oil agreement, it is important that Guyana gets the right team in place and be prepared to engage in hard core bargaining.
This is according to Conrad Enill, a former Trinidad Minister of Finance and Energy, and an energy consultant attached to the University of the West Indies (UWI).
He was speaking during the UWI/Extractive Industry Transparency Initiative (EITI) workshop held on Friday, at the Arthur Chung Convention Centre, Lilliendaal, East Coast Demerara (ECD). During the workshop, Enill explained the intricacies of bargaining in the industry.
Stressing the importance of securing royalty payment, Enill noted that once the Government gets into the oil business, it is no longer a national business. He noted that it becomes a global business, where it will be a contention “with global elites who understand how to take more of your resources than you.”
“You have to understand that this business is not for those who don’t understand the reality of hard, hard bargaining,” Enill said. “We got a lot of it wrong (in Trinidad). We created a situation where we gave too much, $12B (in allowances).
“So I am saying two things, first of all you have to have an objective and secondly, you have to understand it’s (an industry with) global competitors.”
Enill also pointed out that when Trinidad and Tobago first became a player on the world stage in oil exploration, they also had on their team, world renowned technocrats to help with planning. He also spoke of the pitfalls associated with Finance Ministries and blossoming energy sectors.
“The Ministry of Finance and (governing body for) energy need to understand that if the energy sector starts to accumulate at too fast a rate, the country’s finance will be affected, because there is a relationship between production and oil and gas assets in terms of how the country has to support that and what the companies require. That’s the global formula. “Enill referenced one oil company being given $5B worth of allowances due to the company quoting $10B as its operating expenses.
Enill stressed that such an allowance must be given with the understanding that the investment would be viable, for instance viable enough to produce a return of $30B on the investment. He also noted the importance of timing when the concessions are given.
Enill noted that an important consideration for any government set to produce oil for the first time is what the ultimate objective for the hydro carbon sector is.
He listed the options that will be open to Guyana, including whether to use the resources for revenue generation only or to develop a petro-chemical sector, which can create high paying jobs and a sustainable sector.
“Is it simply to monetize it and get the revenues? Or do you want to do something else? In the case of Trinidad, we took the resources and decided we will use it to create a modern, industrial state. That is a policy position that you (Government) have to get sorted out because if the policy position is wrong, everything else will produce different (undesirable) results.”
He referenced a previous case, where an oil exploration company had approached the Trinidad Government. When questions were raised about what the royalty payments to the Government would be, the figure had been less than desirable. A period of hard bargaining had followed, but ultimately the Government side had rejected the price.
Minister of Natural Resources, Raphael Trotman, was receptive to all that was said and cited the event as the beginning of an official partnership with EITI. He did not rule out Guyana becoming a signatory to EITI. However he cited countries that took years to become compliant. These things took some time, he said.
“It will take time for this process to unfold,” Trotman said. “You will be reminded that the United States, a proud champion for openness and transparency, that its application is still in the fourth year of processing.
“The U.S is still not a member of the EITI. So the expectation and the demand that Guyana must be immediately compliant is not reasonable or possible.”
While unlegislated, EITI is a multi-stakeholder group which is considered a global standard for countries with extractive industries such as oil, gas and mining to aspire to.
It exercises oversight over extractive companies in countries which contract their services. There are currently 49 participating countries, with 31 EITI compliant.
Once involved, the EITI process sees companies having to disclose tax and royalty payments, Government’s disclosing receipt of the payments and finally an independent process of verifying the tax and royalty payments.
The scope of EITI’s work also involves providing oversight/assistance with the award of licenses and contracts, the regulation and monitoring of operations.
The partnership also involves oversight of Government’s revenue distribution and management, as well as how it implements sustainable development policies.
The group also has a mandate to publish the payments and revenues the government gets from the respective company, as well as auditing these transactions. It can also reconcile the transactions and publish the report, as well as provide a financial plan to work with. All this is with the view of opening the process to scrutiny.
Over the years, foreign investors have come to Guyana and extracted natural resources. But there have been accusations that Guyana has received little benefit for the leeway and tax concessions that were granted as part of the initial agreements.
One such extractive company that this accusation has been leveled against is Chinese logging giant, Bai Shan Lin. The company has been in Guyana for a decade and came with the understanding that as it harvested logs, it would build a wood processing facility that would churn out value added products and allow local employment. It was also granted massive concessions, including on its imported equipment.
By 2014, however, no facility had been built despite massive amounts of wood exported from its operations. Worse yet, evidence emerged that showed that the company had used its equipment and allowances to expand into other sectors including mining, housing development and even barge operations, at the expense of local operators.
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