Aug 25, 2017 News
By Kiana Wilburg
Government has taken a decision to review the pros and cons surrounding the continued use of Production Sharing Agreements (PSA) in the oil and gas sector.
This is according to Minister of Natural Resources, Raphael Trotman.
In an interview with this newspaper, Trotman said that there are different types of Agreements or Contacts which are entered into between governments and oil and gas companies. He noted however that in 1999, when a PSA was signed between the Government of Guyana and US oil giant, ExxonMobil, the Production Sharing Agreement model was considered “avant-garde”.
The Natural Resources Minister said that Production Sharing Agreements were the standard in the industry and so across the world, that was the model that was being utilized.
Trotman sought to remind as well that in 1999, Guyana was seen as a place where no one wanted to do business, and deep water exploration was considered very risky and costly. He emphasized that many companies shied away from it.
Trotman said, too, that Guyana during that time had no known signs of oil in the manner and scale it does today. He said that it was just seen as a possible frontier. Compounding the issue oftentimes was the threat from “next door,” thus investors were often scared away, Trotman expressed.
He said, “So when Guyana began its endeavours around that period to attract companies, Exxon was just one of them. But this government has not given out a single new contract. All of the contracts right now are Profit Sharing Contracts and that is the model this country has used.”
Trotman continued, “We don’t condemn it. There are different models of course, such as Strict Royalties; some say a Partnership where you get 50 percent of the profits, but what is most important is what you do with the money when you get it. Both (contracts/agreements) will give you a desired outcome, depending on how they are structured—that is that you earn revenue.”
He added, “In the case of the profit sharing, you don’t make any investments, the operator comes and takes the risks, because if you miss by 10 feet, in drilling a hole where the oil is, then it could cost you US$6M to US$7M…”
With this in mind, the Minister said that Government will be doing a review of the kind of agreement to be used for future. He said that the review will consider if Guyana should maintain the use of Production Share Agreements or switch to another that might be in the nation’s best interest.
The Leader of the Alliance For Change (AFC) said that one must bear in mind that this kind of arrangement is what the coalition administration inherited. He said that when governments change, it is expected that the incoming party would honour the contracts that existed before, especially when they have to do with firms from international communities.
PRODUCTION SHARING AGREEMENTS
According to the International Monetary Fund (IMF), a Production Sharing Agreement (PSA) is a contract between one or more investors and the government in which rights to the prospection, exploration and extraction of mineral resources from a specific area over a specified period of time are determined.
As it relates to the terms of a standard PSA, the government hires the investor (-s) as a contractor for the extraction of mineral resources, but the government still retains ownership of the resources.
The investors carry out the works at their own expense and risk-sharing with the government, part of the production output in accordance with the agreement.
CASE OF TANZANIA
When the Production Sharing Agreement between the Government of Tanzania and Statoil of Norway which operates in partnership with Exxon was leaked, many were left to wonder if the nation was being adequately compensated for its resources.
In fact, Parliamentary officials of that African country found that the contract saw the company walking away with windfall profits due to a number of loopholes in the PSA.
One loophole that was cited was in the area of Cost Oil/Gas. This is the biggest challenge in developing countries. In Tanzania, officials there noted that there had been no “ring fencing of blocks”. This means costs incurred in one block can be recovered from another block. The PSA failed to guard against this.
Parliamentary officials of Tanzania said that this is one of the challenges, as it is easier for private companies to mount on costs and even declare losses from profitable blocks.
Moreover, the officials who are attached to the Public Accounts Committee there said that issues like equipment leasing from related parties, transfer pricing and capitalization (thin capitalization) are very crucial in determining the actual costs to be recovered in a PSA.
Tanzania learnt this lesson the hard way. It has since reviewed its model for oil and gas contracts.
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