By Kiana Wilburg
The coalition administration made several missteps during the review of the Production Sharing Agreement (PSA) with ExxonMobil. Local critics and several international organizations have said that the country could have gotten better fiscal terms which would have led to a greater take of the oil profits for the State.
With the damage already done, the International Monetary Fund (IMF) believes that the government must now put together a model PSA with the minimum fiscal terms or package to be accepted for future contracts. It does not believe that the fiscal terms should be negotiated on a case-by-case basis.
The Fund noted that the fiscal package would include the maximum cost recovery ceiling, government’s share of the profit oil, the tax obligations of the contractor, tax benefits or concessions for the contractor and sub contractors.
The IMF said it is crucial that Guyana decides what is going to be its fiscal package for future contracts. It also highlighted that the laws framing Guyana’s petroleum fiscal regime would have to be amended, since they date back to the 1980s.
According to the IMF, the legislative framework is highly discretionary, leaving key fiscal terms to be defined in PSAs, and lacks provisions for activities other than exploration and production.
The IMF also noted that the fiscal regime was designed at a time when there was little information about the geological prospects in the country, and the authorities were probably interested in attracting investment in exploration activities. However, given the de-risking of the basin following recent discoveries and the growing interest of international oil companies in Guyana’s petroleum sector, the IMF stressed that the authorities should consider reforming and modernizing the legal and fiscal framework for new investments in the sector.
THE ISSUE OF ROYALTY
Several local commentators have pointed out that Guyana could have gotten a higher royalty, among other things, with its proven oil reserves.
Royalties are attractive to governments as the revenue is received as soon as production commences. They also ensure that companies make a minimum payment for the minerals extracted.
But many experienced governments understand that oil can be volatile. Today, an oil company can produce 5000 Barrels of Oil Per Day (BOPD). Another oil find can push that production to 8000 BOPD.
It is for this and other reasons, countries like Uganda set out specific circumstances under which its royalty should increase. Its contract with Tullow Oil is an apt example.
According to the agreement between the two, where the production does not exceed 2,500 BOPD, the nation’s royalty would be five percent.
Where the production is higher than 2,500 but does not exceed 5,000 BOPD, Uganda would be entitled to a 7.5 percent royalty. If production is higher than 5,000 but does not exceed 7,500 BOPD, then Uganda would receive 10 percent royalty. But should the production exceed 7,500 then the royalty goes up to 12.5 percent.
Guyana’s contract with Exxon Mobil presents an entirely different ball game. The coalition Government was able to increase the royalty it received from ExxonMobil. Instead of one, it is now a meagre two percent. The APNU+AFC Party has engaged in much self-praise since that increase.
Also of significance, is the fact that the two percent royalty was agreed on when ExxonMobil had announced a forecast of 120,000 barrels of oil per day when production kicks off in 2020. That has now been pushed to over 500,000 barrels of oil per day.
There has been no talk or even the slightest interest from Government or ExxonMobil to have the royalty increased since this drastic change in production figures.
A technical brief that was prepared by Commissioner of the Guyana Geology and Mines Commission (GGMC), Newell Dennison, confirms that ExxonMobil is not open to Guyana securing a higher royalty.
Dennison’s report was based on a meeting that occurred in April 2016.
In his brief, Dennison said it was put on the table that there were some fiscal reviews being done, and while they would not be concluded before finalizing the new agreement and licence (which were both signed in June 2016), it would be necessary to include certain principles.
The GGMC Commissioner said, “A provision for a royalty in a contemplated hybrid PSA (Production Sharing Agreement) was mentioned, and in the context of ensuring that Guyana is not at a disadvantage in a high oil price environment in the future. Esso (ExxonMobil) was not at all receptive to that; however, it was left on the table.”
He added in the document, “I have the view that there may be a fair chance to model some notional improved royalty to kick in, but I also speculate that in the environment of deep water, deep target development, the price of oil would have to go up significantly before the departure of the financials that prevail now and what could materialize becomes of material consequence.” (The entire brief can be seen by following this link:
Minister of Natural Resources, Raphael Trotman had said that Dennison and other GGMC officials were the lead negotiators for Guyana when the ExxonMobil contract was being tweaked in 2016. Dennison’s suggestion, however well intentioned, apparently fell on deaf ears, since no such provision made it into the modified contract.
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