By Kiana Wilburg
No one has to wonder anymore. It is a fact that Guyana is rich with oil. As such, future contracts with oil operators must reflect that the government is aware of the value of its resources. The Government must ask for what it is entitled to. But it can only do this if the fiscal regime governing oil deals is changed.
This appeal was recently made to the Government by Chatham House.
Like others, this international organization wants Guyana to get a fair deal from the next crop of billion-dollar oil companies that want in on the country’s black gold.
Chatham House told the Guyana Government that the risks are highest for exploration companies in frontier areas where no discovery has been made. It noted, however, that a major discovery significantly de-risks the country.
“This is what happened with Guyana, ExxonMobil’s discovery has de-risked it.”
Chatham House explained that when no oil discovery has been made, fiscal regimes tend to be favourable to investors. The anti-corruption entity said it is for this reason that oil companies get significant tax breaks, a low royalty percentage to give the government and its split of the profit oil is greater.
Chatham House noted, however, that these fiscal benefits are scaled back following commercial discovery. It said, “When oil is found, fiscal regimes tend to be more stringent. The significant discovery offshore Guyana has important implications for the evolution of the fiscal regime for subsequent licences in Guyana. As such, the authorities need to make urgent changes.”
Chatham House also noted that in the development of the fiscal regime, the government will be faced with a number of challenges. It said that these challenges will include adjusting current fiscal terms to fairly reflect the change in Guyana’s risk profile without upsetting investor confidence; preparing early for the establishment of a robust revenue management mechanism; legislative and regulatory reform to reflect changes at an appropriate speed (balancing urgency with the need for comprehensive reform); optimizing support and assistance from various agencies and service providers; and capacity to design, benchmark, negotiate, implement and audit the petroleum fiscal system. (SEE LINK FOR ADDITIONAL COMMENTS: https://www.chathamhouse.org/sites/default/files/events/special/24022017%20Guyana%20National%20Seminar%20Summary.pdf
Chatham House is not the first organization to point out the need for Guyana to improve its capacity to effectively manage the oil and gas sector.
Global financial bodies such as the International Monetary Fund (IMF) have said multiple times, that more needs to be done. According to the IMF, there is limited capacity at all levels in the Ministry of Finance and in the line agencies. It said that this is a significant constraint for the possibilities to implement and institutionalize Public Financial Management (PFM) reforms.
As for further capacity building efforts, the Fund said this could and should have been coordinated with local training institutions. In this regard, it said “The Ministry of Finance should explore further the options to cooperate with local training institutions (e.g. recently opened Bertram Collins College of the Public Service; University of Guyana) and other partners to deliver necessary training programs on a continuous basis.”
It added, “Other, cost-effective and efficient solutions, such as developing a partnership arrangement with other countries in the region could be a viable option as well. New capacity-building actions should be designed to channel appropriate training programs through these institutions, and to use their staff to perform training. In this way, training skills could be further built up in those institutions to provide sustainable ongoing training in years to come.”
Given the state of affairs, the International Monetary Fund made several recommendations in areas that Guyana needs urgent capacity building. The Fund said that the country needs to develop capacity to interpret and administer Production Sharing Agreements (PSA). It said that officials should understand thoroughly all the fiscal provisions in these arrangements, including the accounting annex.
It added, “Government needs to establish formal and structured working relationships on responsibilities between agencies with regulatory responsibilities for the petroleum sector.
It needs to develop petroleum fiscal regime models and train officials on tax policy, fiscal modeling and revenue forecasting for the sector.
They also need to strengthen the fiscal reporting including on natural resource revenue flows and statutory bodies and public corporations, and ensure consistency with international standards (e.g., the IMF general template on natural resource revenue statistics).”
It noted too, that the Government needs to build capacity to undertake long term revenue forecasting from extractive industries.
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