Continuing my analysis of the Petroleum Production Agreement signed between the Government and ESSO, CNOOC and HESS, I would like to touch on a few more Articles in the contract. I recommend: Mr. President, this contract is massively flawed and MUST be renegotiated. As a matter of fact, the existing contract should be rescinded and a new contract be negotiated.
Article 10 – Annual License Rental Charge;
Article 15 – Taxation and Royalty;
Article 33 – Signature Bonus
Article 10 – This article stipulates that the Contractor will pay an annual rental charge of US$1 million. This article can be compared to the land usage tax imposed by the Lands and Surveys Commission and the Guyana Forestry Commission to lease holders. However, the Lands and Surveys Commission and the Forestry Commission calculate these taxes based on the acreage of the leaseholder area. The flat sum of $1 million is pathetic.
The annual rental charge for the production of oil and gas cannot be evaluated based on given areas, as is done with land. However, a more scientific and objective way is to impose an annual rental fee based on the projected production submitted and agreed to by both parties.
In other words, if the work program is to produce 100,000 barrels per day, then using a 360 days year, the annual production would be 100,000 x 360 = 36 million barrels. Using a ratio of .5 of 1%, the annual rental charge would have been 180,000 barrels. With a selling price of $50 per barrel, the annual rental would be US$9 million. Production of 250,000 barrels daily, the annual rental charge would have been $22.5 million.
We are really screwed in this contract.
Article 15.1 Subject to Article 32, and except as provided in Article 15.2, 15.8, and except as otherwise set forth in this Article 15.1, no tax, value-added tax, excise tax, duty, fee, charge or other impost shall be levied at the date thereon or from time to time thereafter on the Contractor or Affiliated Companies in respect of income derived from Petroleum Operations….
15.3 The taxable income of the Contractor arising in each year of assessment under this agreement for purposes of the income tax laws of Guyana……shall include the amounts of Contractor’s income tax and corporation tax paid pursuant to Article 15.4
15.4 The Minister hereby agrees:
(a) that a sum equivalent to the tax assessed pursuant to Article 15.2 and 15.3 will be paid by the Minister to the Commissioner General, Guyana Revenue Authority on behalf of the Contractor and that the amount of such sum will be considered income of the Contractor; and
(b) that the appropriate portion of the Government’s share of Profit Oil delivered…..shall be accepted by the Minister as payment in full by the Contractor…..
The above Articles, in this flawed agreement, is telling us that Exxon, Esso, Hess and CNOOC will not be paying any Income and Corporation taxes on their 50% share of “profit oil”. This is not a normal tax holiday, but rather, for the duration of the contract. Article 11.4 states that “profit oil” shall be shared between the Government and the Contractor 50:50. What this means is that the Government will use our share of the “profit oil” to pay the taxes for the Contractor. The Guyana Revenue Authority will have to prepare a receipt for the Contractor as if the taxes were paid, but in fact, nothing was paid. It is only a paper entry.
For example, if the “profit oil” for a year is $10 million, 50% of that amount will be retained by the Contractor and 50% will be for the Government. The Government will now use our portion of the profit (say $5 million) and pays the Income and Corporation taxes for the Contractor. The Contractor keeps their entire share of the profit oil. So if the Income and Corporation tax rate is 30%, Guyana will lose $5,000,000 x 30% = $1,500,000 in taxes. If the profit oil is $1 billion in any year, we will lose $500,000,000 x 30% = $150 million in tax revenue.
Some oil-producing countries are not paid royalties. Indonesia and Angola come to mind. Countries also set a lower “cost oil” before profits are shared. Angola “cost oil” is 50% of recoverable cost, while other countries like Qatar, Gabon and others limit its “oil cost” to about 30%. In Indonesia, the deduction of “cost oil” is almost the same as our contract, but the “profit oil” is shared 85% to the Government and 15% to the Contractor. We must do better for our country.
Article 33 – The Contractor shall pay the Government a signature bonus of eighteen million United States Dollars (US$18 million).
For a man in the street, this is a lot of money. When we look at a country with a tremendous amount of oil below the surface, it is another story. Did we get a fair deal in this signature bonus?
Many countries have done much better than us. We now know that the estimated reserve of good quality oil in the blocks discovered is estimated to be about 4 billion barrels. We should have asked Norway, Brazil, Indonesia, Nigeria and other oil-producing countries to work with us in formulating the best deal for Guyana. Did we?
If we were to get .1 of 1% on the estimated reserve in our basin, the signature bonus would have been 4 million barrels of oil. With an average price of $50 per barrel, the signature bonus should have been $200 million. What if we were to negotiate .2 of 1%, the bonus would have been $400 million. At .5 of 1%, we would have in our coffers a signature bonus of $1 billion.
My countrymen, if we accept these pittances, we would only have to blame ourselves. It is time to rise up and demand that this contract be scrapped, and get the needed help from Norway, Brazil, Ghana or wherever, to get a contract that is symbiotic to all parties concerned.
Charles Sugrim, CPA
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