For future Production Sharing Agreements (PSAs), Government should grant oil blocks to the International Oil Companies (IOC) that offer the best fiscal terms during the bid process. That is the advice of Attorney-at-law Charles Ramson Jr.
Recently, Government was advised that it should be careful in its pursuit of increased royalties for future contracts.
Alessandro Bacci, Upstream Oil and Gas Analyst at Global Data, stated, “If Guyana goes ahead with its plan of increasing the royalties in its production sharing agreements (PSAs), the scope for adjustment will be limited if it wishes to retain its regional competitiveness.
“Under the current contract structure, Guyana may push its royalties up to a 5% rate from the current 2%. Beyond that threshold, it may diminish the attractiveness of the country’s petroleum fiscal framework for investors.”
The PSA with ExxonMobil’s subsidiary, Esso Exploration and Production Guyana Limited (EEPGL), for the Stabroek Block, states, “The Contractor shall pay… a Royalty of two percent (2%) of all Petroleum produced and sold, less the quantities of Petroleum used for fuel or transportation in Petroleum Operations.”
Yesterday, Ramson stated that royalty is a regressive tax, since it could serve to take a greater stream of income from IOCs when the profit is low. In this regard, the consultant said that while it would be favourable to have a high royalty percentage, increasing it would come at a cost.
In some cases, a higher royalty could tax IOCs into a position of loss. This is especially likely in cases where the oil carries a high breakeven price. The breakeven price is the amount of money for which the oil must be sold to allow the IOC to recover costs invested into its production.
Ramson said that, with high royalties, some IOCs could see themselves making very little profit or worse, a loss, and that could affect Guyana’s competitiveness with investors in the region.
Bacci had also suggested a sliding scale, which would see royalties increasing with profits, Ramson concurred.
Nevertheless, he also said that the royalty is just one term of the agreement; that other terms, such as signature bonuses, relinquishment provisions, work programs and decommissioning should also receive attention when considering the viability of an oil contract.
Government could use the success of its first production from the Liza Phase one project as leverage to demand attractive fiscal terms, Ramson said.
In addition, if a country wants the best terms, it could have IOCs bid on those terms.
Ramson, who is Head of the Georgetown Chamber of Commerce and Industry (GCCI)’s Petroleum Committee, said that the companies, in this situation, would propose, for example, relinquishment provisions, and Government would decide which provision is most attractive.
In the same vein, Government could have companies bid on each Contract term, and assess the viability of each proposed contract, based on a weighting scale for those terms. Such a scale could consider, for example, the relinquishment provision proposed as 10 percent of the consideration, or royalty at 20 percent.
Of course, Ramson added, the drafting of a weighting scale for contract terms would have to be market-driven, depending on various factors such as the economic value of the reservoir and the breakeven price.
Then, he said, Government should accept the contracts, which offer the best combination of those terms.
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