By Kiana Wilburg
In order to fund their exploration and development projects around the world, oil and gas companies use a mixture of loans and liquid cash. But if the “abusive” conditions are in place, a company may have the right incentive to plug more loans with unreasonable interest rates into their project which could later be recovered.
This is exactly the case with Guyana and the operators of the Orinduik and Stabroek Blocks.
According to the Stabroek and Orinduik Production Sharing Agreements (PSA), Guyana has allowed loans taken by the companies to be considered eligible recoverable costs regardless of the interest rates.
In the eyes of University of Houston Instructor, Tom Mitro, this arrangement leaves Guyana open to the abusive use of debt by the operators, since Guyana is essentially standing all the costs.
During an exclusive interview, Mitro said, “The treatment of loan interest varies by country and situation. Countries like the USA that have only an income tax on oil and no production-sharing do allow tax deductions for interest on debt of oil companies. However, countries like the U.K., Angola and Nigeria that have royalty and special petroleum tax regimes, do not allow tax deductions for interest costs of oil companies.”
The Petroleum Consultant added, “This is due partly to the fact that these governments offer certain investment tax incentives already such as tax credits or special allowances, and they view interest tax deductions as unnecessary or duplicative. In some PSAs they do allow interest as part of cost recovery, but that is no longer a common practice. If it is allowed, it is vital to establish strict rules that prevent potential abuse.”
Mitro said that most common is setting a maximum debt to equity ratio that effectively limits the borrowing to no more than 60-70% of the capital costs. Also, Mitro said that these regimes may limit the repayment period of the local computations so that interest isn’t excessive.
Another common practice the official pointed out is to cap the rate of interest. In this way, Mitro said that governments avoid companies pushing a lot of their corporate debt at inflated rates into the local project merely in order to obtain cost recovery benefit at the expense of the government. Mitro said that there have been notable cases of abuse such as Chevron in Australia where the authorities accused them of charging interest to their local affiliate at a rate that was well above their actual borrowing rate merely to obtain tax recovery benefits in Australia.
“So I guess my thoughts with regard to Guyana or any country would be that permitting interest as part of cost recovery should ONLY be considered if there are protective caps built in as noted above. Otherwise, the risks become too great of Guyana ending up inadvertently subsidizing the corporate borrowing of mega companies,” Mitro concluded.
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