By Kiana Wilburg
A simplified explanation for the term ring-fencing
A young, married couple decides to start selling goods at Bourda and Stabroek Markets. The man takes charge of running the stalls and at the end of the month; his wife would make a note of how much profit is made. At the end of the first month, the Bourda Market stall incurs a loss of $1000 while the Stabroek Market Stall makes a profit of $3000. But when the wife comes to make a record in the books, the husband tells her that they only made a profit of $2000.
In other words, he deducted the loss made at the Bourda Market business from the profit made at the Stabroek Market operation. This is what can happen in the absence of a provision called “ring-fencing”.
As the name implies, the provision puts a ring around the profits of an operation and protects it from being reduced by losses or expenses from other activities.
Come October 2020, ExxonMobil’s licence for the Stabroek Block will be up for renewal. And when that time arrives, Chartered Accountant, Christopher Ram emphatically states that the renewal should be granted on the condition that ring-fencing provisions must be in place for the Stabroek Block contract.
In the absence of ring-fencing provisions, ExxonMobil can deduct for example, the costs associated with unsuccessful wells from profit making fields like the Liza Phase One and Phase Two projects.
It is upon this premise that Ram underscored the importance of putting this condition in place. In fact, the auditor states that this should be done across the board for all licensed holders.
The Chartered Accountant said, “Every time there is a renewal or an application for such a licence, there is an opportunity for the Minister to set conditions. It is particularly important that he does so where a vast number of blocks are granted since otherwise, the resources of Guyana and our share of oil profit, are compromised.”
During discussions with the International Monetary Fund (IMF) earlier this year, the government raised concerns about the disturbing absence of ring-fencing provisions in the Guyana-ExxonMobil deal.
The IMF in a statement from the meeting with the government said, “The authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues.
The institution added, “The rapid appraisal and development of multiple oil fields could also affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field.”
The IMF noted that the authorities are developing strategies to mitigate such a possibility. It said that this includes a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.
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