Go for royalties, taxes; abandon profit-sharing – Dr. Vincent Adams

Jan 20, 2021 News

Former Director of the Environmental Protection Agency, Dr. Vincent Adams.

Kaieteur News – It is without debate that the Production Sharing Agreement (PSA) Guyana had signed with ExxonMobil is one of the world’s worst contracts in the world. International and regional stakeholders have supported this through evidence of the unfair provisions that would cost Guyana billions of dollars in the lifetime of the project.
Cognizant of the lopsidedness of this contract, former Director of the Environmental Protection Agency (EPA) Dr. Vincent Adams, says that Guyana should abandon PSAs and secure just royalties and taxes from oil companies operating in Guyana.
Dr. Adams made these and other statements on Saturday last, during a virtual Moray House Trust discussion titled Guyana’s Oil: Priorities for 2021. There, he reminded listeners that right now, Guyana accounts for more than ⅓ of all of ExxonMobil’s recovery reserves.
“I think when I last checked, it was about 22 billion barrels. We already have put in the books eight billion barrels, and still are more to come,” the former EPA Director added, as he argued his case for the renegotiation of the 2016 contract.
Having noted that, Dr Adams posits that the “most critical change” that should be made in any renegotiation is the abandonment of the PSA, followed by the move to concession-type contracts, “which is just royalties and fees”, he added.
Further in his presentation, he said that, “We do not have the capacity to do PSA. A lot of countries have realised that and they are going back to these concession-type contracts. All we need, to put it very simple, in a concession type contract is to be able to count barrels to make sure that we have the meter running right, et cetera, and we get our fees and taxes whatever they sell, or whatever they produce.”
A prime example of one country that abandoned PSAs is Indonesia, the country that created this type of agreement. In this arrangement, it stipulates that the host country will receive its profits after the oil company deducts its operating expenses.
At the beginning, the Government of this Southeast Asia nation had thought that this was a wise move, but with each passing year, it soon noticed that its cut of the spoils got smaller; the taxes from the oil sector began to shrink and the operators’ claims of deductable expenses were increasing by the millions.
This had convinced the government that petroleum companies were inflating costs. The government had tried everything it could to keep oil companies from exploiting this loophole in the PSA, but every accounting or auditing effort proved futile against the oil giants.
In January of 2017, the Indonesian Government walked away from the PSA approach, and is now using the “gross-split” method. This gross split rules make contractors bear all the costs in turn for a higher share of the output. The base split for oil blocks is 57% to 43% for the government and contractors, respectively, and 52% to 48% for natural gas fields.
It is against this background that Dr. Adams has drawn the conclusion that PSAs, and in particular Guyana’s PSA, is “a nightmare,”, and reiterated the need for its abandonment.
This newspaper would have published, as one of its investigative pieces, a comparative examination of Guyana’s PSA with ExxonMobil against that of others. It turns out that out of over 130 PSAs this newspaper examined, Guyana’s is in a class of its own.
It is the only one, which has more than a dozen odd provisions all in one place. For example, the PSA sees the government paying the contractor’s income tax out of the country’s share of the profits – none of the other 130 PSAs examined show this arrangement. Further, Guyana’s PSA is the only one out of 130, which has very moderate work obligations for contractors who are vested with offshore licences.
Additionally, the Guyana-ExxonMobil PSA is the only one out of 130 contracts, which has no ring-fencing provisions to prevent costs of unsuccessful wells being carried over to that of successful wells. There is also no sliding scale for royalty to increase as production improves.
Finally, Guyana’s PSA is the only one out of 130 that allows insurance premiums to be fully recovered as well as interest on loans and financing costs that are incurred by the contractors.