Jun 14, 2021 News
Kaieteur News- Over the last five years, the International Monetary Fund (IMF) has been one of Guyana’s key partners in developing the technical capacity that is needed to properly govern the oil and gas sector. In addition to this, the financial institution has been at the forefront of highlighting many loopholes in Guyana’s oil deals as well as its legislative and regulatory framework, which can aid in mitigating significant value loss. In this regard, it has produced several reports between 2015 to now which offer critical recommendations that should be adopted. In spite of the prudent advice it has offered in these documents, there has been no significant progress by Guyana’s political leadership on this front.
For example, on numerous occasions, the IMF has appealed to Guyana to strengthen its petroleum fiscal regime through the revision of the Petroleum [Exploration and Production] Act 1986 (PEPA), the Petroleum [Exploration and Production] Regulations 1986, as well as other tax laws and sector regulations. The IMF has been keen to note that while the PEPA gives the government broad powers to grant petroleum prospecting and production licences, and to negotiate oil contracts, it is silent on processing and refining of petroleum products, pipelines and other modes of petroleum transportation, as well as how petroleum marketing arrangements are to be observed. In spite of this, the country has been pushing ahead with the marketing of its oil and plans to bring gas to shore.
Additionally, with regard to the lopsided oil deal, the IMF has expressed alarm over the opportunities Guyana gives Exxon Mobil and its partners to be abusive in the way they add interests to its expenses, all of which would be recovered in full. Left unchecked, the IMF said that this can have a detrimental effect on the oil profits that would be left to share. In one of its reports, the IMF said it is a well-established industry norm to have limitations on how much interest can be charged and deducted on loans by oil companies. It noted that some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps. Other countries, it advised, go the route of prescribing that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs. Interest on loans to finance exploration is not allowed. Considering the dire consequences this loophole can have for Guyana, the IMF said it would be appropriate for Guyana to limit the amount of debt for cost recovery purposes or disallow interest expense altogether.
Further to this, the IMF has called on Guyana to close other fiscal loopholes in existing Production Sharing Agreements; undertake a policy review of fiscal terms contained in existing PSAs to ensure that these are implemented appropriately, and assess areas of improvement for future investment; design a new generally applicable fiscal regime for upstream petroleum projects that increases the government take and limits the scope for individual negotiations; introduce a revised production sharing mechanism for new PSAs that provide the government with a higher share of profit oil as the profitability of projects’ increases; and publish a model PSA that includes the minimum fiscal terms accepted by the government for future contracts. The IMF has also called on Guyana to apply tighter ring-fencing arrangements to contracts so that oil companies would be unable to deduct the costs associated with exploring other wells or developing other projects from another field that is producing oil.
The foregoing represents a mere fraction of the IMF’s recommendations which the nation’s leaders have failed to implement, yet continue to tell the nation that every possible measure is being put in place to protect the oil sector.
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