Jun 20, 2021 News
In the absence of ring-fencing provisions…
By Kiana Wilburg
Kaieteur News – When oil was first discovered at the Liza well back in 2015, several experts and international institutions urged the authorities of the day to close many of the loopholes in the Stabroek Block Production Sharing Agreement (PSA). Otherwise, the country would lose billions of dollars in revenue.
One such loophole was the absence of ring-fencing provisions. By way of several reports to the APNU+AFC regime, the International Monetary Fund (IMF) in particular, had placed much emphasis on correcting this matter. The IMF had warned that such provisions are crucial since it would prevent ExxonMobil from doing two key things—subtracting the costs of dry holes from the money made from producing fields and deducting from those fields as well, the costs associated with developing future oil projects.
As a result of the authorities’ failure to plug this loophole, at least one Stabroek Block partner is now taking full advantage of Guyana. Hess Guyana Exploration Limited which holds a 30 percent working interest in the block is including as part of its cost recovery for the Liza Phase One Project, expenses associated with future projects. The result is that the oil pie to be shared with Guyana gets much smaller.
Exposing this state of affairs recently was Chartered Accountant, Christopher Ram, in his column, “Every Man, Woman and Child in Guyana Must Become Oil-Minded” and published on his website www.chrisram.net.
In his writings, Ram noted that he reviewed Hess’ latest financial statements which stated that “deductions are also made for General and Administrative expenses of $4.292 million, inclusive of pre-development and pre-production costs of future projects and Exploration expenses of $1.360 million, suggesting multiple cases of the revenue of Liza I bearing non-Liza 1 expenses.”
Had ring-fencing provisions been in place, this would not have occurred.
Ram agreed with Kaieteur News’ conclusion that, at this rate, the Liza Phase One Project would have millions of dollars in expenses rolling over year after year since it would not be able to cover all of the expenses being charged to it by the partners.
He also agreed that future projects such as Liza Phase Two, Payara “and every one of the remaining hundreds of wells that Guyana mindlessly approves without imposing conditions” will suffer the same fate.
Yesterday, Kaieteur News had reached out to Vice President, Dr. Bharrat Jagdeo; Senior Minister, Dr. Ashni Singh; Natural Resources Minister, Vickram Bharrat and Commissioner General of the Guyana Revenue Authority, Godfrey Statia to ascertain how the foregoing issues are being addressed. Unfortunately, those efforts provided futile. Minister Bharrat did promise however to provide a response today.
Former University of Houston Instructor, Tom Mitro, is one of many who strongly advocated over the years for there to be ring-fencing provisions in all of Guyana’s PSAs. Back in 2018, the industry expert had stated that having no ring-fencing provisions, perhaps, would not be so objectionable when it is in a small or “normal”-sized license. “But the (Stabroek block) license in Guyana is gigantic,” expressed Mitro.
He continued, “I don’t think I have ever seen one this big before. To me, it’s the combination of the license size, plus no ring-fencing provisions in a well-explored area that makes it so extraordinary, and not in the best interest of any country.”
Mitro who has more than 30 years’ experience in the oil industry had stressed that the unique situations that gave rise to the birth of Production Sharing Agreements in the first place was that governments wanted to avoid the “consolidation of losses” phenomenon by oil companies which is present in normal tax and royalty fiscal regimes. He said this very characteristic of PSAs, in that it provides ring-fencing provisions, is what made them so highly favoured in most places around the world.
Furthermore, Mitro who is versed in contract-renegotiation had said that the whole reason companies push for having no ring-fencing in their contracts is because it creates an advantage to the company at the expense of the country.
“It will mean that when ExxonMobil and its partners drill exploration wells in some other part of the country, in the same giant Stabroek Block, they can get cost recovery barrels for those exploration costs and that will end up reducing the Government’s share of profit oil,” expressed Mitro.
Having exploration costs coming at the expense of the government is a risky business, most governments prefer to avoid Mitro had said. “That is normally considered to be at the company’ risk, not the government’s. Therefore, lack of ring-fencing is without question, not in Guyana’s best interest…,” Mitro concluded.
The United Nations Development Programme (UNDP) had also commissioned a report by Trinidadian Energy Expert, Anthony Paul, back in 2016 which urged Guyana to close this loophole. But no action was ever taken.
In a separate report, the World Bank had also warned Guyana about leaving itself exposed to abuse by oil companies which would allow any and all costs to cross the fence of producing projects. This was brought to the nation’s attention in 2015, but nothing was done.
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