Guyana blindly paying oil companies’ interest on loans without Govt.’s approval – contract

Mar 26, 2023 News

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Kaieteur News – The 2016 Production Sharing Agreement (PSA) that the Guyana government inked with oil major, ExxonMobil allows the company to pay back accumulated interest on loans it took to develop the resources in the Stabroek Block, without the prior approval of the Minister in charge.

This newspaper highlighted in an article published two weeks ago that the lopsided contract allows for US-billions to be recovered with Guyana’s oil, without sanction from the Minister of Natural Resources, Vickram Bharrat. Included on the list is interest on loans that Exxon accrues.

According to the contract in Annex ‘C’ Section 3.1 (L) “Interest, expenses and related fees incurred on loans raised by the Parties comprising the Contractor for Petroleum Operations and other financing costs provided that such expenses, fees and costs are consistent with market rates” shall be recovered without the further approval of the Minister.

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.

Guyana has not only allowed loans taken by Exxon to be recovered without the approval of the Minister but considers the costs eligible regardless of the interest rates.

Kaieteur News had reported that 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.”

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.

Notably, in the absence of a ring-fencing provision, ExxonMobil is allowed to charge all of its expenses to one project. This means that costs to develop a project that is yet to start producing oil will be billed to the producing field, thereby shortening profits for the country received on that front. This however bodes well for the contractor as 75 percent of the oil is first deducted towards covering expenses. The remainder is then split evenly between the two parties, with Guyana raking in an extra two percent royalty on its sweet light crude.

Despite the inclusion of these provisions and the lack of adequate measures to guard against unfair fiscal practices, the government is unwilling to change the agreement with ExxonMobil. It has however proposed to correct some of the fatal provisions in the new draft PSAs currently open for consultation. The contracts will be applied to the 14 oil blocks presently on auction.

Several stakeholders have called on the administration to subject the Stabroek Block to the new oil contract.

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• expense, ExxonMobil, loans, oil, recover

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