The Windfall Tax paradox

Nov 30, 2024 Features / Columnists, Peeping Tom

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…Peeping Tom

Kaieteur News- It is a curious feature of the modern age that the more complex our agreements, the more we reduce them to simplifications when they suit a purpose. Nowhere is this clearer than in the arguments surrounding Guyana’s Production Sharing Agreement (PSA) with ExxonMobil and its partners.

Vice President Bharrat Jagdeo has taken to invoking the stability clause of the PSA to dismiss calls for a windfall tax. His reasoning? Such a tax would violate the terms of the agreement, presumably because they would disrupt the oil companies’ economic benefits.

Jagdeo’s position, however, rests on an interpretation so narrow and so skewed that one suspects it might serve better as an anecdote than as a basis for public policy. For while he clings to the letter of the stability clause, he appears blind to the broader principles that underpin it and the reality of market economics that shape its outcomes.

A stabilisation clause, as Anthony Paul—an authority on oil and gas—has astutely explained, is not a blanket guarantee of immunity for oil companies from all forms of fiscal policy. Rather, it is an agreement based on an economic model, one that projects a reasonable rate of return for the contractor under given market conditions. This model contemplates oil prices within a predictable range, allowing for modest fluctuations. It does not, however, account for the extraordinary windfalls generated by market anomalies—price surges that far exceed the projections upon which the agreement was founded.

When oil prices soar beyond those projections, the additional revenue is not the result of the contractor’s ingenuity or risk-taking. It is the result of the commodity itself—property of the state—becoming more valuable on the global market. The contractor benefits from higher revenues without lifting a finger, while the resource owner, in this case, Guyana, is left with its fixed share of a vastly inflated pie.

Jagdeo needs to be schooled in the knowledge that the imposition of a windfall tax is not an act of economic vandalism. It is a recognition of justice and equity in resource ownership. Around the world countries have imposed windfall taxes to ensure that when their natural resources deliver exceptional profits, their citizens see a fair share of those gains.

Such taxes do not undermine stabilisation clauses; they reinforce the principle upon which those clauses are based—predictability and fairness. Contractors are guaranteed a reasonable rate of return, but not an unlimited one. When the oil price soars, their revenues increase, even after accounting for a windfall tax. The idea that such a tax would adversely affect their economic benefits is a misreading of both economic models and practical outcomes.

Even if a Production Sharing Agreement (PSA) does not include oil price projections, the principles for imposing windfall taxes can still apply under international investment law and fiscal sovereignty. Governments have the sovereign right to impose such taxes to manage resources and benefit citizens, particularly during unexpected price surges. International practices and arbitration precedents often support governments’ right to impose taxes in the public interest, provided they do not undermine legitimate investor expectations. If companies maintain strong profits, as Exxon is presently doing, tribunals may favour the State, aligning with principles of equity and fairness.

International customary practices support the imposition of windfall taxes on resource industries. These taxes aim to allow resource owners (the state and its people) to share in extraordinary profits generated by their natural assets under volatile market conditions, regardless of specific PSA terms​.

Nor can be argued that the imposition of a windfall tax amounts to expropriation. An international tribunal had ruled in 2012 that Ecuador’s imposition of such a tax did not amount to expropriation.

Vice President Jagdeo, in his haste to declare the impossibility of a windfall tax, betrays his unfamiliarity with the intricacies of oil governance. His assertions suggest a lack of understanding of the stabilisation clause’s intent. This does not inspire confidence in a leader tasked with managing the nation’s most transformative resource.

It would serve the Vice President well to consult experts in the field rather than rely on his instincts or the counsel of those with vested interests in maintaining the status quo. The expertise of individuals like Anthony Paul—who understands not just the mechanics of oil contracts but also the broader principles of justice and equity in resource governance—should be sought and heeded.

The stability clause, as written, does not prohibit a windfall tax. It merely ensures that the contractor’s economic benefits are not adversely affected by changes in fiscal policy. A carefully designed windfall tax can achieve this balance, ensuring contractors maintain their projected rate of return while allowing the state to capture a fairer share of unexpected gains.

The windfall tax is a necessity. Without such a tax, the oil companies will continue to reap outsized rewards at the expense of the nation’s future.

The time has come for Guyana to assert its sovereignty -its right to institute its own fiscal policies – and demand its due. The PSA is not a shackle; it is a tool, one that must be wielded wisely to serve the interests of the nation. Vice President Jagdeo must abandon his defeatist rhetoric and embrace the responsibility of leadership. To do otherwise is to consign Guyana to a fate of squandered potential.

(The Windfall Tax paradox)

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• ExxonMobil, market economics, Peeping Tom, Production Sharing Agreement, The Windfall Tax

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