The Extractive Industries Transparency Initiative (Final)

You can see the effects of climate change and scientists have clearly said what path we have to follow…All of us have a responsibility, all of us, small or large, a moral responsibility. We have to take it seriously. We can’t joke about it. Each person has their own. Even politicians have their own. 

Pope Francis made the above comments following hurricanes Harvey and Irma that left a trail of destruction of enormous proportions in southern United States and the Caribbean. He cautioned that these events should prompt people to understand that humanity would “go down” if climate change is not addressed, and that history would judge those who deny the science on its causes. The Pope warned that political leaders who do not want to work with other countries to stem global warming should be held morally responsible for future effects on the planet. He also referred to the consensus by scientists that global warming is caused by human activity, such as the use of fossil fuels.

Stabroek News’ column last Monday “In the Diaspora” quoted an article in an online magazine where an environmental group suggested that hurricanes Harvey and Irma should have been named Exxon and Chevron, no doubt because of the role they play in contributing to global warming and climate change. The extraction and use of crude oil can be likened to the cultivation of tobacco and the sale of cigarettes. We know that smoking, including second-hand smoking, is injurious to one’s health. Similarly, the use of crude oil to produce energy is injurious to the health and future well-being of the planet.

Guyana is now an upper middle-income country with a per capita income of US$4,250 as of 2016. Three thought-provoking questions arise: Can Guyana afford to forego the extraction of crude oil in its waters thereby avoiding the release of 1.3 trillion tons of carbon dioxide into the atmosphere? Can it accelerate its efforts to switch to renewable energy, thereby avoiding the release of an additional 1.8 million tons of carbon dioxide annually? Can Guyana intensify its efforts aimed at ensuring a sufficiently diversified economy to avoid not only the Dutch disease but also the resource curse? Dutch disease is the negative impact on an economy of any activity that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market. On the other hand, resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources, such as fossil fuels and certain minerals, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources.

With a 2% royalty for every barrel of oil extracted, at current market prices ExxonMobil will get US$49 while Guyana gets US$1, a mere 2.5% of our national budget. While it is true that Guyana will also get 50% of the profits made, such profits will only be determined after the recovery of 75% of Exxon’s capital expenditure. In our column of 28 August 2017, we had presented a table showing that in terms of the recovery of capital expenditure, the United Kingdom tops the list at 51% of the total production costs, due mainly to its operations being offshore in deep stormy waters, requiring more advanced and costly technology. Considering that Exxon’s recovery of capital costs will surpass the United Kingdom by approximately 50%, is there any guarantee that the oil giant will declare a profit, especially in the early years of operations?

Kaieteur News recently carried an article on the Tanzanian experience with ExxonMobil in which it was stated that the country had serious difficulty in verifying the how the figure of “cost oil” was arrived at. Upon examination of the leaked contract with ExxonMobil, the Chairman of the Public Accounts Committee disclosed that there was no “ring fencing” of blocks and that the Production Sharing Agreement contained no provision to guard against the incurrence of costs in one block and recovering them from another profitable block. He referred to the writings of Nobel Laureate Joseph Stiglitz who asserted that “The fact that the typical contract allows the oil companies to walk away with the windfall profits suggests that something is wrong with the way these contracts are designed.” One also recalls the Comptroller & Auditor General of India recommending that his country adopt a revenue-sharing model in place of a profit-sharing one because of the difficulty in verifying oil companies’ expenditure that is charged against its revenue.

Now for this week’s concluding article on the Extractive Industries Transparency Initiative (EITI). It will be recalled that the compliance requirements for countries to become eligible for membership of the EITI fall into eight categories, the first seven of which have already been discussed. Today, we consider the eighth category – Compliance with deadlines for implementing countries – as well as the second part of the EITI Standard dealing with governance and management, followed Guyana’s efforts to secure membership of the EITI.

Compliance with deadlines for implementing countries

The Standard outlines the timeframes established by the EITI Board for publication of EITI Reports, annual progress reports and the validation process. If the EITI Report is not published by the required deadline, the country will be suspended. The suspension will be lifted if the EITI Board is satisfied that the outstanding EITI Report is published within six months of the deadline. If the outstanding reports are not published within six months of the deadline, the suspension will remain in force until the EITI Board is satisfied that the country has published an EITI Report that covers data no older than the second to last complete accounting period. If the suspension is in effect for more than one year the EITI Board will delist the country.

The validation process assesses the country’s progress in complying with each of the EITI Requirements. The level of progress and compliance with each individual EITI Requirement is considered in terms of the following: satisfactory progress; meaningful progress; inadequate progress; and no progress. An assessment of overall compliance with all requirements in the EITI Standard will then be undertaken, applying the same minimum threshold tests used for the assessment of the individual requirements. Other factors that will be taken into account include; (i) the advice and recommendations of Validators and the Validation Committee; (ii) the nature of the outstanding requirements and how close the requirements are to being met; (iii) the magnitude and complexity of the extractive sector of the country; (iv) other barriers to meeting requirements such as but not limited to state fragility and recent or ongoing political change; (v) the extent to which the Multi-Stakeholder Group (MSG) has undertaken actions to resolve barriers encountered; (vi) the good faith efforts undertaken by the MSG to comply with the requirements; (vii) the reasons and justifications for not complying with the requirements; and (viii) any plans agreed by the MSG to address the requirements in the future.

EITI governance and management

The EITI is governed by a not-for-profit members’ association under Norwegian law, and its Articles of Association provide the governing framework. It is an international multi-stakeholder initiative with participation of representatives from governments and their agencies; oil, gas and mining companies; asset management companies and pension funds and local civil society groups as well as international non-governmental organisations. The EITI recognises that strengthened transparency of natural resource revenues can reduce corruption, and the revenue from extractive industries can transform economies, reduce poverty, and raise the living standards of entire populations in resource-rich countries. Its objective therefore is to make the EITI Principles and the EITI requirements the internationally accepted standard for transparency in the oil, gas and mining sectors.

The EITI arranges a global conference at least every three years, and a smaller members’ meeting involving the three constituent groups takes place, mainly to elect the 21-member EITI Board to oversee the activities of the EITI. The Board comprises a chairperson; nine members from EITI countries, six from companies, and five from civil society organisations. Observers include the World Bank, the International Monetary Fund and other relevant stakeholders. The EITI International Secretariat is responsible for the day-to-day running of the EITI Association. A considerable amount of technical assistance is provided to countries implementing the EITI.

There is a Code of Conduct that is binding on all board members, members of the EITI Association, secretariat staff, and members of MSG. The Code covers, among others, (i) personal behaviour, integrity and values; (ii) compliance with applicable laws, regulations and EITI Rules; (iii) conflict of interest and abuse of position; and (iv) gifts, trips and entertainment.  A conflict of interest is a situation or circumstance in which interests of EITI office holders influence or may influence the objective and impartial performance of their official EITI duties. Should they find themselves in such a situation, office holders must recuse themselves and inform the EITI Board or MSG of such recusal.

The Code prohibits the solicitation or acceptance of gifts, gratuities, free trips, honoraria, personal property, or any other item of value from any person or entity that are intended to be, or that can reasonably be perceived to be, a direct or indirect inducement to provide special treatment to such donor with respect to matters pertaining to the EITI.

Finally, the EITI is funded from contributions from EITI members and grants from bilateral and multilateral donors, international financial institutions and other agencies, organisations and entities.

Guyana’s efforts to secure membership of EITI

In Guyana, there is currently no mechanism in place to provide open and accountable management of natural resources, especially as regards public reporting of revenue derived from extractive industries. In May 2010, the Government announced its commitment to implement the EITI programme. In 2011 the then Ministry of Natural Resources & the Environment held discussions with the Government of Norway, and a workshop was held with key stakeholders. In May 2012, the Ministry and the EITI signed a Memorandum of Understanding to assist Guyana in its preparation for the EITI candidacy. A scoping study was commissioned in 2015 and a draft report (Moore Stephens Report) was issued in October 2015.

In 2016, the Government of Guyana reaffirmed its commitment to becoming a member of the EITI with the issuance of an unequivocal public statement which is the first in a series of five steps before a formal application is made. The following actions have also been taken, consistent with the EITI Standard:

(a)          establishment of the EITI National Secretariat (GYEITI) in December 2016;

(b)          appointment of a National Coordinator in February 2017;

(c)           official launch of the MSG in February 2017;

(d)          consultations with key stakeholders and conducting public outreaches in July 2017; and

(e)          submission of a formal application for membership of the EITI in August 2017.

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