Every Man, Woman and Child in Guyana Must Become Oil-Minded

Part 14

The importance of royalty

In the last column which appeared on August 17, I indicated that I would touch next on royalty in petroleum contracts. The concept of royalty under Guyana petroleum laws gained some prominence when the Minister of Natural Resources had succeeded in negotiating an increase in the royalty rate from 1% to 2%, in each case expressed as a percentage of crude oil produced and sold. In fact, the Model Petroleum Agreement provides that royalty would be paid in kind and at the delivery point which is defined as the “fob point of export in Guyana, either offshore or onshore, which shall be agreed by the oil company and the Minister.

Royalty is not peculiar to any particular type of petroleum agreement which broadly can be one of the concessionary system or the contractual system. In other words, royalty can feature in the concession system or the contractual system. Recall that under the concession system, the host country may be paid a signing bonus, royalties based on production and taxes on taxable profits.

Concessions are recorded as the oldest form of petroleum contracts but these are more recently referred to as the Royalty Tax System. Generally, a royalty tax regime can be made up of a combination of three elements: a royalty to secure a minimum payment, the regular income tax applicable to all companies and a resource rent tax which is aimed at capturing a large share of the profits.

Under the Production sharing contract model, the host country retains title to the petroleum until it is produced and ready for export or distribution at the wellhead at which point the Government and the contractor each takes its share which compensates the contractor for its risks, reimburses it for its expenses for exploration, development and production and for its share of profits. It is not unusual to find that under this model, a signing or signature bonus may also be payable, as well as production bonuses at various thresholds of production.

Royalties are also common to production sharing contracts although there are arguments against them under any system. Since such a payment comes off the gross income or barrels of oil produced they are a disincentive to production particularly in relation to marginal fields and it is perhaps why royalty payable under section 45 of the Petroleum Exploration and Production Act may be remitted in whole or in part under section 49 after consultation with the Minister of Finance. The Model Agreement seems to favour the production sharing contract arrangement under which all the risks are borne by the contractor who is allowed to deduct his expenses before sharing what is called profit oil.


The key similarities and differences between the Production Sharing Contract and the Taxation-Royalty Contract are as follows:


Production Sharing                      Contract Taxation-Royalty


Royalties                                    √                                                                       √

Cost oil                                       √                                                                       x

Profit oil                                     √                                                                       x

Share of production                  √                                                                        x

Tax on profits                            x                                                                        √


It is doubtful that there is such a concept of a fair rate of royalty. In fact, the better question is what is a fair return to the contractor and the host country given that in the first case the contractors bears all the risks while in the case of the host country, the country is giving up a non-renewable resource and expects to get a fair rent.

Royalty rates for countries not signed to a Production Sharing Agreement can range from as much as 33% in Venezuela or 30% in Bolivia to 2% in Guyana; profit share to the Government under a production sharing agreement may be as high as 75% based on the scale of production; taxes on income can be actual or deemed, as in the case of any company benefitting from the modification under section 51 of the Petroleum Exploration and Production Act; there can be a host of miscellaneous payments and bonuses; and in the case of a production sharing contract there can be a cap on cost oil from 60% to 90%.

Host governments must avoid being seen as greedy, as Indonesia and Mexico learnt to their cost. While existing licensees may be forced to take a reduced income, it will become difficult to attract other investors. At the same time petroleum companies must also avoid gouging and a reputation for taking advantage of their financial power. Readers may want to determine for themselves what a fair take is but are cautioned that rates vary wildly among petroleum producing countries.


Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 32

The March of Folly   The 2016 Agreement places greater emphasis on “gas”, or more correctly, “associated gas”, compared with the 1999 Agreement, including superficially minor, but no less significant, changes to Article 11 – Cost Recovery and Production Sharing and Article 12 – Associated and Non – Associated Gas.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded

Part 31   Introduction I must start this week’s column by publicly complimenting the painstaking and excellent work done by the technical staff of Ram & McRae in comparing, line by line and word by word, the 1999 Janet Jagan’s Agreement with Esso and the Raphael Trotman’s 2016 Agreement with Esso (not Exxon), Hess and CNOOC.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 30

Today’s column continues a review of the Esso/Hess/Nexen Petroleum Agreement signed on June 27, 2016 and publicly released by the Government of Guyana on December 29, 2017.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 28

Introduction The final, belated and reluctant admission by the Government of Guyana that it received a signing bonus from ExxonMobil, seems to have caused increasing curiosity, not least because the amount disclosed is a rather odd-sounding US$18 million.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 27

New Account On the day this column appeared last week, the press in Guyana, in an outstanding case of enterprising journalism, confirmed that Guyana had indeed received a signing bonus from ExxonMobil.

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