There is a wide variety of petroleum contracts which countries, with the single exception of the USA, may choose to adopt. The USA is unique in that the state or the Government does not have blanket ownership of petroleum resources. If it is on government land, then yes, the property with the petroleum vests in the government and so too if the petroleum exists offshore. But otherwise, petroleum found under the land owned by a person belongs to that person.
In Guyana, as in every other country, the ownership of petroleum vests in the State, whether or not the petroleum is found in private property. Section 2 of the Petroleum Exploration and Production Act which was passed since 1939 vests in the State the property in petroleum existing in its natural condition in Guyana and grants the State the exclusive right of searching for and getting such petroleum. This may not be popular, nor does it seem right and the day may not be too far off when the issue is tested in our courts, whether on the basis of the technical definition of land or the constitutional right to property or on the basis of fair and adequate compensation. We will leave that discussion for another day!
We continue the discussion begun last week when we discussed the concession System /Royalty Tax System practised by some countries, particularly in the early days of petroleum production. This of course is just one of the options at Guyana’s disposal in what is described as the petroleum fiscal system. It is a term which refers to all payments to government required under a petroleum agreement and may be defined as the framework which the government of an oil producing country employs in managing, regulating and sharing the revenues that accrue from the stages of petroleum exploitation.
Income Tax/Petroleum Revenue Tax (PRT): Corporate income tax may be applied at the standard tax rate or the country can opt to use a higher rate, as in Trinidad and Tobago. Prior to 2016 the UK imposed a Petroleum Revenue Tax (PRT), a tax on ‘additional profits’ charged on a participator’s share of profits from each individual tax field. It is intended to collect excess profits but is often viewed as a barrier to investment.
Ring Fence Corporation Tax: Alternatively, the use of Ring Fence Corporation Tax may be applied. This is the same principle as the standard corporation tax but it only applies to components within the ring fence trade, that is, oil activities. However, the rate is independent from the standard corporation tax rate. Relief is denied so as to prevent companies’ manipulation of borrowing levels between ring fence and non-ring fence activities.
Resource Rent: Resource rent is generally a profit related tax but is not computed on the basis of normal corporate profits. It is designed to capture part of the excess profit that can arise when international prices of resources soar and are also known as windfall profit taxes.
Contracting System: Depending on Government’s decision, they may opt to enshrine in legislation the provisions in regard of petroleum exploitation and/or enter into contracts with International Oil Companies for the same. The Petroleum Industry has moved away from the Royalty / Concession system and now employs generally three variations of contracts which are addressed below.
Service Contracts: Service Contracts are the least common option exercised in the Petroleum Industry. As previously noted, in a Service Agreement an International Oil Company (IOC) performs exploration, development and production of oil and gas at its own risk. This is done in the capacity of the contractor of the National Oil Company (NOC) or Host Government.
Joint Ventures: A joint venture is an arrangement between investors who may share in varying degrees the risks of exploration and exploitation of the petroleum. A common example is between the Government/State and an international oil company. In such an instance, the Government usually establishes a National Oil Company (NOC) to act in its capacity.
So how did Guyana go?
We appear to have taken a liking for the production sharing agreement (PSA) model for sharing in the revenue generated by petroleum. The PSA is among the most common type of petroleum contractual arrangements for exploration and development. In this arrangement, the Government as the owner of the petroleum reserves in the ground may advertise a bidding round and then enter into a petroleum as a preparatory step to the issue of a prospecting licence.
From the vantage point of the host government, all exploration and production risks and costs are borne by contractors as cost oil while profit oil is shared on an agreed basis.
The PSA has been specially favoured by all administrations since the Hoyte Administration
- 1992 tax amendment to section 51 (1) of PEPA favoured such PSA’s. That amendment relaxed the tax regime in respect of PSA’s only.
- Both the 2000 and the 2010 NDS (draft), while recognising that “Petroleum is known to exist”, showed a preference for production sharing contract.
- Both model Petroleum Agreements issued by the Government, one in the nineties and the other in 2012 – were substantially PSA’s with a deemed profit tax and a royalty included in Government share of Profit Oil.
We will continue this discussion next week.