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

The 2016 Petroleum Agreement

Part 29 

Introduction

In keeping with a recent undertaking, the Government of Guyana yesterday released the Petroleum Agreement entered into on its behalf by Mr. Raphael Trotman with American oil companies Esso Exploration and Production Guyana Limited and Hess Guyana Exploration Limited and CNOOC NEXEN Production Guyana Limited, from China. The Agreement is dated 27 June 2016 and appears to have been lodged with and assigned the number 1794/2016 by the Deeds Registry, a public repository of information, but kept hidden from the public for well over a year. This column will return to this in a subsequent column.

The purpose of today’s column is to highlight certain features of the Agreement and to draw relevant comparisons with the 1999 Agreement signed by then President Janet Jagan in her capacity as Minister responsible for petroleum. That Agreement too, was kept secret for nearly two decades until this newspaper published a copy earlier this year on its website. Except where explicitly stated, references to Agreement are to the 2016 Agreement.

Structure

The 2016 Agreement has thirty-four Articles, one more than its 1999 counterpart. Article 33 – Notices has been renumbered as Article 34 and a new Article 33 – Signing Bonus has been added. The new Agreement is made under Deed, a legal instrument with which a higher level of formality is associated than an Agreement simpliciter as is the 1999 Agreement.  An amendment of fundamental importance has been made to the very important Article 27 – Applicable Law. Here is how the old and the new compare, with the additional words in the 2016 italicised:

“This Agreement shall be governed by, interpreted and construed in accordance with the laws of the Co-operative Republic of Guyana, and, consistent with such rules of international law as maybe applicable or appropriate, including the generally accepted customs and usages of the international petroleum industry.”

This is a serious jurisdictional issue and it means that if the Agreement was to be taken to Arbitration Guyana law would no longer be the dominant influence. Instead, the arbitrators would have to take account of international law and rules, customs, practice and usages of the international petroleum industry. Minister Trotman is not known to possess any expertise in international or petroleum law but by this insertion is leading the country into dangerous, unchartered waters.

This raises the question about the negotiating team on Guyana side. How can any Government think it has the right to make such long term decisions affecting the future of the country based on zero expertise and even less negotiating skills?

Missing pieces

While the Agreement proper has been released, there are crucial missing pieces which affect any comprehensive review. Annex A – Description of Contract Area in the 1999 Agreement set out nearly four pages of geographical points of the area subject to petroleum licences. That is missing from the information released today. Similarly, Annex B of the 1999 Agreement set out the map of the area but that too has not been published for the 2016 Agreement although it is quite possible that both Annexes A and B have not been altered. What this means is that Trotman has purportedly legitimised the illegality of hundreds more oil blocks than the law permits.

Crucially missing too is Annex C which contains the detailed rules for establishing and determining recoverable costs. Readers of the column will recall that this Annex was extensively discussed in Column 17 carried in September 29, 2017 and a number of issues raised. What makes this Annex so important is that it goes to the heart of costs that are recoverable before the determination of profit oil. This Annex is entirely narrative and there is no obvious reason why it was not released.

What makes its exclusion even more of a concern is that there is a completely new Annex D – Pre-Approved and Certified Petroleum Operations Items which suggests that lawyer Trotman who is incapable of negotiating points of law considers himself competent to negotiate important issues of accounting, costing, and finance.

But that is not all that is missing. There has been an important change of substance to Article 30 – Effective Date. It has been changed so substantially that it will only make sense to show the two separately. First the Effective Date in the 1999 Agreement: “The effective date shall be the date on which this Agreement is duly signed.” Now here is how Effective Date is defined in the 2016 Agreement:

“30.1 This Agreement shall enter into force and effect on the date in which the petroleum prospecting license in respect of the contract area is in full force and effect (“the effective date”).

The 1999 petroleum agreement shall continue to be legally binding on the parties until it terminates or is terminated in accordance with its terms and the bridging deed.”

Any attempt to make sense of the provision by the definitions in Article 1 is frustrated by the circuitous suggestion to the reader to go to the Article! But there is another missing piece: the “bridging deed” referred to in the new agreement.

Strangling future governments 

As if this is not enough, the 2016 Agreement locks the country into this Trotman Agreement into perpetuity. The Government’s hands are tied and it is effectively prevented from exercising one of the most fundamental and sovereign duties of any state in relation not only to the oil companies but also to their successors and assignees. Article 32 – Stability of Agreement has been increased from one to four paragraphs, all of considerable consequence. This column has not been too excited about the Janet Jagan’s Agreement Stability Article but those now appear benign compared with the Granger-Trotman Stability Article. The 2016 changes are designed not only to protect the interests of the oil companies but more importantly, to limit the role of the government in applying new laws in so far as the oil companies are concerned.

Let us look at some of the new provisions. If Guyana decided to make any amendments to its laws, whether through the amendment of existing laws (including the hydrocarbon laws, the customs code, or tax code) or the enactment or new laws, any of which has a material effect on the oil companies, the Government is required to take prompt and effective action to restore the benefits so lost. The new Article requires that the foregoing obligation of the Government includes the obligation “to resolve promptly by whatever means may be necessary (my emphasis) any conflict or anomaly between the Agreement and any new or amended legislation, including by way of exemption, legislation, decree and/or other authoritative acts.”

Article 32.4 provides, inter alia, that any delay by the government to respond to any notification from the contractor that they may have suffered any adverse effects can result in the contractor taking the matter to arbitration. In such a case, the arbitral tribunal is authorised to modify the agreement to reestablish the economic benefits under the Agreement to the Contractor. Where such restoration is not possible, the tribunal has the power to award damages to the Contractor that fully compensates for the loss of economic benefits under the Agreement, both for past as well as future losses.

Financial matters Royalty

The one thing the Agreement shows that Trotman has been truthful about is the increase in the royalty from 1% to 2% and that this is not deemed to be included in the Government’s share of profit oil. However, since royalty is an expense of business rather than an appropriation of profit, the rebuttable presumption is that since profits are shared equally after all expenses have been borne, the effective revenue from royalty is 1% of the income.  But that is not the last word. Article 15.7 allows the Minister to remit in whole or in part, or defer payment of any royalties payable by the Contractor.

Freezing and no taxes    

Article 15 under both Agreements are titled Taxation and Royalty but this too has been amended by Trotman. One of the amendments is to make the Article subject to the stability article so the taxes are generally frozen as at the date of the agreement. In other words, if the contract lasts for forty years, no changes to the tax laws that are adverse to the interest of the oil companies will apply to them.

Just to be clear: Trotman has continued Janet Jagan’s liberal arrangement whereby the government’s share of profit oil is accepted by the Minister as payment in full by the contractor of any income tax or corporation tax otherwise payable. To make this even clearer, paragraph 5 of Article 15 provides that the contractor is required to submit its tax returns to the Minister who is then responsible for dealing with the Guyana Revenue Authority on behalf of the contractor!

The Minister is required to state on the returns that he is paying income taxes on behalf of the contractor and the Revenue Authority must then prepare and issue receipts for the taxes so deemed to be paid. The Agreement also provides for the Contractor to be exempted from property tax and from the provisions of section 10 B of the Corporation Tax Act dealing with payments to subcontractors, during the Exploration Period. Exploration Period is defined in Article 1 to mean the (undefined) initial period, and or the first and second renewal period referred to in Article 4.1.

Affiliated and non-resident contractor companies which conduct business in Guyana in any tax year for 183 days or less on a cumulative basis, is exempted from the provisions of the Income Tax Act and the Corporation Tax Act during the exploration period, on income earned in Guyana.  The 2016 Agreement also provides for exemption from “tax, duty, fee, withholding, charge or other impost applicable on interest payments, dividends, deemed dividends, transfer of profits or deemed  remittance of profits from contractors, affiliated companies or Non-Resident Sub-Contractors branch in Guyana to its foreign or head office or to Affiliated Companies.

Special Bank accounts

Much has been said about the Signing Bonus, which just about every Minister in this Government who has spoken on the matter has lied, as the 2016 Agreement now confirms. That matter is likely to have some repercussions and is deferred to another column. However, there is a sum of one million United States Dollars which the Government has been receiving under a revised Article 10 on the anniversary date, which not surprisingly, has not been defined. According to new Article 10, this amount is paid not to the GGMC but into a bank account held and controlled by the Government of Guyana! Not sure what Trotman means, but the Agreement requires the Contractor to verify the bank accounts. So there is another US$2 million in some bank account. Any guess?

To be continued.