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

The 2016 Petroleum Agreement Compared – Tough Terms

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. Neither the cap on annual cost oil – at 75% of total production – nor the equal sharing of profit between Guyana and the Contractors is affected. However, the 2016 Agreement now makes provision for the deduction of cost gas as well as cost oil from the value of production, which value does not include any reasonable own use or losses in operation.

Article 12 has been substantially amended and increased in very significant ways. Most striking is the new Article 12.4 which gives at paragraph 12 (b), to each of the three companies making up the Contractor, the right of “access to and use of any export facility or pipeline or other facilities or infrastructure built by the Government or by any wholly or partially owned Guyanese state enterprises on terms no less favorable than those of any other party having access or use of such facility.”

Even more significantly, paragraph 12 (c) gives the three companies, subject to the payment of a reasonable price and ownership interest in the facilities, the right to participate in the construction, ownership and operation of any of the types of facilities built by the Government or by any wholly or partially owned Guyanese state enterprises or by any third parties on terms no less favourable than those of any other party participating therein!

In other words, Minister of Natural Resources Raphael Trotman was prepared to agree ownership interest by the three oil companies in any gas facility built by Guyana. But the same Trotman appears blissfully unaware of, or was simply not interested in invoking, Guyana’s option to acquire an interest in petroleum production. Maybe it is now too late for Mr. Trotman to read regulation 18 to the Petroleum Act under which he could set any stipulations or conditions subject to which pros-pecting and production licences may be issued by him.

Domestic supply, international price

Article 13 of the 2016 Agreement is almost identical to the 1999 Agreement except for the interlineation in relation to gas. However, a new provision is inserted requiring the Contractor and the Minister to agree on the basis for the valuation of Natural Gas, with the proviso that if such Natural Gas is sold to the domestic market, it will roughly be priced at ninety percent (90%) of US price, plus freight to Georgetown.

Article 14 is largely unchanged but with additions in relation to Natural Gas. It is useful to note that the Contractor has the right to use “as much production” as necessary in any Petroleum Operations within the Contract Area and also “within the transportation and terminal system.” The Contract Area is in fact a huge area as defined in Article 1 and set out in Annex A and Annex B, as well as any area subsequently coming under the Petroleum Prospecting Licence or Petroleum Production Licence granted to the Contractor.

Taxation 

Article 15 was substantially enhanced in 2016, many elements in favour of the Contractor, except in respect of royalty, which was previously set at 1% and deemed included in Government’s share of profit oil, and which is now a separate, off-the-top payment to the Government. However, the provision in the 1999 Agreement giving to the Minister the power to waive payment of the whole or any part of the royalty has inexplicably been retained. A brief summary of the taxation provisions in the Agreement as they now stand follows.

The Contractor – all three of them – or any of their Affiliated Companies will pay no tax, no value-added tax, no excise tax, no duty, no fee, no charge or no other tax in respect of income derived from Petroleum Operations or in respect of any property held, transactions undertaken or activities performed. There are a few exceptions: import duties subject to Article 21, taxes relating to non-petroleum activities, rent due to the Government, annual licence rental charges, local government rates and taxes, stamp duties, registration fees and similar duty, fee or other import of a minor nature.

Article 21 – Import Duties provides for the Contractor and Sub-Contractors engaged in Petroleum Operations are permitted to import, free of duty, VAT or all or any other duties, taxes, levies or imposts, all equipment and supplies required for Petroleum Operations. Expatriate employees are also entitled to duty-free concessions on a vehicle and household and personal items.

The relevant portion of the Government’s share of Profit Oil is accepted by the Minister as payment in full (emphasis added) by the Contractor of Contractor’s taxes, whatsoever the applicable rate of such levies may be, which the Minister shall then pay on behalf of the Contractor under Article 15.4 (a) to the Commissioner General.

The Contractor is exempted from the Property Tax Act as well as from the provisions of section 10(b) of the Corporation Tax Act (Cap 81:03) which requires a 10% Corporation Tax withholding tax on contracts by non-resident sub-contractors for the duration of the Exploration Period, and for any area within the Contract Area where exploration activity is in progress.

Certain new concessions include:

1.a) Exemption from the Income Tax Act and the Corporation Tax Act by Affiliated Companies or Non­ Resident Sub-Contractors conducting business in Guyana for one hundred eighty three (183) days or less on a cumulative basis, during the Exploration Period on income earned in Guyana.

2.b) Exemption from any tax, duty, fee, withholding, charge or any other impost payable on interest payments, dividends, deemed dividends, transfer of profits or deemed remittance of profits from Contractor’s, Affiliated Companies’ or Non-Resident Sub-Contractors’ branch in Guyana to its foreign or head office or to Affiliated Companies.

3.c) Expatriate employees of the three companies making up the Contractor, their Affiliated Companies and Non-Resident Sub-Contractors are exempt from the provisions of the Income Tax Act of Guyana (Cap. 81.0l) and from personal income tax in Guyana on income earned in Guyana for any given tax year if the expatriate is in Guyana for one hundred eighty three (183) days or less on a cumulative basis.

Local Supplies

Local Supplies is covered under Article 17 which has been substantially modified, and not only in relation to natural gas. Under the 1999 Agreement, the sale of crude oil to Guyana was made on a request by the Minister. Under the 2016 Agreement there is an obligation to do so although the deletion of a request hardly changes the essence of the requirement. What is most interesting is the harsh condition inserted in the 2016 Agreement under which oil and gas will be supplied by the Contractor.

In a nutshell, Guyana must pay in US Dollars or other currency as may be agreed, at a place specified by the Contractor, within thirty (30) days of receipt of the Contractor’s invoice by the Minister. If there is any failure to make this payment, the obligation on the Contractor to supply the domestic market is automatically suspended until payment is made good. Moreover, the Contractor can recover any amount due and unpaid by the Government, plus interest at the Agreed Interest Rate, from the Governments Lifting Entitlement of Crude Oil.

To be continued   

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Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 36

Introduction Readers will recall that Article 27 – Applicable Law, was addressed in Column 29 which is available on the website of the Stabroek News as well as on chrisram.net.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 35

Government inaction now constitutes force majeure! Today we take up from Article 24 which deals with force majeure, the definition of which is set out in paragraph 2.6.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 34

Just a reminder that this series within a series seeks to compare the Janet Jagan administration’s 1999 Agreement with the Trotman 2016 Agreement and as we closed last week’s column we were on Article 20.

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

Part 33   Local Content Article 18 which deals with local content has been subject to a number of modifications, the first of which recognises that the activities will be carried out not by the Contractor but by an Operator appointed by the three companies making up the Contractor.

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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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