Absence of rules on thin capitalisation will hurt Guyana

Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 41


Regulations made under the Petroleum Exploration and Production Act require the application for a prospecting licence to be accompanied by a statement giving particulars of the applicant’s financial status while in the case of a production licence, the application must give full information as to the applicant’s financial status. The Minister has extensive powers under the Act and the Regulations to request such additional information as he thinks necessary or to issue licences with conditions attached.

The applications are not published documents but the Act requires the Minister to cause notice of the grant of a licence stating the name of the licensee and the situation of the land (sic) in respect of which the licence has been granted. Whether the framers of the 1986 legislation did not consider that licences may be granted for off-shore exploration is unclear but it cannot be that only land-based licences require publication. Let us leave that technical matter for a while and return to the financial capacity of the licence holders.

We know that what our local media continue to dub the ExxonMobil Petroleum Agreement of 2016 actually has three contractors – Esso Exploration and Production Guyana Limited (Esso), CNOOC Nexen Petroleum Guyana Limited (CNOOC) and Hess Guyana Exploration Guyana Limited (Hess) – all incorporated in offshore tax havens and operating in Guyana as branches of the offshore companies. We know too that the two non-Esso companies which hold 55% of the interest have appointed Esso as the Operator.

Financial muscle

So let us see the financial status of the three contractors measured by their share capital, i.e. the amount of shareholders money invested in the company, as capital rather than loan funds. Because of this distinction, in financial management talk, this is often considered the real risk capital. But share capital may be further divided into equity or common or ordinary capital and preferred shares with the latter enjoying preferences as to return of capital. In the case of loan capital, the distinction is often between secured and unsecured loans. There is a further consideration which often confuses readers not too familiar with share transactions: there is authorised share capital and there is issued/paid up share capital.

So how do the three companies stack up, based on the information filed with the Commercial Registry.


Esso has an authorised share capital of US$10.5 million made up of US$10 million in Preference Shares and US$500,000 in common or ordinary shares. However, it seems from information available that the paid-up or issued capital is US$300,000.

Hess Corporation

Hess is incorporated as an Exempted Company in the Cayman Island with limited liability. Its share capital on incorporation was US$50,000 divided into 4.5 million ordinary shares of US$0.01 per share and 500,000 preference shares of US$0.01 per share.


Incorporated in Barbados, this company is authorised to issue an unlimited number of common shares and an unlimited number of preferred shares. The incorporation documents filed with the Guyana Commercial Registry in 2014 reveal that at that date the company had issued 200,100 Shares of Nil Par Value at BDS$1.00 each.

Assuming that these companies had not issued any further shares, the total share capital invested by the three oil giants in the equivalent of 2,000 blocks in the Gulf of Mexico is approximately US$450,000.

Using the capital structure to manage profits

This is no simple academic exercise. A company’s issued share capital is useful for many reasons. It gives an indication of how much of their own money the shareholders are prepared to invest in the company. This is particularly important for lenders who may have an equity: debt yardstick, not being prepared to lend to the company more than say four to five times the shareholders’ investment. But here is where it is particularly important to the Petroleum Agreement. Let us compare Companies A and B both of which require financing of one billion dollars made up of equity capital of eight hundred million dollars and two hundred million dollars of loan capital attracting interest of 5% per annum. And let us assume that Company is the opposite – two hundred million dollars in equity and eight hundred million dollars in loan capital attracting interest at the same rate.

All other things being equal, Company A’s net profit will be $30 million more than that of Company B.

To prevent this kind of financing arrangement, many countries set out what are called thin capitalisation rules designed to restrict the amount of interest which a company is allowed to pay. One method for example is to limit the interest charge to a proportion of net profit. Clearly, in the absence of such rules, the company can engage in what is sometimes called tax planning by the international company or transfer pricing by the host government. The 2016 Agreement actually encourages such tax and profit planning by explicitly making “interest, expenses and related fees incurred on loans raised by the Parties comprising the Contractor for Petroleum operations and other financing costs provided that such expenses, fees and costs are consistent with market rates.”

Interestingly, the Agreement seems to apply the market rates test to expenses, fees and costs and not to interest. If this indeed is the case, it is a huge loophole that would be easy to exploit.


But that is not all. The Agreement allows for exemption from withholding tax as well as corporation tax; does not require the lodgment of any bonds; or the taking out of insurance. What all of these do is increase the opportunities for profit management while also increasing the risk which creditors take, facilitate the transfer of funds out of Guyana and add to the potential adverse impact on Guyana of any disaster.

Next week we will look at whether ExxonMobil can be held legally responsible for the debts and obligations of a Guyana branch of its Bahamas subsidiary.

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