In his continuing series, former Auditor General Anand Goolsarran says that in financial terms, the Production Sharing Agreement (PSA) signed in 2016 between Guyana and ExxonMobil’s subsidiary, EEPGL is overwhelmingly weighted in favour of the oil giant.
Writing in his accountability column in Monday’s edition of Stabroek News, Goolsarran maintained his call for a renegotiation of the deal and said that the oil company should have shown a sense of social conscience in negotiation with this country.
The Guyana Government has come in for severe condemnation over the PSA but last week Minister of State Joseph Harmon said it was a done deal and would not be revisited.
Goolsarran, who has argued for a revenue-sharing model rather than a profit-sharing one, said that Guyana’s natural resources belong to its citizens and should be exploited so as to ensure that they obtain the maximum possible benefits from such resources.
“Upon careful examination of the Agreement, however, the reverse appears true. The Agreement is overwhelmingly weighted in favour of Exxon, raising serious doubts about our negotiators’ ability to agree on a deal that is fair for both parties, and one that represents the best interest of the country. While we acknowledge that one of the key objectives of a company is the maximisation of shareholders’ wealth, the pursuit of such objective needs to be tempered with a social conscience, especially when negotiating agreements with poor developing countries like ours with little or no bargaining power and an inexperienced team of negotiators”, Goolsarran stated.
Pointing out that the Government’s fixed share of profit oil ignores the profitability of the project, he noted that according to a recent International Monetary Fund (IMF) report on the deal, most PSAs around the world usually have a formula in which the government’s share increases as a function of production, a combination of production and prices, or an economic variable such as the ratio of cumulative revenue to cumulative costs, or the project’s internal rate of return.
Further, the IMF report had said that in many countries, the top tier government share of profit oil could be as high as 80 or 90 percent and considering that Exxon’s tax liability has to be settled from the Government’s share of profit oil, the fixed 50 percent profit oil share is considered relatively low.
With crude oil prices climbing from approximately US$50 per barrel to US$62.65 as of last Thursday, Goolsarran said that Exxon is set to increase its profitability since it would need less than 75 percent of its production and sale to recover its costs. He noted that the reverse is true if the price falls below US$50 but pointed out that an official of Exxon is reported to have stated recently that even if the price falls to US$40, Exxon will still be able to turn a profit.
Asserting again that the two percent royalty that the Government would be receiving is too low in comparison to other deals and that seven percent would be more appropriate, Goolsarran said that the IMF report appears to support that view when it commented that in countries where ad valorem rates are applicable, the rates vary from eight percent to 20 percent. The IMF report had cited Trinidad and Tobago where the royalty rates are between 10 percent and 12 percent while for the United States, the rate is 16.6 percent. Colombia’s royalty rates are between eight percent and 25 percent while for Brazil and Peru, the rates are 10 percent and five to 20 percent respectively, the IMF report had noted.
The former Auditor General contended that Exxon’s exemption from the payment of income tax, value-added tax, corporation tax and property tax in respect of income from petroleum operations or from property held, remains a concern.
“While we acknowledge that some form of fiscal incentives is needed to attract investments, by all standards these exemptions are weighted too generously in favour of Exxon. To compound matters, the Minister responsible for petroleum is required to pay on behalf of Exxon, income and corporation tax on Exxon’s taxable income, out of the Government’s share of profit oil”, Goolsarran lamented.
He argued: “When one assesses the financial implications in terms of the net benefit to the country (i.e. royalty plus net share of profit oil minus the value of the exemption of various taxes), the inescapable conclusion is that Agreement is overwhelmingly a one-sided affair. It could very well be that aspects of the Agreement violate our laws, especially in relation to corporation tax, income tax, value-added tax and property tax. From an environmental perspective, it could also very well be that it would better to leave the crude oil under the seabed when all the above and other factors are considered. With an estimated 3.2 billion barrels the fossil fuel that Exxon has found so far, the analysis and calculations indicate that in excess of 1.5 billion tons of carbon dioxide will be released to the atmosphere from the use of such fuel!”