The observation was made much earlier in the series and repeated for emphasis last week: Guyana’s present petroleum fiscal regime encompasses both 1) its basic constitutional, economic, financial, and accounting legislation, as well as 2) the specific terms and conditions enshrined in the 2016 Production Sharing Agreement (PSA). Indeed, this dual combination holds for all countries. Such worldwide information is reported in annual directories (for example, the Ernst & Young: Global Oil and Gas Tax Guide). For 2017 this Guide has reported that companies engaged in upstream petroleum operations in Guyana, are, in the main, governed by the Petroleum Act, Petroleum (Production) Act, Petroleum (Exploration and Production) Act, Maritime Zones Act, Income Tax Act, Corporation Tax Act, Capital Gains Act, Property Tax Act, and taxes as the Value Added Tax (VAT), and excise tax laws levied indirectly on items.
In similar manner, my columns on the fiscal regime have also sought to confirm the truism: there is no single system [fiscal regime] which is right for every situation. Worldwide, there are great differences in the petroleum sector as regards geological prospects, reservoir conditions, costs, prices, infrastructure and availability of services. Consequently, “attractive investment opportunities can exist in several jurisdictions, and a fiscal system which works in one, may not work in another”. (Oil Contracts, p 93). Readers should be reminded here that this assertion comes from perhaps the most celebrated progressive civil society advocacy group for transparency and fairness in global oil contracts!
Guided by similar contributions, I have repeatedly urged in this series that Guyana’s 2016 PSA should be judged on four basic criteria, namely, its treatment of 1) changing profitability of Exxon and partners (Contractor); 2) the choice the Government of Guyana (GoG) makes between revenue now (early) or later; 3) the total risk allocation outcome between Contractor and GoG; as well as, 4) the PSA’s impact on sustainable investment flows into the sector.
While the overall design and structure of the fiscal regime largely determines both revenue yield and economic impact; the individual taxes, tools, instruments and components, which constitute the fiscal package need to be separately appreciated. This is required in order to correct the popular misconception that if one tax is increased/maximized or brought to levels of similar taxes in other jurisdictions, the 2016 PSA would bring greater benefit for Guyana. Fiscal regimes, however, are synergistic. They are more than the sum of their individual components, both written and unwritten.
The main fiscal components of Guyana’s 2016 PSA include:
First, a signature bonus of US$18 million (already paid). Globally, such bonus payments are quite varied. Some are paid on resource discovery or first production, but essentially all are similar; an upfront payment to the State as Owner of the nation’s mineral wealth.
Second, a royalty of 2 per cent on “all petroleum produced and sold less the quantity … used for fuel or transportation in Petroleum Operations”.
Third, Cost Recovery and Production Sharing are detailed in Article 11 of the Guyana 2016 PSA. This provides for the Contractor (Exxon and partners) to bear and pay all contract costs incurred in its petroleum operations. These are recoverable from Cost Oil/Gas. However, Recoverable costs have an upper limit of 75 per cent for each period. And the balance: Profit Oil/Gas (a minimum of 25 per cent), which “shall be shared between the GoG and Exxon and partners, for each Field or Fields on a 50:50 basis”.
Fourth, the Contractor (Exxon and partners) is required to file corporation/income tax returns with the Guyana Revenue Authority (Article 15.2) and its tax liabilities are paid to the GRA out of the GoG’s “take” (Article 15.4) (a-b).
Fifth, it should be noted that to date, there is no indication the GoG/State is contemplating participating as Owner/Contractor under the 2016 PSA. Worldwide, some States have done that under their PSAs, mainly through the formation of a National Oil Company (NOC), which co-invests in the exploration, development and production activities.
Sixth, there are several miscellaneous taxes and revenue gathering imposts operating in the broader fiscal environment. In the main, there are indirect taxes like the value-added tax (VAT), import duties and excise taxes along with various levies and other imports.
Seventh, relatedly, there are rental charges (US$1million per licensed area ̶ Article 10) and for training, publication and scientific equipment a fee of US$300,000, as well as a similar sum for social responsibility and environmental support. Further, Annex C Section 3.1.g states: “All rentals, taxes, levies, charges, fees, contributions and any other assessments and changes levied by the Government in connection with the Petroleum Operations and paid directly by the Contractor” are treated costs recoverable without further approval of the Minister.
Finally, there are the domestic market obligations (DMO) of the Contractor to fulfil local market requirements for oil, if requested by the GoG.
At this juncture it should be highlighted that recently, the ongoing debate on Guyana’s coming time of oil and gas production and export has witnessed two fundamental shifts. First, there is the proposal, under consideration, to shift the institutional base for the administration and execution of Guyana’s petroleum policy from the Ministry of Natural Resources to a Unit/Department of Energy within the Ministry of the Presidency. Second, there has been Exxon and its partners reporting a seventh successful ‘find’, the Pacora ̶ 1 (2018). As a consequence, projected daily crude output is now being ramped-up from 120,000 to 500,000 barrels a day, which more than quadruples the earlier estimated crude output.
Because so much of the public debate has been ad hominem (denunciation of the Minister in charge of the sector), it would be very important to see how this situation plays out against, presumably, non-partisan non-political public servants. Further, given, that hostile critics have played on the supposedly low returns to the people of Guyana based on the modest output of 120,000 barrels per day, it would also be enlightening to see how a four-fold-planned increase in this flow will be accommodated by partisan/political critics.
Next week, I continue exploring Guyana 2016 PSA’s fiscal regime. There I shall indicate ultimately, why, no matter what critics say, the Guyana’s 2016 PSA while it can be improved (like all oil contracts) nevertheless remains a win for Guyana.