‘Warts and all’: the fiscal regime of the 2016 PSA remains a win for Guyana

Introduction

Last Sunday’s column introduced two far-reaching observations concerning Guyana’s 2016, Production Sharing Agreement (PSA). That column had also promised to reveal why, as matters presently stand, the 2016 PSA represents a “win for Guyana” despite, admitted imperfections. Today’s column develops this theme.

Recapping, the observations made were: firstly, it is the fiscal regime as a whole, which effectively determines revenue yield. This yield though, is a result of the synergistic effect on each other, of the individual fiscal components of the regime. Consequently, the fiscal impact of the regime is likely to be greater than the sum of each individual component (whether taxes, allowances, operating business rules, or other “terms, and conditions”). The expectation however, is that, holistically the fiscal regime would disincentivize tax avoidance/evasion behaviour by the Contractor, while simultaneously incentivizing investment flows into Guyana’s petroleum sector.

The second observation is that all fiscal regimes embody both written (tangible) and unwritten (intangible) components. The unwritten components/intangibles would include, for example, whether the fiscal regime is seen by Parties to the PSA as the product of a zero-sum game, in which one Party gains only at the expense of the other. Such behaviour clearly determines the level of trust/goodwill among Parties. Altogether, one can expect the intangibles to impact the Parties’ behaviour.

These two observations that were made concerning the fiscal regime, apply de rigueur to the broader 2016 PSA. And, taking the above under consideration, I had further promised readers to reveal today, why I believe the PSA as it presently stands, although clearly imperfect (as indeed all PSAs are), nevertheless, represents “a win for Guyana”.

The argument

Readers are aware of the multi-dimensional threats I have considered, which confront Guyana’s petroleum sector. These include such “known unknowns” risks as the depth of the petroleum “finds”; environmental challenges; potential energy market uphea-vals; and, broader geopolitical/ strategic threats. By definition, the “unknown unknowns”; even though we realize these exist, they remain indefinable.

I submit that, in the area of known unknowns risks; the greatest of these is the existential risk arising from the border (territorial) claims of Venezuela.

This judgement is rooted in 20th and 21st century history of global conflicts. As Michael Clare observes: “global conflicts are increasingly fueled by the desire for oil and natural gas and the funds they generate”: (Fighting for Oil: 21st century energy wars) This circumstance is evident across a wide swathe of states, including Syria, Nigeria, South Sudan, Ukraine and even the East and South China seas. Further, researchers have suggested that, behind several other global conflicts, which may appear to be “idiosyncratic”; when examined carefully they are seen to be driven largely by a “fixation on energy”. This makes the twenty-first century one of  proliferating “energy wars”! Therefore, based on such historical evidence, Venezuela presently represents the greatest existential threat to Guyana’s petroleum sector.

Serious analysis of the 2016 PSA must take onboard the adage: “in a world so heavily dependent on oil and gas (now and for the foreseeable future), for all countries control over this resource is a key element of their national security, national treasury, national well-being and indeed position in the international system.” Possession of oil and gas potentially enhances the position of states; and, conversely, weakens the position of those who do not possess these.

Consequently, it is of immense geo-strategic/political value to Guyana that the 2016 PSA has been signed with Esso Exploration and Production Guyana Ltd, (EEPGL), an Exxon subsidiary, CNOOC Nexen Petroleum Guyana Ltd, and Hess Guyana Exploration Ltd. As a consequence, we find the two largest likely global economies in the early 2020s (when Guyana’s production is expected to come on stream)  ̶  the USA and China  ̶  have a joint stake in local operations. This stake cannot eliminate all geo-strategic/political threats, but it must be admitted, it significantly neutralizes them. This is enhanced because the United States relations with Venezuela are, on the whole, adversarial; and, this combines with China, where there is an element of “emerging economy solidarity” to create added restraint on Venezuela!

While serendipity has no doubt played a role in the evolution of this ownership and operating structure, as indeed it does in all human affairs, its foundation truly lies in the skills, technical capabilities/ advances, along with the Contractor’s “knowledge” in identifying its “needs”; and, where these can be “sourced” if there is insufficient in-house capability. The strong list of successful wells that Exxon and partners have brought on-stream, (more than an estimated 3.2 billion barrels of oil equivalent since 2015) has helped to create an important de facto deterrent to Venezuelan’ claims (Liza, Payora, Snoek, Liza Deep, Turbox, Ranger and Pacara).

This contention is supported by recent reports the Ministry of Natural Resources, which has advanced the view that: “accelerating production of oil from Guyana’s fist offshore well is important to rebuff any claims Venezuela may make in court in relation to the Area” (‘Oil and Gas Law Training and Development Seminar’ Stabroek News, March 10).

Conclusion

This week’s column has integrated both my running commentary on Guyana’s petroleum debate and continuing evaluation of the fiscal regime incorporated in the 2016 PSA. Recognition of the issues I have raised in today’s column does not negate the validity of observations/criticisms of the PSA. What it does seek to have acknowledged however, is that: the PSA as presently constituted, significantly reduces the existential threat of Venezuela’s territorial claims.

The PSA still may or may not fulfil Guyana’s expectations about its transformational impact on the economy and society. Relative to people’s expectations, the country does not, and indeed cannot know for sure, at this stage, whether such expectation will be fulfilled. What we can be sure of, however, is that, in an absolute sense, Guyana’s income, wellbeing, and economic value-added in the period immediately following 2020 will be absolutely enhanced. Those who suggest that, in an absolute sense, Guyana will be worse off are peddling nonsense. Indeed, similar nonsense is caricatured in demeaning press portrayals of the second-fastest growing continent on Earth  ̶  Africa, as a Region of declining incomes, increasing poverty, and constantly ravaged by oil majors, oil robber barons, and complicit African leaders. What a heresy!

Comments  

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