The economic perspective… Government take, profit, and accounting for costs

Introduction

Today’s column along with the next portrays selected aspects of my recent discussion of the fiscal regime in Guyana’s 2016 Production Sharing Agreement (PSA), from the perspective of basic economic principles. I believe this would enhance readers’ appreciation of those issues. In pursuit of this, I shall discuss briefly the following five topics 1) Economic profit, government take and other developmental benefits; 2) accounting for exploration & evaluation costs (EE); 3) reserves estimation & classification; 4) the life cycle of petroleum projects, and 5) tax evasion and avoidance. The first two topics will be considered today.

From the perspective of economic principles, we may re-state the ‘government take’ relation under the PSA 1) economic profit derived by the Contractor (Exxon and its partners) from Guyana’s petroleum operations is equal to the cumulative gross revenues the Contractor receives, less the cumulative gross costs that are incurred, over the full life cycle of the project. This measure represents the operations’ cash flow. 2) Government take (expressed as a percentage), is therefore equal to all government (GoG) revenues derived from taxes/fees/imposts; profit sharing; and benefits, which are earned, if the GoG secured at some point in time, a working interest (as an investor) in the Contractor’s operations, divided by the cash flow (economic profit). 3) Consequently, the Contractor’s take (%) is the residual, or 1- government take (%).