The Petroleum (Exploration and Production) Act 1986 (Part II)

Angola, Africa’s second largest oil exporting country with a GDP per capita of US$3,230 in 2018, has recovered over US$5 billion of state funds, including $3 billion siphoned off the Sovereign Wealth Fund (SWF) through corruption and money-laundering. The head of the SWF was the son of former President Jose Eduardo dos Santos who ruled the country for 40 years until 2017; while dos Santos’s  daughter was the chair of the state oil company, Sonangol.

Last January, the Natural Resource Fund (NRF) Act was passed ‘to manage the natural resource wealth of Guyana for the present and future benefit of the people and for the sustainable development of the country…’. Regrettably, the political Opposition was not present when the related Bill was presented to the National Assembly. Had it done so, the Bill might have been referred to a select committee for detailed scrutiny before the Assembly’s approval.

Key provisions of the Act relating to the management of the Fund include:

The Minister of Finance having overall responsibility for the management of the Fund, including the preparation of an Investment Mandate. He is assisted by a Senior Investment Advisor and Analyst, and Investment Committee comprising six members having experience and expertise in financial investments and portfolio management;

A Public Oversight and Oversight Committee to be established, comprising 22 members drawn from mainly civil society organisations, to monitor compliance with the Act as well as independent assessment of the management of the Fund and the utilization of withdrawals;

The Bank of Guyana to be responsible for the operational management of the Fund, including maintaining proper books of account and preparing monthly and quarterly reports;

A Macroeconomic Committee to be established to advise the Minister on the Economically Sustainable Amount. This is the maximum amount that can be withdrawn from the NRF in a fiscal year while ensuring the long-term financial sustainability of the Fund, a fair inter-generational distribution of natural resource wealth, and maintaining stability in the annual withdrawals from the Fund;

The Bank’s Internal Audit to be responsible for the internal audit of the Fund;

The Auditor General to perform the external audit of the Fund and report the results not later than 30 April of the following year; and

The Minister to table an annual report, including audited accounts, in the National Assembly. 

Critics argue that there is an over-concentration of powers in the hands of the Minister since: (i) the Minister he has overall responsibility for the management of the Fund; (ii) the Bank of Guyana as the operational manager has a reporting relationship with the Minister; and (iii)  the Minister is responsible for appointing the members of both the Investment Committee and the Macroeconomic Committee. One way to address these concerns is to ensure that the positions referred to at (iii) are publicly advertised, applications are assessed by an independent committee, and appointment made by the Minister who is obliged to act on the committee’s recommendations.  

In today’s article, we conclude our coverage of the key provisions of the Petroleum (Exploration and Production) Act 1986. One will note a severe concentration of powers in the hands of the Minister responsible for natural resources. The Department of Energy has indicated that there are plans to review this important piece of legislation which was last amended in 1997. Hopefully, any revised version, or preferably new legislation to replace it, will address this issue.

Petroleum production licence

The holder of a petroleum prospecting licence has with two years, or such other period allowed by the Minister, to apply for a production licence in respect of any discovery block or blocks containing a petroleum reservoir. A person not having a prospecting licence who has supplied data to the satisfaction of the Minister that a petroleum reservoir is located in a block or blocks, may apply for a production licence.

The application is to be made to the Minister, accompanied by detailed proposals for the construction, establishment and operation of all facilities and services for the recovery, processing, storage and transportation of petroleum from the proposed production area; and other information as may be required by the Regulations. Where the Minister is satisfied that all the requirements of the Act have been met, he may grant a production licence on such conditions that the Minister determines. These include ensuring:

(a)          The most efficient and beneficial use of the petroleum resources concerned;

(b)          Availability of adequate financial resources, and technical and industrial competence and experience to carry on effective production operations;

(c)           Ability and willingness to comply with the conditions on which the licence is proposed to be granted;

(d)          Satisfactory arrangements for the employment and training of citizens of Guyana and the procurement of goods and services obtainable within Guyana; and

(e)          An agreement that the State, or any agency thereof, may exercise the option to acquire an interest in any joint venture for the production of petroleum in any block or blocks.

If the applicant is in default in his/her application for a production licence, the Minister may determine that special circumstances exist which justify the granting of the licence, notwithstanding the default. The Minister may refuse to grant a petroleum production licence by giving the applicant notice of doing so; providing grounds for refusal; and giving the applicant reasonable time within which to make representation and/or to amend the application.

A petroleum production licence must state, among other things, the date of the grant of the licence; the identity of the block or blocks to which the licence relates; and the conditions under which the licence is granted. It may also include a requirement to supply petroleum or petroleum products, to the extent specified in the licence, to meet the requirements of Guyana as well as provision for refining, disposal or sale of petroleum which may be recovered in the production area. Once a licence is in force, the licensee has exclusive rights to carry on prospecting and production operations in the production area and to sell or otherwise dispose of petroleum recovered. A petroleum production licence is granted for a period of 20 years.

Renewal of petroleum production licence

Upon application, a production licence, can be renewed not more than once for a maximum period of ten years. The Minister shall refuse to grant a renewal if the licensee is in default unless, in the opinion of the Minister, special circumstances exist that justify the granting of the renewal, notwithstanding the default.

Cancellation of licence and force majeure

The Minister may cancel a licence for default by the licensee by giving at least 30 days’ notice, providing details of the default, and specifying a reasonable period within which the licensee can make representation and/or remedy the default. Where the default cannot be remedied, the licensee has to provide adequate compensation and to take steps to prevent a recurrence.

A licensee may be unable to fulfill his/her obligations, or any part thereof due to circumstances beyond the licensee’s control, such as an act of war, hostility, insurrection or an exceptional, inevitable and irresistible natural phenomenon, or any other act constituting force majeure. In such circumstances, the licensee shall not be considered in breach of the licence. However, the licensee must promptly inform the Minister of the occurrence and provide him with the relevant details. Where the Minister is satisfied with the cause of the licensee’s failure to honour his/her obligations, the Minister may extend the license for such additional period as he considers necessary. The Minister may, however, refuse to agree to an extension of the licence if the licensee could have taken reasonable steps open to him to honour his obligations, notwithstanding the occurrence of the above events.

Unit development

Unit development refers to the co-ordination of operations for the recovery of petroleum in a production area, in which part of the reservoir is located with operations for the recovery of petroleum in any other area in which another part of the same reservoir is located. A holder of a production licence may enter into an agreement with one or more other licensees for the unit development of a petroleum reservoir. A copy of the agreement must be submitted promptly to the Minister for approval.

For the purpose of securing more effective recovery of petroleum from a petroleum area, the Minister may direct in writing any licensee, whose production area includes part of that petroleum reservoir, to enter into an agreement with another licensee or licensees for unit development of that petroleum reservoir.

Restriction on surface rights

Except with the approval of the President, there are restrictions relating to certain lands, such as

those set apart or required for such public purpose; land dedicated as a place of burial or which is a place of religious significance; or the foreshore. In other cases, the permission of the land occupier must be obtained with certain prescribed boundaries. There is also provision for the avoidance of interference in mining operations, allowing the grazing of livestock and the cultivation of surface land.

Restriction on the transfer of controlling interest in a corporate body

Without the prior consent of the Minister, a body corporate holding a petroleum production licence is precluded from transferring any equity interest, or enter into any agreement, arrangement, or understanding, with any person to do so, if the effect would be to give the person control of the body corporate.

Financial provisions

The holder of a production licence must pay the Government royalty as specified in the licence for petroleum obtained by him/her in the production area to which the licence relates. If the licensee fails to do so by the due date, or any further time allowed by the Minister, the Minister may serve notice on the licensee, prohibiting the removal of, or any dealings with, the petroleum from the production area and/or from any other production area subject to a licence held by that holder. The prohibition remains in force until all outstanding royalty has been paid or until an arrangement has been made, acceptable to the Minister, for the payment of the royalty in arrears. Any person who contravenes the prohibition notice shall be guilty of an offence and shall, on summary conviction, be liable to a fine of G$75,000 and imprisonment for three years.

The Minister may by order, after consultation with the Minister of Finance, remit in whole or in part any royalty payable by the licensee on application; or defer payment of any royalty, on such conditions as the Minister may specify in the order. Additionally, the Minister of Finance may, by order, direct that any or all of the following shall not apply to a licensee with a production sharing agreement with the Government: Income Tax Act; Income Tax (In Aid of Industry) Act; Corporation Tax Act; and Property Tax Act. The order shall be subject to affirmative resolution of the National Assembly.