Envisioning oil – Tax what you can see

In attempting to develop a broad vision of where the oil and gas sector in Guyana is heading, last week (https://bit.ly/2Gue7ZD) I decided to use the decision chain consisting of five economic and three political decisions that the noted natural resources development expert, Sir Paul Collier, gave in 2013 in a talk at the London School of Economics on Reversing the Resource Curse: How to Harness Natural Resource Wealth for Accelerated Development (http://www.lse.ac.uk/lse-player?id=1803). I considered the first economic link in the chain, namely that countries should seek to discover their own resources, which he claimed is usually broken at the very start of the process. I argued that in retrospect Guyana was short-changed because that link was broken, but there are also future implications, another of which I will now turn to address.

ExxonMobil and its associates have been making a substantial investment and are projected to make other substantial finds at a time when far more oil has already been discovered than the world can burn if it is to meet its climate target of keeping warming preferably not more than 1.5% greater than in pre-industrial times. Speaking on the environmental issue, no less a person than the Pope has said, ‘Enforceable international agreements are urgently needed, since local authorities are not always capable of effective intervention. … Given this situation, it is essential to devise stronger and more efficiently organised international institutions, with functionaries who are appointed fairly by agreement among national governments, and empowered to impose sanctions’ (Encyclical letter Laudato Si’ of the Holy Father Francis on Care for Our Common Home, 2015).

Two years ago, another world-renowned economist and advisor to the United Nations, Professor Jeffrey Sachs, warned that the world will have to get rid of fossil fuels by 2050 and that in getting there the low cost (Saudi Arabia $10 per barrel compared to Guyana US$35-40) producers who have as much oil as the world should burn are the ones who are most likely to remain in production as the world counts down to that time (http://www.lse.ac.uk/lse-player?query=Jeffrey + sachs+). Only a few days ago, Stabroek News reported that the largest political party in Norway – Western Europe’s largest oil producer – has supported restricting oil exploration in that country. At about US$1 trillion, Norway also has the world’s largest sovereign wealth fund, managed by its central bank, which has also decided to reduce its investment in oil and gas assets. According to the governor of the bank, ‘We have always known that oil and gas activities will be phased out sooner or later… A stricter global climate policy may mean that this will occur sooner than foreseen earlier’ (‘Climate before cash’: Young Norwegians call time on oil industry, SN:21/04/22). https://bit.ly/2XDRfh8

Various measures, including compensation, will have to be used as the world seeks to eliminate the use of fossil fuels, and you can bet your bottom dollar that the first call on a compensation fund, not only for development costs but also for forgone profits, will be the multi-national oil companies, who will not stand idly by and allow their assets to become stranded.  Has any consideration been given to this issue and can it in any way be locked into contractual arrangements with the companies? 1999, when we signed the first agreement with Exxon, is already 20 years ago, so 2050 is not so far away. And please also note that the slave masters were promptly compensated but the descendants of the slaves are still quarreling for reparations!

The second important economic link in the chain is to capture the maximum value of the resources for the society, and there are two important considerations here. Firstly, the companies need to be properly taxed, and according to Collier, Taxation 101 suggests that government should tax what they can see, i.e. actual production. Less attention should be paid to sharing profits, which for the most part are what accountants say they are, and the oil companies employ some of the best accountants. Collier claimed that for decades, African countries have been fleeced by companies involved in transfer pricing.

A good example of this practice, even in a developed country with strong institutions and the longest of accounting tradition was Starbucks, the second largest restaurant/coffee chain after McDonald’s, with global market capitalisation of US$40 billion. Between 1998, when it opened in the UK, and 2012, the company opened 735 outlets and made about £3 billion in coffee sales but paid only 8.6 million £ in income taxes, and this was largely because the tax authorities disallowed some of its requested deductions. Between about 2009 and 2012, the company reported a loss and paid no taxes on sales of 1.2 billion pounds while a smaller company, Yum Brands Inc., incurred taxes of 36 million pounds on 1.1 billion pounds in UK sales. ‘Yet transcripts of investor and analyst calls over 12 years show Starbucks officials regularly talked about the UK business as “profitable”, said they were very pleased with it, or even cited it as an example to follow for operations back home in the United States’ (Reuters Special Report – How Starbucks avoids UK taxes). https://reut.rs/2URaHKJ

Right here in Guyana it is reported that for ten years Omai Gold Mines never reported a profit, so one must be thankful that it had to pay a royalty of 5% of production! Needless to say this important link has also been broken for much of the quarrel with the ExxonMobil agreement is about its paltry 2% production sharing agreement. Confronted with dissatisfaction, the government likes to draw attention to the 50% profit sharing it has negotiated with the company. We have seen how easily this can go south and there is already much debate about the quantum (some say US$4.4 billion) of the pre-contract costs the company is demanding.

The agency problem, namely how to ensure that those who are negotiating act in the best interest of the country and not for themselves, is the second aspect of this effort to capture the most value for society. Professor Collier proffered that the most effective way of doing so is to ensure that there is transparency and completion in the negotiation process by auctioning the licences. 

In Guyana, not only was the licence not auctioned, but the government secretly negotiated US$18 million signing bonus with Exxon, which the country was told – after the information was leaked – is in an account in the Bank of Guyana and is to be used to pay the legal costs of Guyana border dispute with Venezuela before the International Court of Justice. Some have argued that the signing bonus should have been far more than this and since the vast majority of Guyanese support a peaceful end to the border controversy by whatever means, why resources for going to the court had to be secretly negotiated is unfathomable. It is even uncertain where those resources are: the regime promised to place them in the Consolidated Fund and then it was disclosed that they were invested!

So here we have it: like the first, the second of the five links that should be consistently implemented over many years if transformational development is to result from Guyana’s oil resources has already been broken.

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