Introduction
This week’s column treats with what still passes today as Guyana’s “national debate on its projected Government Take” or revenue share obtained from the export of barrels of crude oil equivalent (boe) based on its petroleum discoveries as detailed in last Sunday’s column. To recall, that column had considered the national debate as it pertained to the local reporting on the size, speed and the “success rate or creaming curve” revealed in those discoveries. By and large, I had concluded that a political bubble aimed at first denying the finds as fake news/propaganda and later morphing into a national debate directed at separating successful petroleum finds from government success.
I, therefore, posited that the quick flourishing locally of echo chambers, media hucksters and hustlers, self-styled experts and analysts had generated a national debate, which was confined to distinct loops and circuits of opinion that were effectively closed to “outsiders”.
This circumstance reinforced the standing of the “noise and nonsense” elements in the national debate rather than to enlighten Guyanese. For the debates on Government Take this set of circumstances has grown objectively worse as today, one London-based NGO has entered the debate—Global Witness—and another German-based social enterprise—Open Oil—has re-entered it.
Significantly, Government Take as a debate topic poses a challenge as it has a strong technical component. This challenge is steep for newcomers to the petroleum industry. Not surprisingly, the soi-disant experts and analysts and their media promoters are now on written record with some embarrassing and outlandish howlers. Through lack of understanding, the national debate correspondingly disappointed. However, because of its technical component, perhaps the best starting point for my presentation is a basic description of Government Take and the measurement challenges it poses
What is Government Take?
I believe the best way to anchor one’s understanding of Government Take is to envisage it as a price determined by forces of demand and supply in an economic market. Worldwide, and in Guyana, over recent decades the number of oil companies seeking petroleum exploration and development concessions, leases, and contracts from Governments has grown substantially, thereby revealing a vibrant “demand” for exploration and development acreage. The petroleum companies’ demand, and the many Governments involved “supply” this acreage
As Owners of the supply of petroleum acreage, Governments negotiate the fiscal terms and other conditions under which they will grant permissions. This can be done through the application of established law, on a case by case basis, or both. Typically, the fiscal terms and conditions include bonuses, rentals, royalties, production sharing agreements (PSAs), earned interest provisions, corporate income taxes, and other special taxes. The other conditions refer to matters like local content requirements, investment incentives. The totality of the effects of the fiscal terms represents the price the investor must pay for the agreed rights to explore and develop on the acreage obtained. The fiscal terms form the country’s fiscal system.
Several conclusions flow from the above. One is that a country’s fiscal terms, conceived as the price for renting petroleum acreage must consider all its elements as one package, in order to determine how competitive that price is in the international petroleum market. Second, given the large number of countries offering petroleum exploration and development acreage a wide variety of such agreements exist. Third, to serve as an efficient price, Government Take must bring benefit to both the Government as seller and the companies as buyers.
In Guyana’s national debate, all three of these conclusions were routinely violated. Thus, individual fiscal terms were abstracted from Guyana’s fiscal system and contrasted with the same terms, which are higher in an entirely different system and then used to discredit Guyana’s negotiators. Further, differences between Guyana’s fiscal terms and those of other countries were uniformly portrayed to discredit Guyana irrespective of the underlying competitiveness of these terms.
Most importantly, the noise and nonsense element participating in Guyana’s national debate failed to comprehend how taxes work. Among their several effects, taxes transfer income from private spenders on the taxed items to the Government. To that extent, therefore, higher taxes or increased Government Take, clearly disincentivizes spending on petroleum exploration and development. The Government must, therefore, navigate a trade-off between its increased revenue share or Take on the one hand, and providing incentives enough to sustain needed investment spending in the petroleum sector, on the other. If taxes did not disincentivize investment spending, then all Governments would see their revenue as “manna from heaven”; generated from a costless public cash machine. This was how foolish the debate had become
In the literature, Government Take is measured as the total effect of Guyana’s fiscal system on the cash flow of each oil field. This is the international market price at which the country traded its potential petroleum exploration and development acreage. It, therefore, defines Guyana’s “competitiveness for internationally mobile petroleum exploration and development capital”. As such, it helps to shape global crude oil prices.
Observations
Two observations are warranted at this juncture. The noise and nonsense elements in the national debate painted a simplistic and relentless “no quarters given” struggle between the Government and foreign oil companies. As a rule however, Govern-ments, as Owners of a country’s petroleum wealth, and petroleum companies as producers of it, may share a common goal of earnings maximization from each oil field. This apart their goals will differ. Private petroleum companies seek to maximize returns on their investment because that is how capitalism works. To do this they have to lower the geological, financial—economic, and political risks attached to their endeavors, while keeping in mind their corporate goals. For Governments the goal maybe to maximize its Take consistent with other national development objectives, including the sustainable flow of investment in petroleum exploration and development.
Second, the fiscal terms of Guyana’s PSA are, like practices worldwide reveal, certain to be adjusted as experience with them grows. In this sense Guyana’s PSA is a dynamic document open to change and, therefore, improvement. To treat it as set in stone is designed to hype its claimed limitations, as a political attack on the present governance of the coming petroleum sector.
Conclusion
Next week I’ll continue this discussion focusing on comparative issues of measurement.
