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The new gov’t and the Exxon pact

Entering the fourth week of its term and with an emergency budget for 2020 pending, the PPP/C administration has crucial decisions to make on the oil and gas sector and little time to do so. It has already made missteps in the way it has handled the review of matters pertaining to the Field Development Plan (FDP) for Payara  which is to be the third well development for ExxonMobil’s subsidiary here, EEPGL.

The choice of the former premier of the Canadian province of Alberta, Alison Redford QC to spearhead the review, and whether this had been as a result of Ottawa’s funding of the process has also muddied the waters.  The government is still to publish terms of reference for the work of Ms Redford and her team which would enable experts in these fields to determine whether they are appropriate choices for this task. Presumably, the team is proceeding with its mandate on the issues before it including likely excessive flaring from Payara and the handling of reservoir water offshore by EEPGL.

The technical issues pertaining to the Payara FDP are minor considerations when ranged against the broader dilemmas posed as a result of the reckless Production Sharing Agreement (PSA) concluded by the Granger administration with EEPGL in 2016. During the recent election campaign neither the PPP/C nor President Ali had given a clear statement on how the 2016 PSA would be ameliorated to the benefit of the Guyanese people.

Enough has been said and written on the injustices and ambiguities of the PSA. These are well known to the PPP/C government and President Ali and his performance in office will be judged significantly on the steps he takes to rebalance the PSA in favour of Guyana and its people. If not before, the public expects that the 2020 budget will contain a formal declaration of intent by the PPP/C government to renegotiate the PSA. One does not expect overnight changes in the agreement but at the bare minimum, ExxonMobil must be put on notice that the terms of the 2016 PSA are unacceptable and that key decision-makers here had been placed under duress and taken advantage of. Indeed, Guyana was hopelessly outmatched in the construction of the PSA as it had no suitable experts on its side. The gross unfairness of the process and the inequities of the agreement provide the impetus for the renegotiation.

Not to be lost sight of by the government is that the oil revenues that have begun to flow are for the development of the future Guyana – 50 years hence – and for generations to come. The Stabroek Block and the Liza-1 well are not for the benefit of only today’s citizens. The revenues must lay the foundation for future  generations based on sustainable and perpetual economic growth in a carbon neutral economy. To accomplish this requires that Guyana extracts the best possible deal from ExxonMobil.  What we have at the moment is woefully unacceptable.

Notwithstanding the fact that the PSA is a profit sharing agreement rather than a revenue sharing one, the 2% royalty payment to Guyana for its oil has stood out as an obscenity. It must be improved upon significantly. The many loopholes in the PSA for Exxon’s claimed recoverable expenses to reduce profit sharing to Guyana  must be addressed. There must be ring-fencing of the various offshore cost centres to prevent Exxon from simply floating expenses at will in Guyana’s direction. Exxon must pay taxes to Guyana. No major undertaking in any sector of this economy must be able to operate without paying its share of taxes. The period for cost recovery of Exxon’s investment also has to be confronted. There are also major gaps in the PSA in relation to environmental protection.

In 2017, the Ministry of Finance commissioned a study of the 2016 PSA by the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF).  Quite stunningly, the FAD did not have access  to the actual PSA which was still under lock and key. It relied on  publicly available information and third party data. The report was submitted in November of 2017 but not released by the government. Key details were published in this newspaper on December 24, 2017 after it became privy to the document. It is worth repeating some of the key  findings as these should guide the new government on the way forward.

A pivotal finding of the report after assessing similar PSAs from around the world was that the Stabroek PSA had the lowest Average Effective Tax Rate (AETR) of “government take”.

The report said: “With rates set at modest levels, royalties have the advantage of ensuring early and dependable revenue for the government. Royalties charged on the gross value of production,                                            however, are insensitive to costs and, thus, to the underlying profitability of projects. If set at high rates, investors may perceive them as an implicit depletion policy as they are likely to increase the marginal cost of extraction and reduce the range of feasible projects. This does not seem to be an issue in Guyana, however, as existing PSAs appear to enjoy royalty rates well below of what is observed internationally”.

The report said that in jurisdictions that imposed ad-valorem royalties, rates often vary between 8 and 20 percent. For example, Trinidad and Tobago’s royalty rates for oil and gas range from 10 to 12 percent; the United States has assigned  a 16.6 percent royalty in its Outer Continental Shelf; Colombia’s royalties are set between 8 and 25 percent; Brazil at 10 percent; and in Peru rates range from 5 to 20 percent.

The FAD report also pointed out that the government share of profit oil is fixed at 50 percent in the case of the Stabroek Block PSA and was not uncommon in modern PSAs. It asserted that the main disadvantage of this type of mechanism is that it does not enable an increasing share of profit oil/gas to the government linked to the profitability of projects.

“Most PSAs around the world usually have a formula in which the government share increases as a function of production, a combination of production and prices, or an economic variable such as the ratio of cumulative revenue to cumulative costs, or the project’s internal rate of return. Moreover, in many countries, the top tier government share of profit oil could be as high as 80 or 90 percent”, the report asserted.

Since this report, the barrels of oil equivalent recoverable from the Stabroek Block has zoomed. That development alone makes the 2016 PSA thoroughly unacceptable. President Ali faces a major decision on this front. He must act to secure a just agreement for the country and its future generations.

Source:Stabroeknews

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