Brief on Technical meeting reveals…ExxonMobil was not open to Guyana securing provision for increased royalty

Jan 08, 2018 ExxonMobil, News

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By: Kiana Wilburg

Should the future of USA oil giant, ExxonMobil exceed financial expectations, it appears that the multi-billion dollar company would not be open to Guyana securing a royalty that is higher than the two percent enshrined in the June 2016 agreement.
This was revealed in a brief on the technical meeting between ExxonMobil and officials of the Guyana Geology and Mines Commission (GGMC). The meeting occurred in April, 2016. The document was prepared by GGMC Commissioner General, Newell Dennison.
In his report on the meeting, Dennison said it was put on the table that there were some fiscal reviews being done and while they would not be concluded before finalizing the new agreement and licence (which were both signed in June 2016), it would be necessary to include certain principles.
“A provision for a royalty in a contemplated hybrid PSA (Production Sharing Agreement) was mentioned and in the context of ensuring that Guyana is not at a disadvantage in a high oil price environment in the future. Esso (ExxonMobil) was not at all receptive to that. However, it was left on the table.”

He added in the document, “I have the view that there may be a fair chance to model some notional improved royalty to kick in, but I also speculate that in the environment of deep water, deep target development, the price of oil would have to go up significantly before the departure of the financials that prevail now and what could materialize becomes of material consequence.” (The entire brief can be seen by following this link: file:///C:/Users/k.wilburg/Downloads/GGMC%20Brief%20on%20Esso%20April%2015%202016.pdf).
Minister of Natural Resources, Raphael Trotman had said that Dennison and other GGMC officials were the lead negotiators for Guyana when the ExxonMobil contract was being tweaked in 2016. Dennison’s suggestion, however well intentioned, apparently fell on deaf ears since no such provision made it into the modified contract.
CRITICISMS
The contract that the Government has with ExxonMobil has come in for scathing criticisms from several quarters. The International Monetary Fund (IMF) for example has noted that the contract has several loopholes.
But the Government believes that there is no need for alarm or worry as several international bodies, the IMF included, are lending tremendous support to help Guyana remove every possible chance for exploitation by the operator.
This was noted recently by Trotman. He was at the time responding to a question from this newspaper which was based on the disturbing findings of the IMF.
One issue the IMF in a report points out is in relation to ring-fencing. The IMF said that in principle, the ring-fencing arrangement ensures that the government’s revenue from the Stabroek Block is calculated based on each field or well separately.

The Fund stated, “However, this is undone by the Production Sharing Agreement framework, allowing the contractor to allocate cost oil to any field within the contract area.”
To the aforementioned, Trotman said that on November 30, he and the Finance Minister, Winston Jordan, sat with IMF representatives and those issues were ironed out.
Trotman said, “We went through them with the Guyana Revenue Authority and others. The answer is that we are working. IMF, World Bank, the Caribbean Development Bank (CDB) and the Inter-American Development Bank are giving us tremendous support. And we are building capacity on a daily basis and hiring capacity and ensuring that we cover all that we are supposed to…”
The Minister said that with the help of those international agencies, Guyana will be in a position to tighten all loopholes.
He added, “We invited the IMF to tell us what we are lacking in this regard, so Guyana is not alone in this.”
START AUDITING
The International Monetary Fund has also urged the authorities of Guyana to commence auditing of all exploration, development costs by USA oil operator, ExxonMobil.
Elaborating further on the matter, the IMF said that plans to establish a petroleum industry taxpayer unit attached to the large taxpayer office in the Guyana Revenue Authority (GRA) should be prioritized. The Fund said that this effort is supported by a consultant from the US Treasury office of Technical Assistance.
The IMF said, “It will be important for this unit to start verifying and undertaking audits of cost incurred during the exploration and development phase, which is getting underway now. It would be advantageous to establish close working relations between the GRA and the sector regulators (Ministry of Natural Resources, Guyana Geology and Mining Commission and the prospective Petroleum Commission) to ensure that the limited petroleum sector expertise in government is applied most efficiently.”
The International Monetary Fund said the intention is that the Guyana Revenue Authority will be the single revenue collection agency for the petroleum sector. It opined that this is a reasonable decision given the key role played by the Production Sharing Agreement and the pay-on-behalf arrangement for corporate income tax in existing contracts (this is where the contractor’s income tax obligations are settled from the government’s share of the profit oil). However, given the limited experience in the GRA with petroleum taxation, the IMF said that there is urgency to develop skills in this area.

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