In spite of promises to do better…Govt. has already made some fundamental oil and gas mistakes – Ram

Jan 19, 2018 News

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By: Kiana Wilburg

Business Minister, Dominic Gaskin recently posited that the Government has paid attention to the mistakes made by other nations in the oil and gas sector. He assured that Guyana would walk a different road.
But many commentators believe that by virtue of the 2016 Agreement signed by the Government, there is already and inherently, a fair share of significant mistakes even before oil production kicks in.
Making this comment recently was Chartered Accountant and Attorney-at-law, Chris Ram.
Ram noted that the new Agreement includes ring-fencing and cost problems which appear to leave Guyana wide open and vulnerable. Ram s opinion in this regard was also supported by the International Monetary Fund (IMF) in their most recent report on Guyanas oil wealth.
One issue the IMF in a report points out is in relation to ring-fencing. This provision ensures that ExxonMobil cannot transfer the expenses incurred at one well to another.
The IMF said that in principle, the ring-fencing arrangement ensures that the governments 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.”
Tanzania is just one of the many countries which paid dearly for failing to close such a loophole in the Production Sharing Agreements it had with oil operators.

Kaieteur News had carried an article on the Tanzanian experience with ExxonMobil in which it was stated that the country had serious difficulty in verifying how the figure of “cost oil” was arrived at.
Upon examination of the leaked contract with ExxonMobil, the Chairman of the Public Accounts Committee disclosed that there was no “ring fencing” of blocks and that the Production Sharing Agreement contained no provision to guard against the incurrence of costs in one block and recovering them from another profitable block. The Chairman referred to the writings of Nobel Laureate Joseph Stiglitz who asserted, “The fact that the typical contract allows the oil companies to walk away with the windfall profits suggests that something is wrong with the way these contracts are designed.”
This newspaper also reported Indonesias switch from the profit-sharing model to a revenue-sharing one. This was because each passing year has seen a dwindling of the countrys share of profits in the belief that oil companies were inflating their costs.
This was despite the fact that the government-owned entity that manages the oil sector has a staff of 750 professionals and approximately 80% of that staff is involved in the verification of cost recovery claims by oil companies to ensure that they are fair and accurate.
Ram said that the Government missed several opportunities to correct a number of flaws in the 1999 contract including the insertion of strong anticorruption measures, as Kenya recently did.
Ram said, “But we did not seize the opportunities. The multiple changes made to the 1999 Agreement by the 2016 Agreement are almost without exception, in favour of the three companies making up the Contractor. It would be nice if Mr. Gaskin was right but there is no basis for such assurance or optimism, and we can start with the absence of local content requirements, or with taxation.”
He added, “It would have helped, too, if the Business Minister (Dominic Gaskin) had identified maybe the three significant mistakes made by other countries and be more specific as to how they are avoided under the governing Agreement. Even if Guyana seeks to correct the flaws identified by the IMF, based on the Contract the Government signed, we are already past that stage. The Agreement has a very tight stabilisation clause which means that the status quo has to be maintained in relation to the Contractor.”

CLOSING LOOPHOLES
Commissioner General of the Guyana Revenue Authority (GRA), Godfrey Statia, is also one who firmly believes that adequate ring-provisions are indeed necessary when it comes to the oil and gas sector. In this regard, Statia opined that Guyana must safeguard itself.
While in Guyanas contract with ExxonMobil, the mechanisms to safeguard against ring fencing are absent, GRAs Commissioner General notes that the effects can be minimised with the right regulation, separation provisions and controls and continual audits and reviews. He said that there must be identification and isolation of activities, assets, costs and revenues for each well.
Statia expressed, “Sure, Guyana must be on its guard. The principle (of ring fencing) exists in certain industries in Guyana already and GRA is taking steps to deal with this as it relates to companies which are in the habit of transferring costs as it relates to sister and related companies…”
While there are growing concerns regarding the lack of ring fencing provisions among other issues, Natural Resources Minister, Raphael Trotman, has assured that steps are being taken to address such loopholes.
Trotman had said that he and the Finance Minister, Winston Jordan, sat with IMF representatives and those issues were ironed out.
Trotman had 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.”

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