Exxon has taken advantage of Guyana’s weakness

Jan 28, 2018 Features / Columnists, Peeping Tom

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ExxonMobil in responding to criticisms of its fiscal incentive agreement with the government of Guyana, resorts to rudimentary economic arguments about why duties are necessary, and why exemptions are allowed. In so doing, it skirts the important contention about the open-ended and uncapped concessions which it and its sub- contractors have been handed by the government of Guyana.
It is not unusual for investors to demand fiscal concessions. The argument goes that import duties have to be paid and this adds to the cost of the investment. The increased costs can thereby affect the returns on that investment. As such major investors, demand that with respect to capital equipment, duties and taxes be waived.
In the case of ExxonMobil, it makes the same argument by stating in its full-page advertisement that “applying an import duty on foreign–sourced equipment increases the already high cost of oil and gas operations”. In other words, if it has to pay import duties, this would inflate its investment costs and affect its competitiveness.
What Exxon does not state is that it really does not matter if those costs are high, since this does not increase the real costs to the company. The oil giant has skilfully outfoxed the APNU+AFC administration by going towards cost recovery. In other words, whatever it spends it is going to recover from the proceeds of the oil that it will drill. The basic economic argument that duties increase investment costs and consequently narrow the investor’s rate of return does not apply to Exxon, since these duties are deductible as cost recovery.
Exxon enjoys uncapped concessions including on all-terrain vehicles. How do all-terrain vehicles count as part of its petroleum operations?
Exxon had an obligation to cap these concessions so as to limit the possibilities of abuse and to limit any manipulation of cost recovery which will end up shortchanging what the Guyanese people obtain for their oil?
Uncapped concessions have been highly criticized in Guyana. It has unfortunately also been represented as a case of lost revenue, which it is not, since there is validity to the argument that without concessions there would be no investment.
Governments, faced with the possibility of concessions ending up being higher than revenues, have therefore sought to limit concessions by capping them at a certain level of investment, since even the best of tax administrators cannot effectively police uncapped concessions.
The GRA has indicated that it will establish a special unit to monitor the Exxon concessions. But to what end? Exxon has uncapped concessions. It can bring in whatever it wants. It has a virtual tax holiday. So why is the GRA attracting onto itself unnecessary administrative costs by setting up a special unit? To what end?
Exxon enjoys tax waivers. It makes no practical sense to increase the cost of tax administration for non-revenue purposes.
The GRA and the National Assembly are impotent against Exxon. Exxon has negotiated clauses which will allow it to avoid the effects of any increased taxation. This places Exxon paramount to the nation’s parliament, because any action by the legislature which materially affects the interests of Exxon triggers a clause which obligates the government to take action to neutralize such effects.
In the case of disputes which cannot be resolved between the parties to the agreement, this goes to arbitration. These arbitration proceedings do not come cheap. Yet, this fact was lost on the negotiators who only negotiated a US$18M signing bonus, the majority of which is set aside for the payment of legal fees should the territorial controversy with Venezuela be placed in front of the International Court of Justice.
Exxon has already begun to file its costs with respect to its operations before it began drilling. The tab is therefore running. It has been running since 1999. This tab has to be paid from cost recovery. It is not GRA’s task to verify this tab. So how does the GGMC intend to verify the pre-exploration bill which Exxon will hand them and which will have to be paid out of the production which is expected to start in 2020.
By the time Exxon’s costs are aggregated, there is not going to be anything much left for the people of Guyana. The oil will be gone just like how the gold went with Omai, leaving only crumbs for the real owners of these resources, the Guyanese people.
This is all the more reason why Exxon should not have limited its concessions to a percentage of its overall investment so as to avoid the possibility of abuse. Guyana’s tax system does not possess the resources to properly monitor the tax concessions given to Exxon. The oil giant, with its superior negotiating skills and legal expertise, has taken advantage of Guyana. It has broken our backs with this one-sided agreement.

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