Guyana signs on to absurd arrangement with Tullow/Eco-Atlantic, CGX and Ratio - 1 % royalty subjected to cost recovery

Guyana signs on to absurd arrangement with Tullow/Eco-Atlantic, CGX and Ratio – 1 % royalty subjected to cost recovery

Mar 28, 2018 ExxonMobil, News

Minister of Natural Resources, Raphael Trotman

By Abena Rockcliffe-Campbell
Because of the “tricks”—like gold plating, transfer pricing and transfer mispricing—most often played by oil companies in the calculation of profit oil, many countries consider royalty to be the fixed revenue once oil prices are stable. This is simply because royalty is off the top.
Azerbaijan, Nigeria, Qatar, Indonesia, Trinidad and Tobago, Canada, Uganda, Chad, Ghana, Papa New Guinea, the United States of America, England, and Norway all have contracts stipulating that royalty will be paid off the top.
Guyana has dared to be the exception.
Guyana’s royalty, based on the agreements signed with at least three companies, is being lumped with the country’s share of profit oil, which makes the royalty subject to cost recovery. This is extremely unusual in the oil industry.
An examination of Production Sharing Agreements (PSA) that two Governments of Guyana signed with different oil companies revealed that these contracts were signed with Eco-Atlantic and Tullow, CGX Energy Inc. and Ratio Energy Limited.
One of the many common clauses in these contracts states, “The Government’s share of Profit Oil specified in Article 11 includes royalty payable by the Contractor at the rate of one percent (1%) of Crude Oil produced and sold, and delivery to the Minister, pursuant to Article 14 of his share of Profit Oil equivalent to royalty shall constitute payment of such royalty in kind.
“Within one hundred and eighty (180) days following the end of each year of assessment receipts evidencing payment of Contractor’s royalty shall be furnished by the Minister to the Contractor stating the amount and other particulars customary for such receipts.”
Kaieteur News revisited the 1999 agreement that the government had signed with ExxonMobil, which has the same oppressive clause. However, the clause was omitted from the 2016 contract with ExxonMobil.
It is now clear that in negotiating the one percent royalty increase in 2016, the clause was removed.
This reality gives credence to what Kaieteur News learnt which is that all of the oil contracts, which have been signed by APNU+AFC government as well as the PPP/C government are similar.

Minister of State, Joseph Harmon

In fact, this newspaper understands that the model that was being used over the years dates back to the 1970s. Guyana has just about 10 existing contracts with various oil companies, which are being released periodically.
These have all been modeled from a contract that the country had with Mobil, a company that had a presence in Guyana during the time of former President, the late Linden Forbes Sampson Burnham.
It was that same template that was reportedly used to formulate the ExxonMobil 1999 PSA.
However, when ExxonMobil announced that it found oil in commercial quantities offshore Guyana in 2015, and the APNU+AFC government took another look at the contract, a decision was taken by government to review and renegotiate the contract.
In fact, this newspaper carried an article back in 2016 that quoted Minister Raphael Trotman, expressing government’s desire to do same. That article can be read here: https://kaieteurnewsonline.com/2016/06/29/govt-reviews-17-year-old-contract-with-exxon-mobil-but-agrees-it-provides-relative-protection-as-constituted-2/.
ExxonMobil, knowing the advantageous provisions of the 1999 contract, took a firm stance that it was not willing to renegotiate that contract. The company had grounds for that position. Nevertheless, the government manoeuvered a one percent increase in royalty, which in ExxonMobil’s view, was negligible; it does not hurt the company in anyway.
But, that meagre increase and the inclusion of a signature bonus, which is also trifling in the grand scheme of things, were predicated on an agreement to extend the life of the contract beyond 2018. Government also managed to negotiate the removal of the lumping. ExxonMobil’s only lien on Guyana’s two percent is an uncapped transportation cost.

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