Countries & their Production Sharing Agreements… Guyana must keep close watch on oil companies’ way of operating – IMF warns

Aug 26, 2018 News

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By Kiana Wilburg

If the Government of Guyana is interested in ensuring the nation is not ripped off in oil deals it signs, then it would be wise to keep a close watch on the modus operandi (way of operating) of oil companies.
This was the advice offered to the Government in May by the International Monetary Fund (IMF). The financial institution said that Guyana’s authorities need to learn from the mistakes made and challenges faced by other countries as they tried to apply Production Sharing Agreements (PSAs) that mostly favour oil companies.
The Fund said that simultaneously, the Government must seek to pay attention to the manner in which oil companies define eligible recoverable costs in an oil deal and how this can affect the country’s profits. The IMF urged Guyana to ensure regular control and audits of costs incurred before recoverability is accepted under PSAs.
It also stressed the importance of the Ministry of Finance and the Guyana Revenue Authority (GRA) working together to effectively define how to cooperate. The Fund said that this speaks to sharing data of a fiscal nature which are regularly submitted by the oil operator. It said that this includes, but is not limited to, statements of costs and cost recovery.
Additionally, the Fund called for Guyana’s authorities to review its PSA model so that all potential operators can know what to expect. It stressed that certain aspects of the PSA should not be left to a Minister’s discretion.

JORDAN AGREES
Finance Minister, Winston Jordan is of the firm view that the existing template for Production Sharing Agreements must be revised. He made this announcement during the presentation of budget 2018.
The economist reminded that for 2017, three additional oil discoveries in the Stabroek block were announced by USA oil giant, ExxonMobil. These were: Payara, Snoek, and Turbot.
Jordan had said that while the quantity and quality of the latter two discoveries were still being assessed, these discoveries have de-risked the basin, which is estimated to contain at least seven billion oil-equivalent barrels, and has resulted in the significant ramping up of exploration activities in other already-allocated off-shore blocks.
In light of these discoveries, the economist said that the Government also anticipates significant interest in exploring the unallocated blocks of Guyana’s derisked, off-shore basins. As such, the Finance Minister said it is imperative that the Government safeguard the rights of the nation to a fair share of resource wealth.
He said that in order to do this, the existing template of the Production Sharing Agreement (PSA) must be revised to be more accommodating to changing commodity prices while maintaining a level of progress that is responsive to profitability.
The Finance Minister said that while the Government strengthens its ability to negotiate more equitable PSAs, key agencies within the recently established Inter-Ministerial Technical Committee on petroleum will continue to coordinate capacity building and interactions with the industry.

TROTMAN UNCERTAIN
While Jordan holds the aforementioned view, it appears that the Government is not certain if it would refrain from the continued use of Production Sharing Agreements (PSA) or strengthen this flawed model.
This was confirmed by Minister of Natural Resources, Raphael Trotman. His comment came on the heels of a Kaieteur News article that was published a few months ago on the lessons Indonesia learnt from using PSAs, a contractual model it is credited with creating.
This arrangement stipulates that the host country will receive its profits after the oil company deducts its operating expenses. The Government of Indonesia thought that this was a wise move in the beginning. But with each passing year, it soon noticed that its cut of the spoils got smaller, the taxes from the oil sector began to shrink and the operators’ claims of deductable expenses was increasing by the millions.
The aforementioned convinced the Government that petroleum companies were inflating costs. The Government tried everything they could to keep oil companies from exploiting this loophole in the Production Sharing Agreement. But every accounting or auditing effort proved futile against the oil giants.
Earlier this year, the country took the decision to move away from the very agreement it piloted.
With this in mind, Kaieteur News asked Trotman if he believed that Guyana would be wise to move in the same direction. The Natural Resources Minister said however that PSAs have advantages, especially for countries which do not have capacities to monitor and be fully involved. He said, “It took Indonesia decades to build capacity and to be able to de-link from it. We can’t compare Guyana with Indonesia.”
At this point, Kaieteur News emphasized to the Minister that it took a staff of over 700 individuals in Indonesia to monitor cost recovery claims by oil companies. The newspaper insisted that surely there is something to be learnt from Indonesia if that point is considered.
The Minister said, “Of course there is something to be learnt from Indonesia. We have in fact, met with officials of their national oil company. We are looking at areas of possible transfer of skills and experiences.”
But as it relates to walking away from the use of PSAs, the Minister said that it is difficult to pronounce on such a matter at this stage.
“We have had the current model reviewed and more reviews are being conducted by international agencies so it’s difficult to say at this moment whether we will walk away completely or strengthen the model we have,” Trotman said.

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