Tax regimes, contractual terms must enable Govt. to realise full value of its oil resources

Sep 24, 2018 News

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– say Int’l Bodies, as appeals continue for improved provisions in Guyana’s petroleum agreements

By Kiana Wilburg

Resource extraction can be a significant source of revenue for a government. But for this to happen, the government must balance obtaining a high share of the value of the resource with terms attractive enough for capable companies to invest.
This was recently pointed out by the Natural Resource Governance Institute (NRGI), an independent nonprofit organisation dedicated to improving countries’ governance over their natural resources. Since 2015, the institution has been providing advice to Guyana’s authorities.
According to the Institute, finding the balance between a high return for the country and attracting investors, is tricky, and requires effective governance on four tasks. It said that the first is setting fiscal terms that are neither too high nor too low and that provide a suitable share of both the risk and return of extraction operations. It said that the second is creating a legal framework that provides sufficient assurances to investors, but which is not so rigid that the assurances prevent the government from responding if economic circumstances change significantly. The third, NRGI said, is ensuring that authorities collect the full amount of revenue set by the fiscal terms. The fourth is to ensure that government officials are held to account for each of these tasks.
NRGI explained that a fiscal regime comprises a set of terms that dictate how much companies should pay to a government in taxes and other types of payments such as royalties and production shares. It noted that a well-designed fiscal regime ensures that companies pay as much revenue as possible while ensuring that investors find that country attractive to invest in, through payments that are timed according to the country’s needs and consistent with the government’s desired rate of exploration, development and production. It said, too, that a well-designed fiscal regime also attracts capable investors, promotes greater resource discoveries, controls production costs, and creates competition for resource licences, which in turn promote greater revenues.
Additionally, NRGI said how fiscal terms are set within the law is important for two reasons. First, the legal structure can assure investors that the fiscal regime they invest under will not change significantly over time. Second, setting terms in legislation or regulation that is generally applicable and transparent reduces discretion and helps prevent officials from setting terms that are in their own interests, rather than in the interests of the country.
NRGI noted that legislation also provides equality between taxpayers, can significantly reduce transaction costs, and help ward off claims of special treatment. While these two objectives are important, the Institute said that there is a balance between fixing fiscal terms within the law and allowing enough flexibility to change terms as circumstance evolve.

NRGI is not the only institution that has called for Guyana to adopt a more aggressive tax regime and improved contractual terms for oil and gas. The International Monetary Fund, the World Bank and the United Nations Development Programme have also voiced their concern in this regard. President David Granger promised the media some weeks ago that every aspect of the oil and gas industry will be reviewed by the Energy Department, which is housed in the Ministry of Presidency.
REVIEWING THE MODEL
It was on Saturday that Head of Guyana’s newly established Energy Department; Dr. Mark Bynoe noted that there will be moves to review the existing model of the Production Sharing Agreement (PSA). He told Kaieteur news that this will be done to ensure Guyana gets the highest value for its resources.
Dr. Bynoe said, “We currently have a PSA and it is what we used in the case of Exxon. As you would understand, we want to ensure we review that in its entirety because there will be things that will need tweaking and that is understood. The idea is to have a model PSA which is more contextual to our current reality and where we are going.”
The official added, “That model PSA, once it is in place would be looked at by the Department (continuously) and it will be applied and tweaked where necessary.”
Dr. Bynoe also sought to stress that the PSA would not be a one-size-fits-all approach. He said that there would be times when it will need to be amended depending on the context of the situation that obtains.
He elaborated, “What I am saying is that it will depend on the context of the situation. Let us say for example, you have in land wells that you have no interest coming forth, except for one person who wishes to pursue some exploratory action there. Do you think an open market tender is the best route to go? (No) So that is all I am saying. It will depend on the situation, location, context and everything.”
Dr. Bynoe added, “What we are interested in ensuring is that Guyana gets maximum returns on its resources and that those resources or the benefits derived there from would redound to Guyana. The entire focus is to ensure we are getting the biggest bang for the buck.”

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