Let National Assembly determine fiscal terms for oil contracts - Dr. Jan Mangal

Let National Assembly determine fiscal terms for oil contracts – Dr. Jan Mangal

Jan 25, 2019 News

Former Petroleum Advisor to the Government, Dr. Jan Mangal is of the firm view that the National Assembly should be the body determining the fiscal terms to be used in oil contracts. He insists that it should not be left to be negotiated on a one-on-one basis by a Minister.
Dr. Mangal said that there is much evidence which supports this. The Oil and Gas Consultant said, “Let the National Assembly fix them or at least fix narrow ranges, because in places like Guyana which have a history of corruption, the more discretionary decision-making left to officials, the higher the risk of corruption. So if a Minister can do a deal that allows for the transfer of billions from the country to the oil company then there is a huge incentive for bribery.”
The former Government advisor said that this incentive needs to be removed, and the way to do it is by fixing these fiscal terms in the National Assembly.
Transparency bodies such as the Natural Resource Governance Institute (NRGI) have also recommended that the nation’s Members of Parliament be in charge of setting fiscal instruments for oil contracts. They even went a bit further and said that these fiscal elements, when decided on, should become part of the overarching law for the sector.
NRGI said that setting fiscal regimes through law increases transparency and accountability, because contracts are more likely to be kept secret. Also, the Institute said that negotiations bring additional opportunities for corruption or manipulation.
Additionally, if the applicable fiscal regime varies from contract to contract, NRGI said it can make monitoring onerous and frustrate the efforts of policymakers to carry out policy ref

Former Petroleum Advisor to Govt., Dr. Jan Mangal

orms.
The international group stated, too, that fiscal regimes should divide risk appropriately between the investor and the state. Uncertainty, it articulated, is inherent in the extractive sector. It said that oil, gas and mineral projects may encounter technical challenges or be affected by unexpected price increases or contractions. As such, the Institute stressed that the fiscal regime should ensure that the State does not end up bearing a share of risk disproportionate to its expected return.

It said, too, that the state should be compensated for the loss of resources, regardless of the profitability of a given operation. NRGI said that this is because oil, gas and mineral resources are finite. It stressed that fiscal instruments such as baseline royalties provide a guaranteed return for the state, even if a project runs at losses.
The Institute also noted that transparency and consistency can help strengthen the state’s position. In this regard, the body noted, “The extractive industries are characterized by significant asymmetries between states and private actors. States own the resources and thus have real bargaining power. However, companies often have more information about the specific parameters of extractive projects and are more sophisticated in tax planning, which can give them the upper hand in negotiations.”
Furthermore, NRGI stressed that fiscal regimes should be progressive. In this regard, it noted that extractive projects can generate substantial rents. It pointed out that rents (sometimes called “windfall tax”) are the financial returns above those a company requires to make the investment profitable.
NRGI stressed that mechanisms to measure and tax a share of windfalls can enhance state returns in times of high profits and adjust to allow for adequate company returns during times of low profits.