Energy Dept. has no justification for doing one-on-one negotiations for oil deals

Jan 28, 2019 News

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…Evidence shows it does not work for Guyana – Dr. Mangal

By Kiana Wilburg

The Energy Department’s intention to have one-on-one negotiations for contracts in the oil and gas sector spells a very bad sign for Guyana, says Oil and Gas Consultant, Dr. Jan Mangal.
The former Petroleum Advisor to the Government said the data exists to prove that these negotiations are highly prone to corruption. In fact, Dr. Mangal opined that there is evidence that Guyana and its negotiators are unable to bargain in the country’s interest. He highlighted that the terms in all of the contracts for offshore blocks already awarded are unfavourable to the country. Dr. Mangal said that if the Department looks at the previous awards, it would see that one-on-one negotiations do not work for Guyana.
He said, “So why would they want to continue doing something that does not work in the favour of Guyana? Is it because of self-interest? The Government and the Department need to learn from the data and learn from the mistakes made, and do things differently now. So they should pursue transparent, open auctions.”
The Oil and Gas Consultant said that the Department of Energy has no justification to be proposing one-on-one negotiations.

The International Monetary Fund (IMF) and more recently, the UK-based anti-corruption body, Chatham House, have advised Guyana’s authorities to eliminate opportunities for one-on-one negotiations on the fiscal elements of petroleum contracts.
Both recommended that the Government put fiscal elements for the sector into standardized laws and regulations. In fact, Chatham House recently said, “Governments should move as many fiscal elements as possible into standardized laws and regulations that apply across licences. Although this can reduce flexibility, it simplifies administrative functions and minimizes the number of fiscal matters that need to be negotiated with each company…”
But the Energy Department has been pushing for the fiscal elements to be addressed in the model Production Sharing Agreement (PSA).
The Head of the Department, Dr. Mark Bynoe, had told Kaieteur News that the model PSA would contain best practices on various fiscal elements such as cost recoverable items for oil firms and auditing deadlines. He said this model would then be used to “negotiate” with oil companies.
Bynoe had said, “What we are seeking to do with the model PSA is not to present an instrument, which would necessarily be used as a one stop shop. What we are seeking to do is to develop a best practice map…
“So we are looking to take from global best practices, what is best suited and we negotiate that …What the model PSA would do is to have the best practices incorporated …and provide scope for negotiations going forward.”
Kaieteur News tried several times to contract Dr. Bynoe to ascertain if at all, these fiscal elements would make it into the nation’s old petroleum laws and regulations. But these calls went unanswered.
Other transparency bodies such as the Natural Resource Governance Institute (NRGI) have also recommended to the nation’s Members of Parliamentarian (MPs) to set fiscal instruments for oil through laws rather than individual contracts.
NRGI said that negotiated, rather than standardized fiscal regimes, are prevalent in the extractive sector. In this regard, it noted that setting fiscal regimes through laws 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 reforms.
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 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.

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