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Chatham House Advisor says…Model PSA should have tight cost recovery provisions, sanctions, require future contracts be subject to new laws
By Kiana Wilburg
While the Energy Department is still to release the new model Production Sharing Agreement (PSA) it has been working on for the last few months, Chatham House Advisor and Local Content Expert, Anthony Paul believes that there are at least 12 key elements which must be included in that document to safeguard Guyana from significant revenue leakage and abuse.
These fundamental provisions Paul recommended are contained in a report he wrote on the request of the United Nations Development Programme (UNDP). That international organization had commissioned this report for the Government. It was handed over to the administration in 2016.
Local Content Expert and Chatham House Advisor, Anthony Paul
The Principal Consultant of the Association of Caribbean Energy Specialists Ltd. said that Guyana can readily, and should require in its new model PSA, that all contracts be subject to new laws and regulations and not immune to ring fencing provisions which allow costs from unsuccessful wells to be offset against those that are.
Further to this, Paul recommended that Guyana needs tighter cost recovery provisions. In this regard, he said that Guyana needs to determine what can be recoverable and non-recoverable based on international best practices. Along these lines, he said that there should be transfer pricing controls and suitable sanctions included in the model PSA.
Paul also said that Guyana’s model PSA needs to have stronger local content and capacity development requirements, and if possible, have it attached as a caveat for being able to keep the exploration or production license.
Furthermore, the Consultant emphatically stated that Guyana’s model PSA needs to have clear rules on the disclosure of the beneficial owners for oil companies involved, capital gains tax, methods to be used for the accounting of all expenditure and where documents should be held, as well as the international benchmarking costs that would be used.
The Chatham House Advisor also said that it would be in Guyana’s best interest to tie the model PSA to signature bonuses, aggressive relinquishment clauses, and the right to refusal of farm-outs or farm-ins following a thorough evaluation of the technical and financial capability of the firm as well as its strategic fit to Guyana.
Also, the Consultant suggested that the new Model PSA should allow the government to have retained equity or carried participation in all new licenses.
FISCAL PACKAGE
The coalition administration made several missteps during the review of the Production Sharing Agreement (PSA) with ExxonMobil. As such, local critics and several international organizations have said, and continue to say that the country could have gotten better fiscal terms which would have led to a greater take of the oil profits for the State.
With the damage already done, the International Monetary Fund (IMF) is one global watchdog that has called for the government to put together a model PSA with the minimum fiscal terms or package to be accepted for future contracts. It does not believe that the fiscal terms should be negotiated on a case by case basis.
The Fund noted that the fiscal package should include the maximum cost recovery ceiling, government’s share of the profit oil, the tax obligations of the contractor, tax benefits or concessions for the contractor and sub contractors.
The IMF said it is crucial that Guyana decides what is going to be its fiscal package for future contracts. It also highlighted that the laws framing Guyana’s petroleum fiscal regime would have to be amended since they date back to the 1980s. According to the IMF, the legislative framework is highly discretionary leaving key fiscal terms to be defined in PSAs, and lacks provisions for activities other than exploration and production.
The IMF also noted that the fiscal regime was designed at a time when there was little information about the geological prospects in the country, and the authorities were probably interested in attracting investment in exploration activities.
However, given the de-risking of the basin following recent discoveries and the growing interest of international oil companies in Guyana’s petroleum sector, the IMF stressed that the authorities should consider reforming and modernizing the legal and fiscal framework for new investments in the sector.
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