President Granger, Energy Dept sending mixed signals on review of Exxon deal for Stabroek Block

Aug 09, 2019 News

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ExxonMobil’s Production Sharing Agreement (PSA) for the Stabroek Block comes up for review in October 2020. When that time comes, Guyana will have another golden opportunity to discuss with the operators, being ExxonMobil’s subsidiary, Esso Exploration and Production Guyana Limited (EEPGL) , Hess Corporation and CNOOC/NEXEN, those terms it desires to have improved.

At his most recent press conference, Head of the Energy Department, Dr. Mark Bynoe, was asked if this time around, Guyana will have a special consulting team by its side for the crucial review.
This question was asked in light of the fact that the first review which was done in October 2016, left a number of loopholes for significant revenue leakage along with generous fiscal terms that benefit only the Stabroek Block operators.
Dr. Bynoe said that the Department is quite aware that it does not have all the resources contained therein.
“And so, whatever we do as we have been on record as saying, we seek to hire third parties to assist us as we build up that national capacity and that modus operandi is not likely to change,” the Energy Department Head had added.
But it appears that this is not the impression the Stabroek Block operators were given by President, David Granger.
Hess Corporation which has a 30 percent stake in the Stabroek Block has told his investors that the President has promised, publicly and privately, that the contract will be honoured.
In fact, John Hess who serves as the CEO of the American firm is of the impression that the Stabroek Block operators will be able to benefit from the lopsided deal without any tweaks, and for decades to come.
At the Bernstein 35th Annual Strategic Decisions Conference that was held several weeks ago in New York, Hess was asked to say if he believes the government of Guyana will allow the license holders to continue making high returns over the coming decade plus.
This is especially in light of the fact that the country is now aware of the quality of its reserves and the fact that it is not able to benefit from same to a significant degree.
In this regard, Hess said that the license holders have been assured by President, David Granger,` and the People’s Progressive Party (PPP) that they will honour the existing contract. He noted that both sides have told the company this privately and they have said so in public too.

The CEO said, “We also have Exxon as our partner and CNOOC which I think helps us in ensuring the Production Sharing Contract is followed and so, you know, I am not saying the political risk is zero but we feel pretty confident that we can work well with both parties and they want to honour those contracts and that is what we have been told…”

The CEO added, “… All I count on is what the President of the country has told us as well as the opposition and they are going to honour those Production Sharing Contracts.”

INHERENT WEAKNESSES

Since the release of the Guyana-ExxonMobil contract, many industry analysts have said that there are numerous weaknesses which Guyana should address at the earliest opportunity, with the renewal period for the deal being one of them.
The paltry two percent royalty is just one of the many provisions considered by industry analysts to be abnormal and in urgent need of regularization.
Specifically, University of Houston Instructor, Tom Mitro, recently pointed out to absurd provisions which allow expatriates and sub-contractors’ salaries or income to not be subject to tax.
The Petroleum Consultant noted that under Section 15.12 of the PSA, expatriates’ salaries are not subject to Income tax if they don’t spend more than 183 days in country. Mitro said that this is an old trick in the book as the company simply gets many expats to be in rotation to avoid going over the 183 days.
The Consultant stressed that most countries have plugged this tax avoidance loophole that companies have been abusing while noting that Guyana should too in all of the existing PSAs.
With respect to subcontractors’ income, Mitro highlighted that Section 15.10 of the PSA allows for it to be exempted from Corporate Income tax during the exploration period. The Consultant categorically stated that this is somewhat bizarre and should be corrected in Guyana’s model PSA.
Mitro had also told Kaieteur News that many countries have recognized how much they are losing in this regard and are already imposing the tax. He recommended that Guyana does the same.
Other issues Mitro said must be corrected include paying the contractor’s income tax out of the country’s share of profits, rectifying the unusually large size of the blocks, upgrading the work obligations contractors have to meet as license holders, increasing the size of signing bonuses, implementing ring-fencing provisions to prevent costs of unsuccessful wells being carried over to that of successful wells, removing clauses which allow insurance premiums to be recoverable, and removing the troubling provision that allows the operators to fully recover interest and financing costs.

 

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