Guyana paid $7.8B last year in interest on ExxonMobil leases

Jun 28, 2021 News

Will continue to pay more if loophole is not closed – Chris Ram

Kaieteur News – Following his recent review of the 2020 financial statements for ExxonMobil’s subsidiary, Esso Exploration and Production Guyana Limited (EEPGL), Chartered Accountant, Christopher Ram has discovered the extent to which Guyana is losing billions of dollars due to another gaping loophole in the 2016 Stabroek Block deal.
In his column titled, “Every Man, Woman and Child in Guyana Must Become Oil-Minded” Ram noted that significant portions of Esso’s capital expenditure are financed by leases. But what is more alarming is the fact that Guyana is saddled with servicing the interest on those leases which for 2020, is a whopping $7.8B, up from $345 million in 2019.

Chartered Accountant, Christopher Ram

Unless Guyana amends the provision in the Stabroek Block deal that allows all loans and the accompanying interest rates to be recovered, Ram categorically stated that Guyana will continue to suffer the same fate year after year.
Kaieteur News would have previously reported on the International Monetary Fund (IMF) as saying there is no economic logic for allowing this. The IMF even advised the former APNU+AFC Government to prohibit oil companies from recovering the interests and other financing costs. The IMF had even urged Guyana to ensure its production sharing framework explicitly states that this is not allowed. The financial institution had said that this would be an important step for Guyana as it would be closing a potential loophole for inflated costs via inter-company financing. However, nothing was ever done.
In agreement with the IMF was former University of Houston Instructor, Tom Mitro. In an interview with this publication, Mitro said this arrangement leaves Guyana open to the abusive use of debt by the operators, since Guyana is essentially standing all the costs.
During an exclusive interview, Mitro said, “The treatment of loan interest varies by country and situation. Countries like the USA that have only an income tax on oil and no production-sharing do allow tax deductions for interest on debt of oil companies. However, countries like the U.K., Angola and Nigeria that have royalty and special petroleum tax regimes, do not allow tax deductions for interest costs of oil companies.”
The Petroleum Consultant added, “This is due partly to the fact that these governments offer certain investment tax incentives already, such as tax credits or special allowances, and they view interest on tax deductions as unnecessary or duplicative. In some PSAs, they do allow interest as part of cost recovery, but that is no longer a common practice. If it is allowed, it is vital to establish strict rules that prevent potential abuse.”
Mitro said that the most common approach is setting a maximum debt to equity ratio that effectively limits the borrowing to no more than 60-70% of the capital costs. Also, Mitro said that these regimes may limit the repayment period of the local computations so that interest isn’t excessive.
Another common practice, the official pointed out, is to cap the rate of interest. In this way, Mitro said that governments avoid companies pushing a lot of their corporate debt at inflated rates into the local project, merely in order to obtain cost recovery benefit at the expense of the government.
Mitro said that there have been notable cases of abuse such as Chevron in Australia where the authorities accused them of charging interest to their local affiliate at a rate that was well above their actual borrowing rate merely to obtain tax recovery benefits in Australia.