Exxon taking back 2% royalty paid to Guyana

Jun 23, 2022 News

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…‘arrangement’ also reduces taxes due to GRA

Kaieteur News – Esso Exploration and Production Guyana Limited (EEPGL) under its Production Sharing Agreement (PSA) with government, is robbing Guyana in more ways than one, a contention agreed to by Vice President Bharrat Jagdeo, during a press engagement at Office of the President on Tuesday when he described the arrangement as ‘lopsided.’

While differing on the ways with which the defects can be remedied, the Vice President also sought to bring clarity to a looming issue, namely whether EEPGL—ExxonMobil Guyana— can recover the two percent royalty it is supposed to pay to the country, on every barrel of oil ‘produced and sold from the Stabroek Block.’

Confronted with the issue recently, Jagdeo told reporters he did not want to venture a position he would have to walk back on in future and further, it should be a matter best dealt with by the technical people, namely the Guyana Revenue Authority and lawyers. On Tuesday last, however, the Vice President during an almost two-hour long press engagement, used the occasion to venture an answer, therein providing some clarity but in the process leaving more questions than answers.

DEFINITIVE ANSWER?

The question had previously been posed to the Vice President by this publication and on Tuesday, he said, “now I can answer definitively because I have talked, I have spoken (sic) to GRA on the tax side so because the royalty is not cost deductible but it is GRA, based on our laws, are GRA tax deductible but they don’t come out of the cost bank so the contractor has to pay from its share, the two percent royalty to the government.”

This, however, translates to a dilemma, since the first part of the Vice President’s answer that under the Laws of Guyana, the royalty is listed as a tax deductible for tax purposes. What this means is that the royalty is a tax-deductible expense for EEPGL.

This means that the royalty is paid out of ExxonMobil Guyana’s expenses—this much is corroborated in EEPGL’s own financial statements which outline royalty being paid as an expense. A royalty payment in the oil or gas process is a percentage of production paid to the owner of the resource, minus production costs. Royalties are free from costs and charges.

UNANSWERED QUESTIONS

Under the PSA, expenses are recovered by the company out of the 75 percent of oil produced that is set aside as ‘cost oil’ for which recoverable amounts are to be paid. The PSA, does not in any way spell out that royalty is not recoverable, which based on the provisions of the contract, EEPGL recovers its expenses that include the royalty paid to Guyana.
Additionally, the taxes that are supposed to be paid to the GRA, calculated on the income on the oil operations is conversely lessened. This since, the amount of income on which the taxes are calculated on to be paid, is less, since EEPGL’s royalty expense is in fact tax deductible.

As such, it would mean that ExxonMobil Guyana not only takes back the royalty it has been paying to Guyana but the amount calculated as owed to GRA lessened and inherently forgone to the oil companies operating the Stabroek Block.

The Vice President’s assertions, together with recent statements by ExxonMobil, still leave unanswered questions since the law dictates that the royalty be considered a tax deductible expense by Jagdeo and Exxon also claims the amount is paid being from the oil companies’ after tax share. Jagdeo said, “…the contractor has to pay from its share, the two percent royalty to the government” while ExxonMobil asserts in word that the royalty is being paid from its share of profits, its financial lists it as an expense.

CRESCENDO

The explanation as proffered, suggests that Guyana in fact earns more than ExxonMobil, since after cost oil—up to 75 percent of gross production—is deducted to meet recoverable and other operational expenses, the remaining 25 percent profit is then split 50/50 after which Exxon pays the royalty from its share of profit. Its Financial Statements for the past two years (2020 and 2021) however, does not corroborate but instead lists royalty as an after expense collectively with other recoverable costs such as Exploration, Production and Exploration Costs to be deducted from the total revenue in order to arrive at the entity’s comprehensive profit for the year.

The crescendo on Tuesday regarding the nature of the royalty payment comes on the heels of a barrage of uncertainty that had been expressed by senior leaders of government. These include, Jagdeo who, last week, three years after Guyana began producing oil, was unable to provide clarity saying instead, “I don’t want to venture public positions that I may have to walk back on at some point in time so I will be a bit cautious on this,” he told the newspaper.

Opposition Leader, Aubrey Norton was also asked to weigh in on the state of affairs this past week and he too was unable to provide a definitive response. According to Norton when asked, “If it is royalty, it cannot be recoverable,” and was adamant, the Stabroek block PSA doesn’t make royalty recoverable. Former Minister of Infrastructure, and current Shadow Oil and Gas Minister, David Patterson also told the Kaieteur News that the two percent, “is not supposed to be recoverable.” He was of the view based on his understanding of the PSA, Guyana’s two percent royalty is not supposed to be recovered by the oil company.

UNAWARE

Leader of the Alliance For Change (AFC) and former Security Minister Khemraj Ramjattan, submits that during the Coalition government’s handling of the PSA, there was no provision in the document for Exxon to reclaim the two percent royalty. As such, he said he is “unaware” that the payment is recoverable. Ramjattan added too that if the oil company is in fact reclaiming the royalty, it “goes against the contract”, in his view.
Winston Jordan, who was Finance Minister under the last administration, had told the Kaieteur News, “absolutely not,” that the two percent royalty is not recoverable by the oil companies. He even mentioned that the oil company itself has stated that the two percent royalty is coming out of its profit.

Additionally, this publication had reported that in neighbouring Trinidad and Tobago (T&T) instead of the companies paying royalties out of their share of profit oil, the weak oil contracts (PSAs) left that country actually making those payments on behalf of the foreign oil company.

 

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