Exxon’s contract on 2% royalty misleading as Guyana bears the burden – Chris Ram

Jun 24, 2022 News

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– Guyana bears the burden

Kaieteur News – With the revelation that Royalty being paid to Guyana by ExxonMobil Guyana is in fact being recouped by the US-based, operator of the Stabroek Block, it would be apposite to note that the country was warned about the misleading nature of the Production Sharing Agreement (PSA) at least three years ago by Chartered Accountant Christopher Ram.

He had at the time—September 2019 even before ExxonMobil Guyana began production offshore Guyana warned that the PSA at Article 15.5 suggests that the payment of the royalty is by the contractor but “that is at best misleading.” Royalty, he argued “is not being paid by the contractor but, like any other expense, is borne by the Government as well as the Contractor.”
He had posited that because royalty is a deductible expense to arrive at profit oil, the Government bears half the cost of the two percent royalty.
Ram at the time had contended that the word “royalty” has a host of meanings but in the business or commercial sense it is used to refer to moneys paid for the sale or use of a capital asset owned by another.

He noted too, it is not uncommon to see the word used in relation to intellectual property, including artistic and literary works, and in the mining sector, it is used to describe the payment made to the owner of resources for the extraction of some natural resource whether renewable – such as timber, or non-renewable, such as precious stones, bauxite, manganese or petroleum. Qualifying his position further with regards ownership of Guyana’s oil, Ram pointed to the Petroleum (Production) Act and noted that on the enactment of the 1986 Petroleum Exploration and Production Act, it left two sections, including one that stipulates “The property in petroleum existing in its natural condition in strata in Guyana is hereby vested in the State, and the State shall have the exclusive right of searching for and getting such petroleum.”

On the matter of changing that aspect of the arrangement, the Chartered Accountant and Attorney at Law noted that at Article 32.1 it dictates. “After the signing of this Agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted thereunder any increase of or any new petroleum related fiscal obligation, including, but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imposts.”

According to Ram, “this is the inheritance which (Raphael) Trotman, (Carl) Greenidge and (David) Granger have bestowed on Guyana. What a shame! All that is left for them to do to complete their generosity is to waive the royalty as they are permitted to do under section 49 of the Petroleum Exploration and Production Act.” According to Ram, “the non-renewable petroleum resources belong to the State and anyone seeking to exploit it must pay a royalty for that right.”
This publication yesterday reported that 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. 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 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. 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 are 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.

Crescendo

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 and the political opposition. 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.
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.

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