‘Free oil’ in Exxon contract more generous than taxes, royalty lost

‘Free oil’ in Exxon contract more generous than taxes, royalty lost – Chris Ram

Jun 25, 2022 News

I am not entirely satisfied that these concessions are in fact permitted under the Petroleum Exploration and Production Act but who cares? We fight for political power but nonchalantly give away our patrimony.

Kaieteur News – Under the provisions of the Production Sharing Agreement with Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana—free oil given to the operator works out to be more generous than the taxes and royalty being lost through the provisions in that contract.

Chartered Accountant and Attorney-at-Law, Christopher Ram

The findings were documented in an oil sector analysis penned by Chartered Accountant and Attorney-at Law-Christopher Ram, who observed that in the PSA at Article 14.1, it provides among other things that:
“The Contractor shall have the right to use as much production as may be needed in any Petroleum Operations within the Contract Area and also within the transportation and terminal system. In the event of third party usage of the transportation terminal systems, the quantities so used or lost outside the Contract Area shall be proportionate to aggregate use of that transportation and terminal system. All quantities so used or lost shall be excluded from any calculations of entitlement pursuant to Article 11.”
Describing the provision as generously misleading, Ram posited that “Article 14.1 is more generous than the Taxation and Royalty Article by allowing deduction from gross production the fuel equivalent used not only in the Contract Area of 26,806 sq. km. but in an enlarged transportation and terminal system.”
He suggested at the time, “with our petroleum people showing a frightening mix of unwillingness to learn with an apparent inability to learn, the Agreement sets us up for a very lopsided arrangement.”
Ram posited too, “I am not entirely satisfied that these concessions are in fact permitted under the Petroleum Exploration and Production Act but who cares? We fight for political power but nonchalantly give away our patrimony.”
As it relates to the royalty and taxes lost, this publication recently reported that in addition to the foregone earnings lost as a result of Guyana paying taxes on behalf of the oil companies, the amount due to the Guyana Revenue Authority was also lessened, since the royalty payments are tax deductible.
Additionally, Tom Mitro, a former director of the University of Houston’s Global Energy, Development and Sustainability programme, and former Chevron executive with decades of experience negotiating international contracts has argued that it is additional benefits in the PSA that caused the contract to be lopsided in favour of the oil companies.
He argues that the country is losing primarily through the deductions being made by the operator and not necessarily in the profit sharing aspect of the deal.
His views were recently shared in a Forbes Magazine Energy report captioned “As Guyana’s Oil Business Booms, Could A Potential New Deal With Exxon Loom?”
In that publication, Mitro highlighted that it was the many other negotiable clauses in the contract, they were established in favour of Exxon – an approach that most of Guyana’s peers have not agreed to.
He cited as example, that one such provision allows Exxon to recover all interest on loans borrowed to fund the development of related oil projects. In practice, Mitro said, this means that the operator and its partners are able to charge Guyana for the cost of borrowing from their affiliates with no limits. “Contracts typically have cost recovery mechanisms, but usually with limits,” Mitro said, explaining that without written limits, companies can abuse the amount of borrowing they do within the conglomerate.
Another provision of the 2016 PSA highlighted by Mitro, allows ExxonMobil Guyana to not have to pay any income tax on their profit share, and that the government will provide a receipt that can be used for tax deduction purposes elsewhere.
Additionally, it was noted that there is a clause that allows Exxon the right to get cost recovery oil right from the beginning, to cover the future decommissioning and abandonment of the project at its end. These costs will not be actually incurred for several years.
This publication last week had reported that already, for 2020 and 2021, ExxonMobil and its partners, Hess Corporation and CNOOC Group, have recovered a whopping US$355.7M for decommissioning costs which would be incurred in another 18 years for the Liza Phase One Project.
According to Mitro, “In this case, the government is giving Exxon something of value – oil – to cover Exxon’s future costs.”
According to the international expert, “it is unusual to pay upfront for a future expense because of the recognised time value of money.”
He, in the article, posted that Exxon’s experience and deeper knowledge of contracts likely strengthened their negotiating position, while on Guyana’s side, domestic politics also played a role in the deal cut since the negotiations came just before a contentious election, and the promised revenue was advertised as offering a better future for Guyana.
Additionally, it was noted that, “it also came right before Exxon publicly announced that results from a second exploratory well indicated that Exxon would recover more than twice the amount of oil it had originally expected.”