Exxon contract silent on whether royalty is recoverable

Jun 27, 2022 News

– but clearly states what can or cannot be deducted

Kaieteur News – The Production Sharing Agreement (PSA) that Guyana signed with ExxonMobil subsidiary Esso Exploration and Production Guyana Limited (EEPGL) and their partners for the Stabroek Block, Hess Guyana Exploration Limited is very specific on cost recovery.

Under the terms of the PSA signed in 2016, up to 75 percent of the gross production of crude oil can be deducted as cost oil for expenses.
In that PSA, there are essentially two categories, spending that can be recovered by the contractor, “without the Approval of the Minister,” instances where deduction can be made subject to the approval of the minister. A third category exists however where there are very specific exceptions where there is no recovery whatsoever such as provided for under Article 3 of the PSA which demands a Guarantee to be paid over to the state shortly after signing.
Another specific spending that has been blocked for deduction out of oil such as penalties to be imposed on the company by a Guyana court, or the costs related to arbitration. Other specific spending that has been explicitly spelled out as not for recovery is that of costs incurred as a result of negligence on the part of the oil operator.
In total, in the Annex of the PSA, which outlines which items are specifically not to be recovered, there are seven such instances. Another aspect of the criteria for recovery or not can be gleaned from the charges that have been identified and specifically earmarked for Ministerial Approval.

These include, Commission payments made to intermediaries, contributions or donations to organisations in Guyana, and expenditure on research into, and development of new equipment and techniques for the oil operations. There are also a total of 13 wide-ranging clauses, with even more sub-clauses highlighting in detail what the company is allowed to recover without the approval of the minister ranging from surface rights cost in acquiring the oil block to decommissioning costs to be used some 20 years later.
In such detail is the breakdown of spending that from holidays and transportation of staff, travel and expense of expatriate staff. Charges for payments for services and the hiring of affiliate companies have been catered for in the PSA as being recoverable, purchases of materials to run the operations. There is even a provision for the recovery when buying used goods. The contract says those can be recovered providing the item purchased is had at 75 percent of the cost of a brand-new item. Rentals, duties, levies, taxes, insurance and losses, legal expenses, training costs, general and administrative costs, production costs, development costs, exploration costs, pre contract costs and even interest payments have been identified as being recoverable without the approval of the Minister, “including any other assessments and charges levied by the government in connection with the petroleum operation and paid directly by the contractor.”
Royalty is not mentioned a single time when it comes to what is recovered with or without the approval of the minister or explicitly barred altogether.
Commissioner General of the Guyana Revenue Authority (GRA) Godfrey Statia over the weekend in an attempt to provide some clarity on the matter of royalty had said, even though Section 3.4 of Annex C, vests the power in the Minister to determine the recoverability of an expense not covered under the provisions of Section 3, “such discretion has not been exercised by the Minister relative to Royalty.”
He did confirm that royalty is not explicitly mentioned as cost recoverable under Annex C, Section 3.1 (without further approval of the Minister) or 3.2 (with approval of the Minister). Further, it is not mentioned under Section 3.3 of Annex C as a Cost not Recoverable under the Agreement.”
The section pointed to by Statia which he attributes to cater for royalty, reads, “Other costs and expenses not covered or dealt with in the provisions of this Section 3 and which are incurred by the Contractor in the conduct of the Petroleum Operations are recoverable subject to the approval of the Minister.”