IMF gives advice to help Guyana garner windfall taxes from Exxon and others

Sep 11, 2022 News

…as oil companies receive big $$$ in last 15 years

By Zena Henry

Kaieteur News – United Nations Secretary General Antonio Guterres in early August called for oil producing countries to put in place windfall taxes to curb the ‘grotesque greed’ of oil and gas companies making huge profits from increased costs of the fossil fuel commodities. “I urge all governments to tax these excessive profits and use the funds to support the most vulnerable people through these difficult times,” the Head of the global organisation had stated. It was highlighted that not only are the windfall taxes necessary to ensure nations get a piece of the increased profits, but to break the power of oil cartels deliberately maintaining low production which drives up product cost.

To further address the issue of more money for countries and their citizens, the International Monetary Fund (IMF) published, just days ago, guidance for policymakers on options for taxing windfall profits. The summary of the IMF document : “Taxing Windfall Profits in the Energy Sector”, states that the surge in fossil fuel prices in 2022 has generated substantial windfall profits in the energy sector and policymakers in many countries are exploring policies to tax part of these profits. Excess profits can be taxed therefore, by tax instruments targeted at economic rents, [any payment to an owner or factor of production in excess of the costs needed to bring that factor into production] that avoid discouraging investment and limit any impact on further price increases. It continued that “many fossil fuel producing countries already have an adequate rent-capturing fiscal instrument in place (while) others may want to consider introducing a permanent tax on windfall profits from fossil fuel extraction that should be more cautious about temporary and possibly poorly designed windfall profit taxes. “Given the importance of encouraging decarbonatisation of energy generation, it seems counter-intuitive to introduce exceptional tax measures on renewable electricity generation,” the Fund highlighted.

It said that the revenue surge in 2022 has boosted profits for many energy companies but also increased pressure on households and businesses. “The need to raise revenue to support fiscal measures to alleviate the associated pressure from higher fuel prices has sparked renewed policy interest in the taxation of windfall profits in the energy sector, and some countries have introduced exceptional tax measures in response.

The note published, “provides guidance for policymakers on options for taxing windfall profits and presents an overview of the current practice for taxing windfall profits—or more generally, economic rents—originating from the extraction of fossil fuels.”

A recent report by BMO Capital Markets, a banking subsidiary of the Canadian Bank of Montreal, said that oil and gas producers are expected to book record cash flows while offering the best return on capital employed (ROCE) in 15 years; noting that stronger oil and gas prices will be the key driver of record cash flows in the industry.

The subsidiary had stated too that the oil companies generated a record US$300 billion of free cash flow last year, compared to just US$17 billion in 2020, and now, cash flows are set to increase further as energy commodity prices rally. It said that despite the rising costs of production and inflated costs along the supply chain, the oil and gas sector offers compelling value for a “select subset of producers” with vastly improving returns profiles.

A recent report by the UK Guardian stated that big oil companies and the Organization of the Petroleum Exporting Countries (OPEC) are holding the world to ransom by not letting “…a good crisis go to waste.” It said that a new study calculated that the oil and gas industry has made more than US$2.8B a day in profits over the past half-century. “In the second quarter of 2022, Exxon posted a profit of $17.9B, the highest any publicly listed oil company has ever reported. Chevron hauled in $11.6B, while Shell reported $11.47B and BP $9.3B, its biggest windfall in more than 14 years.”

The report continued that National oil companies such as Saudi Aramco saw year-on-year profits rise of 90 percent during the second quarter. The Saudi kingdom raked in a cool $88B during the first half of 2022, while Norwegian’s Equinor paid $3B in dividends last month, and France’s Total tripled its income. Glencore, the world’s largest coal shipper, made record profits and will pay shareholders an additional $4.5B.

“While shareholders and executives reap the benefits of this crisis, families struggle with exorbitant fuel and energy bills on top of climbing food prices. The UN reports that 50 million people in 45 countries are facing famine,” it was highlighted. The UN secretary had condemned the oil companies saying it was immoral for corporations to be making record profits at a massive cost to the poorest communities and the climate.

“The combined profits of the largest energy companies in the first quarter of this year runs close to $100 billion,” he had said, “I urge all governments to tax this excessive profit and use the funds to support the most vulnerable people through these difficult times.”

Guyana, one of the newest and most promising of oil producing nations has refused to implement windfall tax on ExxonMobil and its partners. The country’s Vice President Bharrat Jagdeo has offered that because of fiscal arrangements in Guyana’s oil contract agreement, it would be a breach to impose the tax on the massive returns being enjoyed by the companies.