Why is renegotiation of ExxonMobil’s contract so important?

Sep 18, 2022 News

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By Zena Henry

Kaieteur News – The conversation on any change, renegotiation or altering of the 2016 Production Sharing Agreement (PSA) between Guyana and the Stabroek Block oil consortium has picked up steam once again, now that a document, an addendum to the PSA has surfaced and proves that a change was made to the agreement two years after it was signed by the former Coalition Government.  The addendum, which holds signatures that include that of former President David Granger and former Exxon CEO, Rod Henson, specifies that the two percent royalty Guyana is supposed to be getting off the top is not recoverable by the oil companies as an expense.

Politicians on all sides have agreed strongly that the 2016 agreement is not suited to serve the best interest of the country, but they have also maintained the ‘sanctity’ of the contract and the existence of a stability clause that protects the provisions already made in the agreement. To change the contract now, some have also said, will not look good for Guyana as that move could impact investors’ confidence in doing business here. The conversation on a better oil deal for Guyana has even taken a turn to exchanges on drawing down more from the oil industry through a robust system of polices, mechanisms, laws and equipment to help improve oversight and management of the sector, rather than to renegotiate.

However, the addendum provides a specific alteration to the contract itself and is now a part of that 2016 agreement. That means at some point, the parties, the Government and oil companies, got together and agreed to add something to a provision within the PSA. The PSA says at Article 31.2 Miscellaneous that ‘This Agreement shall not be amended or modified in respect except by written agreement entered into by all the parties which shall state the date upon which the amendment or modifications shall become effective.’

Since this Article leaves space for renegotiations through a collective decision to do so, the outstanding question is whether the Government has ever approached the consortium to come back to the bargaining table. It is clear through the addendum, that the previous Government took the oil companies back to the bargaining table, hence the statement by Attorney-at-Law and Chartered Accountant, Christopher Ram, who exposed the addendum document, indicating that the PPP Government should take the example of the previous Government and demand renegotiation of the oil contract.

The word, renegotiation, has been making the rounds and has been on the lips of all commentators local, regional and international, who believe that Guyana shortchanged itself in the oil agreement. But why is renegotiation of the Exxon Contract so important?  Those pushing for change to the PSA say it is important because it will help Guyana to correct some of the oppressive provisions that are causing the country to lose more money than it should from its oil endowment.

Some of these areas where change could be extremely effective in Guyana getting more revenue is the specification of non-recoverable expenses by the oil companies, the implementation of ring fencing, adjusting the tax payment arrangement, the monitoring of oil company cost, and the audit timeline, to name a few.

Specification of non-recoverable expenses

Under Section 3, Annex C of the PSA, 3.2 lists costs that could be recovered by the oil company only with the Minister’s approval while 3.3 lists costs not recoverable under the agreement. Professionals within the oil sector, in particular those from Trinidad and Tobago urged Guyana to address the cost recovery clause by ensuring it is pellucid on what the oil companies could recover and cannot since they will find ways to recover every cent spent. It was in fact the spirited discussions on whether the two percent royalty was recoverable by the oil company that led to the addendum being revealed, and showing ultimately, that not only did the previous Government get Exxon to agree on not recovering the royalty, but it also caused Exxon to go back to the bargaining table to effect such a change.  Trinidadian officials had told the Kaieteur News during their oil conference in the twin island nation months ago that Government needed to watch what the oil companies are recovering and to have it stated clearly what they can recover or not. The officials said it took Trinidad some 60 years before it realised that the oil company at the time was recovering the royalty that it was paying Trinidad- the owner of the resource.

Adjusting the tax payment arrangement

In the Stabroek Block PSA, Guyana has agreed to, under the taxation provisions, pay ExxonMobil’s share of Corporation and Income Tax. Clause 15.4 (a) of that PSA stipulates that the Minister of Natural Resources agrees that a sum equivalent to the tax assessed to be paid by the Minister to the Commissioner General of the Guyana Revenue Authority (GRA) on behalf of the contractor—ExxonMobil Guyana – 15.4 (b) of the clause states too that the Minister agrees that Government’s share of profit oil delivered, “…shall be accepted as payment in full for the contractor’s share of Income Tax and Corporation Tax.” The Minister is also expected to cause receipts from the Guyana Revenue Authority (GRA) to be issued to the oil companies proving that they paid their taxes here when they did not. For the period 2019 to 2020, Guyana is said to have given away $327B in tax exemptions. The GRA said that unless policy changes are made in the oil sector, it predicts the exemptions will only continue to balloon. Of an important note also, is that while the global oil industry is benefitting from high oil prices, Guyana cannot increase its take from the large sums of unexpected cash that is now available due to higher crude prices. While some oil producing nations have implemented windfall taxes on oil companies, Guyana it is believed, must adhere to the current PSA where the Government has said it cannot impose any new taxes without the agreement of the oil companies.

Implementation of ring fencing

The absence of ring fencing provisions in the PSA is seen as a major weakness within the 2016 agreement. Regulars within the oil and gas industry have argued that the lack of a ‘ring fencing’ provision acts as a subsidy and allows the contractor to charge Guyana for the cost of new wells even before they start producing oil. Simply put, ‘ring fencing’ in the PSA would have stipulated how the oil companies could treat revenue from the different projects it is developing. Guyana so far, is set to have some 10 FPSOs pumping crude during the life of the industry. This means 10 different projects will be on stream, and without the ‘ring fencing’ provision, it means that Guyana has failed to specify how the oil companies will handle the revenue from each project.  The Institute of Energy Economics and Financial Analysis (IEEFA) headed by Tom Sanzillo, had said that without the ring fencing provision, ExxonMobil and its partners are able to deduct costs associated with either developing a new oil project or drilling an exploratory well, and all of those expenses could be charged against any project such as the Liza Phase One or Two projects that are currently producing. At this rate, he said that Guyana will not realise its oil gains before 2030s, if at all.

Monitoring of oil company cost

Guyana has the opportunity to verify and audit the oil companies’ expenses to ensure that the bills handed over are true. But the country is urged to pay closer attention to the companies spending and to access information ahead of the audit to increase vigilance of oil sector expenditure that will be recovered before Guyana gets its share of profit oil. Finance professionals are adamant that the efficient monitoring of costs could save Guyana millions if not billions of US dollars should the country have a team of relevant professionals tracking oil spending and keeping up with the numerous transactions.

Vice President Dr. Bharrat Jagdeo is adamant, however, that Guyana cannot engage in real time monitoring of costs since this is not catered for by the 2016 PSA. He contends that real time monitoring would require the Government to be involved in the day to day affairs, co-managing alongside the oil companies- rights he said Guyana does not have. Section 7.1 of the PSA states clearly, however, that the Natural Resources Minister could request cost from the oil companies on a monthly or quarterly basis; thus allowing Guyana to have ahead of the audits, data on oil company spending that auditors could begin to verify before the audit period. Jagdeo has said that monthly and quarterly reports on costs, is not real time monitoring but accepts the benefits of having the oil bills before the audit.

Increase in audit timeline

The accounting provisions in the 2016 Stabroek Block agreement says that Guyana only has a two-year window to audit all costs expended by ExxonMobil and its partners, Hess Corporation and CNOOC Petroleum Guyana, in a fiscal year. If that timeframe runs out, the country has to accept as correct, all costs incurred for the said year. Since Guyana failed to audit in a timely manner, the costs ExxonMobil and its partners incurred for the Liza Phase One and Two projects, the oil companies can fully recover over US$3.5B and US$6B respectively. It is also able to recover without any challenges, US$460M, which was spent prior to the signing of the 2016 contract. Oxfam America, a social justice organisation and the International Monetary Fund (IMF) have both advised Guyana that the timeframe to audit the oil company expenses is too short. They told Guyana that given the nation’s capacity deficiencies, the two-year deadline the Government has accepted in the PSA, along with the fact that it can only do one audit per year, is not sufficient. They stressed that the timeline should be extended to afford Guyana more time to verify and audit the oil company spending, thus ensuring that the expenses of the operator is not bloated to reduce Guyana’s share of profit oil. When asked about this topic, Minister of Natural Resources Vickram Bharrat, as well as the VP, claimed that Exxon will allow Guyana to address possibly illegitimate costs despite the expiration of the two-year audit timeframe in which Guyana would have been allowed to object to cost. It was highlighted that while Guyana has a mere two-year audit timeframe, Kenya reserves the right to complete its oil sector audits within seven years, while Peru has a time limit for four years minimum and the USA, three years minimum.

These are some of the provisions, politicians have argued, that allowed the oil consortium to make an investment in the country. Along with the political and territorial uncertainties that came with the country, the friendly oil company PSA was said to have helped in offsetting risks.

However, to add more perspective to the oil sector story, it should be understood that the petroleum industry is a capital intensive one, meaning heavy costs are incurred to explore and then produce the commodity. All businesses seek to maximise profit, so the oil companies are known to find ways to squeeze the most out of countries, especially when they fail to negotiate well. Yet, on top of having a lucrative agreement, oil companies will seek ways to further increase profits within various areas of the industry using both legitimate and illegal methods.  It is for that reason that auditing expenses, for example, is so important. There are also guidelines in this sector, standards and norms that chart a way for efficient management and oversight of industry. And these implementations are recommended to be done in the earliest stage of the sector’s development, so as to not disrupt mutually agreed upon provisions that could affect operation and most importantly, revenue in the future. Outside of renegotiation, Guyana has been urged to up its overall management and oversight capacity by increasing its professionals and experts in the area of environmental protection and finance in particular.

The Coalition Government by the time it left office had devised and had in Parliament three key legislation namely, the Petroleum Commission Bill, Local Content, and the Natural Resource Fund. They had secured at least two loans and one grant from the World Bank and IDB to upgrade its human resource to specifically tackling the oil industry. With a total of over US$30 M from the banks, focus was to be placed on capacity building for key state agencies including GRA, GGMC, EPA, and Ministry of Finance, among others. The current Government has made slight changes to two of the laws before passing them, but did not implement the Petroleum Commission, an independent oversight and management body responsible for the oil and gas sector. The current Government is yet to fully utilise the capacity building loans.

 

 

 

 

 

 

 

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