Govt. proposes to plug loopholes for corruption, abusive transactions between oil companies and related parties

Mar 19, 2023 News

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Kaieteur News – One of the most egregious ways oil companies are known to rob countries of billions worth of profits is through related party transactions. In the absence of contractual rules or domestic laws, oil companies and their subcontractors or even subsidiaries can jack up the prices for items that are way beyond market levels. In some cases, it is worse than inflated bills; there are even reported cases of duplicated costs and false invoices.

Acutely aware of how prevalent this practice is in the industry, the PPP/C Government has proposed to implement a strict provision that compels oil companies to conduct their related party businesses in keeping with international prices.

This is specifically outlined in the draft Model Production Sharing Agreements for the 14 blocks that form part of the nation’s first licensing round.

The provision that speaks to this is termed: Arm’s length transactions. It states in the draft documents: “Except as otherwise agreed in writing between the Minister and the Contractor, all transactions recorded in the accounting records shall be conducted on an ‘arm’s length’ basis or on such a basis that may assure that all such revenues shall not be lower and costs or expenses shall not be higher than the international market price for goods and services of similar quality supplied in similar terms prevailing at the time of the transaction in the regional market relevant to Guyana.”

The draft documents also require that regulators have access to information on all transactions for future blocks. It states that the contracted oil companies shall provide the minister with the accounting data and information necessary for such party to fulfill any statutory obligation in regard to Petroleum Operations here.

There are also provisions to ensure that there is proper maintenance of accounting records. Towards this end, the draft documents state that the contractor shall be responsible for maintaining accounting records relating to petroleum operations under the agreement signed and in accordance with the accounting procedures in the deal, accepted accounting practices generally used in the international Petroleum industry and any applicable local law.

Importantly, the documents state that accounting and related records kept under this agreement shall record in sufficient detail and clarity the work performed under the Agreement, the costs incurred, and the quantity and value of all petroleum produced and saved from the Contract Area and not used in petroleum operations.

It was further noted that transactions shall be recorded in such a manner as to provide a clear understanding of the sub-components of each item including, without limitation, such costs as broker’s fees, transportation charges, loading and unloading fees, demurrage, import duties, surcharges and licence fees associated with the procurement of materials and equipment, and applicable taxes.

It should be noted that the proposed terms in the new model PSAs complement the commercial provisions which were released last December by the People’s Progressive Party Civic (PPPC) Government. The main commercial terms include a royalty rate of 10 percent, cost recovery capped at 65 percent, and profit sharing of 50 percent.

There is also a minimum signing bonus required from the bidders of US $20 million for deep water and US $10 million for shallow water blocks.

In terms of tax, the tender provides that a corporation tax of 10 percent and a property tax of 0.75 percent will be levied on the participating entities.

It is worth noting that bidders will be required to commit at least US $1 million per year towards the employment and training of the citizens of Guyana in accordance with the Local Content Act.

In a statement to the media last week, the ministry said the draft Model Petroleum Agreements embody rigorous research and analysis by the ministry’s internal team, and external consultants on all topics relevant to a modern petroleum agreement for Guyana.

The ministry said the process involved a comprehensive assessment of the current petroleum agreement and the identification of best practices relevant to every contractual aspect of a modern agreement grounded in the Guyana context.

To ensure new investments are governed by a comprehensive framework of international best practices, the ministry said there will be an overhaul of the 1986 Petroleum Act and Regulations.

Feedback on the draft model agreements should be addressed to the Minister of Natural Resources and sent to [email protected] with the Permanent Secretary copied, [email protected].

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• Abusive, corruption, Countries, oil, transactions

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