Oil companies could potentially exploit loophole to recover 10% royalty for new blocks

Aug 08, 2023 News

– as Govt. only lists signature bonus, training fees and financial support for social projects as non-recoverable in draft oil law

Kaieteur News – The Petroleum Activities Bill 2023 which is expected to replace Guyana’s 1986 oil law demands the payment of royalty from oil companies. However, it does not explicitly state that this cost cannot be recovered.

Should such a loophole be preserved in the law, it could be potentially exploited by oil companies that would have to pay a 10 percent royalty for future blocks.

This 10 percent royalty represents a significant increase over the two percent being paid on oil production in Guyana’s Stabroek Block. In that offshore concession, ExxonMobil leads a consortium where they are producing approximately 400,000 barrels of oil per day from two projects.

While the draft legislation does not state that royalty is not recoverable, it clearly does so for three other categories of payments. At Part VII of the proposed law dealing with revenues and financial guarantees, it states that a signature bonus, a term applied to the sum of money a company offers the government upon signing an exploration or production contract, shall not be cost recoverable.

At another section, it is noted that “A petroleum exploration, petroleum production licence, or petroleum agreement shall provide for the annual payment of a training fee during the period of the licence or petroleum agreement. The training fee shall not be cost recoverable.”

In terms of financial support for projects, the Bill states, “A petroleum exploration licence, petroleum production licence or petroleum agreement may require a licensee to establish a programme of financial support for environmental, social and other projects to be funded by the licensee, which shall not be cost recoverable. The licence or petroleum agreement shall establish the terms of the programme and the amount of financial contribution payable by the licensee.”

With respect to royalty, the proposed law states that the holder of a petroleum production licence shall pay to the State, royalty in respect of the gross petroleum produced in the production area.

Where the holder of a petroleum production licence fails to pay any royalty due to the State by the due date, or any further time allowed by the Minister, the proposed law states that the official may, by notice served on the licensee, prohibit the removal of any petroleum from the production area concerned, or from any other production area subject to a licence held by the licensee, until all outstanding royalty in arrears has been paid inclusive of interest accrued or until an arrangement has been made, and accepted by the Minister, for the payment of the royalty in arrears.

The Bill also states that interest in this case is to be applied at a rate of six percent per annum unless otherwise prescribed by the Minister.

Furthermore, any person who contravenes a notice for payment of royalty shall be guilty of an offence and shall, on summary conviction, be liable to a fine of $20 million together with imprisonment for three years.

Additionally, the Minister may, on application of a licensee, and after consultation with the Minister assigned responsibility for finance, by order—remit, in whole or in part, any royalty payable by the licensee; or defer payment of any royalty by the licensee on such conditions as the Minister may specify in the order.

The proposed law was laid on the National Assembly last week and is expected to be debated on Wednesday.

If successfully passed, it will mark the completion of one of the remaining tasks authorities said would be completed before accepting bids in September for the nation’s first auction. That bid round is set to feature 11 shallow water blocks and three deep water concessions.

The passage of the new oil law will also complement two modernized oil contracts that the government is still refining. Those new contracts have appropriately designed terms and conditions that will govern the shallow and deepwater blocks.

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agreement, ExxonMobil, Guyana’s Stabroek Block, petroleum exploration licence

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