‘Guyana has right to change oil contract’- New Int’l Report

Oct 17, 2023 ExxonMobil, News, Oil & Gas

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“Guyana, as a sovereign state, has the right to exercise its legislative power, and the right to enact, modify, or cancel any law at its own discretion. It can be argued that by deciding to invest, the investor takes the business risk to be faced, with changes of laws or even likely to be detrimental in its investment, notwithstanding this stabilization clause. A prudent investor knows that laws will evolve over time.”- Int’l Report

Kaieteur News – The Government of Guyana (GoG) has been reluctant to amend the lopsided terms of the 2016 Production Sharing Agreement or Contract (PSA/PSC) signed with oil major, ExxonMobil and partners, stating that this country must abide by the ‘sanctity of contract’ principle to avoid any legal repercussions.

However, a new report compiled by eight specialists, with decades of experience in the sector, has recommended that Guyana enact changes, since the very core of the agreement goes against general international petroleum industry practices. The ‘Oil and Gas, Natural Resources, and Energy Journal’ (ONE J) report published in May 2023 by the University of Oklahoma, College of Law Digital Commons, examined the ‘Evolving Trends in Production Sharing Agreements & Cost Recovery Systems’ of eight oil producing nations, including Guyana.

Brazil, Indonesia, Malaysia, Trinidad and Tobago as well as Angola, Ghana and Kazakhstan were also included in the report. One of key findings in the document as it relates to Guyana a relative new emerging frontier oil and gas producer, was the lopsided nature of the very agreement. It underscored the fact that the Stabilization Clause in the 2016 contract only mentions protecting the interest of the Contractor (ExxonMobil). In this regard, the report noted: “this is unlike an economic equilibrium clause which protects the interests of both parties.” Consequently, the report noted that contract is not in line with modern trends.

Guyanese have been protesting against the lopsided deal, calling on Government to effect changes. Former Minister of Natural Resources, Raphael Trotman, who entered into the agreement with Exxon on behalf of the country in a new book had cited his support for a renegotiation of the deal. As an Attorney-at-Law, the ex-Member of Parliament (MP) noted that the contract was not cast in stone.

Meanwhile, on the other side of the political divide, former President Donald Ramotar also signaled his support for a better oil deal.  In spite of the calls from Guyanese and international experts, the People’s Progressive Party has made it clear that the contract terms will remain.

Article 32 of the Exxon contract, which lists out conditions for ‘Stability of the Agreement’ states at 32.1 that, ‘Except as may be expressly provided herein, the Government shall not amend, modify, rescind, terminate, declare invalid or unenforceable, require renegotiation of, compel replacement or substitution, or otherwise seek to avoid, alter, or limit this Agreement without the prior written consent of Contractor.”

The agreement goes on to say at 32.2 that “after the signing of this agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted there under any increase of or any new petroleum related fiscal obligation, including but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imposts.”

Upon examining this provision, the report opinioned  that Guyana has a right to make changes as necessary, arguing that investors should not be immune to risks in business. It stated, ‘Guyana, as a sovereign state, has the right to exercise its legislative power, and the right to enact, modify, or cancel any law at its own discretion. According to the report, it can be argued that by deciding to invest, the investor takes the business risk to be faced with changes of laws or even likely to be detrimental in its investment, notwithstanding this stabilization clause. A prudent investor knows that laws will evolve over time.’

Taxes

Apart from the “freezing provisions” in the ExxonMobil contract, the report goes on to flag the “generous” taxation policy enjoyed by the company. It noted that an International Monetary Fund (IMF) Assessment Report in 2017 indicated that the contract has the lowest Average Effective Tax Rate (AETR) of all the fiscal regimes evaluated. To this end, the specialists said, “This observation strengthens the argument that the fiscal terms offered in the agreement, are very generous to the investor and that the contract is lopsided.”

Arbitration

Meanwhile, another section of the report that delved into the settlement of disputes provision found that the contract does not adhere to industry best practices. It explained that the contract provides for the International Centre for Settlement of Investment Disputes (ISCID) arbitration under Articles 26 and 32.4; whereas Article 26 provides for Sole Expert and Arbitration.

“The issue here is whether these provisions are enforceable and the proper interpretation of Article 32.4 of the ExxonMobil PSC under the Guyanese law, the governing law of the contract,” The study cautioned. It went on to point out, “Unfortunately, Articles 32.4 and 26 demonstrate that the ExxonMobil PSC is lopsided and arguably in favor of protecting the investor interest. Repeatedly, in the PSC, there is mention of protecting the contractor’s economic benefits while no mention is made of protecting the interests of the State.

Ironically, while the contract makes mention of “generally accepted customs and usages of the international petroleum industry”, and states that the contractor and sub-contractors shall operate in a manner as is ‘customary in the international petroleum industry, in accordance with good oil field practices,  it can be argued that the very core of the contract does not adhere to general international petroleum industry practices.’

About the authors of the ONE J Report

The study on PSAs and Cost Recover was compiled by Eduardo G. Pereira, Reg Fowler, Thomas Stephens, Alicia Elias-Roberts, André Lemos, Wan Mohd Zulhafiz Wan Zahari, Reyhan Kamil and Nurzhan Kakimov. The specialists together boast decades of experience in the petroleum sector. For instance, Eduardo G Pereira is a professor of natural resources and energy law as a full-time, part-time, honorary, associate, adjunct, researcher and/or visiting scholar in a number of leading academic institutions around the world. He has been active in the oil and gas industry for more than 15 years and is an international expert on joint operating agreements.

Reg Fowler is a legal consultant with more than 25 years providing English international law advice to oil majors operating in the UK, Russia, Kazakhstan and Africa. Meanwhile, Alicia Elias-Roberts is currently the Deputy Dean in the Faculty of Law at the UWI St. Augustine Campus in Trinidad and Tobago. She teaches Oil and Gas Law and International Environmental Law at the University of the West Indies (UWI), St. Augustine Campus.

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• Contract, lopsided, oil, PSA, Report

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