ExxonM free to recover interest rates without Minister’s approval – oil contract

Nov 22, 2023 ExxonMobil, News, Oil & Gas

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Kaieteur News – Oil major, ExxonMobil is free to recover the interest, expenses and fees incurred on loans for the development of the resources in the Stabroek Block, without consent from the Minister responsible for Petroleum.

This is outlined in the 2016 Production Sharing Agreement (PSA) Guyana signed with ExxonMobil and Co-Venturers, Hess and CNOOC.  Annex ‘C’ of the Agreement, specifically in Section 3.1, which governs costs that can be approved without the Minister’s approval states: “…interest, expenses, related fees incurred on loans raised by the Parties comprising the Contractor for Petroleum Operations and other financing costs provided that such expenses, fees and costs are consistent with market rates.”

The government, despite repeated requests, has been reluctant to disclose the interest rates being charged by the developer.  During a press conference last week hosted by the Minister of Natural Resources, Vickram Bharrat, Kaieteur News specifically asked the Minister to confirm the rate of return on Exxon’s multibillion-dollar investments in the Stabroek Block.

The Minister went on to provide an unrelated answer, explaining that Guyana was not investing in the oil and gas sector.  He said, “The government is not directly investing in the oil and gas sector. That is the misinformation I believe that is being spread and there is this perception among our people, that the government is taking the money and investing in oil and gas but if I ask you as the media how much money did Guyana invest in oil and gas in the oil and gas exploration offshore, we haven’t invested anything. We haven’t invested anything, not a dollar in the exploration, the upstream activities offshore Guyana.”

Meanwhile, Vice President Bharrat Jagdeo in October during his weekly media engagement was asked to bring clarity on the issue when he said he was not going to “confirm anything”.

On Friday, Executive Member of the Alliance For Change (AFC) and former head of the Alliance For Change (AFC), Dr. Vincent Adams called out the government for lacking transparency on the interest rates being charged by the company.

Dr. Adams argued that the loans are being racked up by Guyana like drunken sailors to develop the resources, however the country remains in the dark on the rate of return.
“We ought to know what the magnitude is in terms of what we are paying for because we are the ones who are paying it… we have got to understand and open our eyes and hold them accountable for they should be telling us what those interest rates are,” the former EPA boss reasoned.

He said an interest rate of 10 percent was mentioned in the public domain; however, this is yet to be confirmed by the government. To this end, the AFC described the interest rate situation as “kitchen table economics” since the Natural Resource Fund (NRF) rakes in a mere 1.36% in interest but the country could be borrowing loans at an average 10% interest rate.

IMF advice

Several international organizations, such as the International Monetary Fund (IMF), have warned Guyana about the abuse that can take place when companies are allowed to recover 100 percent of the interest on its investments. In fact, the IMF cautioned in independent reports that Guyana should, as a protective measure, should cap the interest that is allowed for recovery.

In a 2018 report, the IMF said “the treatment of interest expenses in the Stabroek Block PSA is very generous, constituting an important source of possible revenue leakage.” In fact, the IMF said it examined several scenarios which illustrated how “excessive or abusive” oil companies can be in the use of loans to fund oil projects.

The IMF said it examined three scenarios, one of which looked at 75 percent to 100 percent of the development costs for the Liza One and Liza Two Projects in the Stabroek Block being funded by loans with a repayment period over 10 years with a 10 percent interest rate. The IMF said the revenue loss could be as high as US$2.6B. Such a practice, the organization said can have a “detrimental impact” on government revenue.

The financial institution was also keen to highlight the uniqueness of the Stabroek Block PSA, in that it allows the recovery of interest as an expense, irrespective of where the financing is sourced from. It therefore means that instead of using a bank or other traditional sources, ExxonMobil Corporation can provide its subsidiary (ExxonMobil Guyana Limited) in the Stabroek Block with loans, charge an interest, and recover same without worry.

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• Approval, ExxonMobil, interest, investment, rate, recover

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