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Windfall taxes do not violate petroleum contract – T&T Energy Expert
Trinidadian Energy Expert and International Consultant, Anthony Paul
kaieteur News- “Since all contracts must abide by national law and since such an instrument does not violate existing contracts, Windfall Profits Taxes provide a simple and fair mechanism to ensure that countries get their just dues.”
This is the view of Trinidadian Energy Expert and International Consultant, Anthony Paul. In a recent article, Paul made the point that oil companies do not produce oil; nature does. The role of the oil companies is simply to extract the resource.
Paul explained, “Nature blesses countries with it. Once the oil company removes it, that asset is gone forever. For this reason, countries should realise that they are not just innocent bystanders to the business venture of oil and gas.”
In fact, the Energy Expert described the role of countries as “active contributors,” providing their natural heritage as an asset in the business. This, he noted, makes countries co-investors with a contractor, so that both can make money.
Vice President, Bharrat Jagdeo
“An investor who brings money wants to make profit in proportion to the amount it invests. Similarly, countries should make a return on the investment of their asset, proportional to the value of that asset,” the International Consultant pointed out.
He was keen to note that Stabilisation clauses in contracts are based on an agreed economic model which contemplates a rate of return to the contractor, based on a projected price or pricing formula for the commodity on an agreed market.
However, Paul explained that when the price of the commodity is far higher than the projected price in the economic model, the extra profit is referred to as a windfall. To this end, he noted, “Since the market conditions are generally beyond the control of the producer, it is the commodity itself that creates the higher revenue, not any action of the contractor.”
It has therefore become customary in jurisdictions around the world, including developed countries, to introduce a Windfall Profits Tax to ensure that the owner of the resource gets a bigger share of the profit, in line with the disproportionate contribution the resource makes to the increased revenue, the Energy Expert said.
Further, “Since all contracts must abide by national law and since such an instrument does not violate existing contracts, Windfall Profits Taxes provide a simple and fair mechanism to ensure that countries get their just dues,” Paul noted.
He explained that while a law may be necessary, it is far from sufficient, adding that Guyana can learn a lot from its neighbour in Trinidad and Tobago, where, in spite of excellent legacy policy and legal provisions, poor implementation means that the twin island has been losing billions of dollars each year for more than two decades.
Back in 2022, amid surging oil prices influenced by the war in Ukraine, several top oil producing countries such as the United Kingdom, the United States of America and Canada introduced a windfall tax on the excess profits that were being earned by oil and gas companies.
In Guyana, Vice President and Chief Policymaker for the oil and gas sector, Bharrat Jagdeo noted that this could not be replicated in Guyana since, “we are bound by a PSA (Production Sharing Agreement) with very specific terms on the taxation side.”
To this end, he suggested “if you change the taxation here, it’s considered a breach of the contract.”
Seeking to draw a distinction between Guyana and the ABC countries, Jagdeo suggested that those companies would have been operating for decades in those jurisdictions and as such would have come under the standard tax regime for the respective countries within which they operate.
It must be noted however that Guyana’s PSA restricts Guyana from affecting the expected revenue of the contractor. A tax on windfall revenue would have no impact on “expected revenue” since the tax would be applied to the excess income earned when oil prices are high.
(Windfall taxes do not violate petroleum contract )
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