Jagdeo: ‘No windfall profits for Guyana from higher oil prices’

Dec 13, 2024 News

---

 …says excess profits going towards cost recovery

Kaieteur News- Chief policy maker in the oil and gas industry Vice President Bharrat Jagdeo said that there is no excess profit to gain from increased oil prices as he dismissed calls for the government to institute windfall taxes from ExxonMobil.

At his weekly press conference, held at Freedom House on Robb Street, he made this comment in response to a question posed by this publication in relation to the government not instituting a windfall taxes mechanism despite current oil prices being higher than the average price per barrel, which could have given each of the 300,000 established households here $2M per month. “What kind of economics here you are bringing to me…there’s no excess profit and everything else.”

Jagdeo explained that in the industry projections are made and based on that projection, prices may be higher. However, even with these higher prices, the cost recovery affixed by the contract is 75%.  “It means you’re amortizing the expenses faster so you can get to a higher share of the profit. You’re just amortizing the expenses faster and that’s what’s happening. So if it took you 10 years to amortize the investment at $50, and just to give an example, the price for oil, it may take you 7 years to do it at $75 and that means thereafter you were entitled to 52%, crudely putting it, of their revenue. It’s a simple method,” he reasoned.

On November 29, this publication reported that Jagdeo maintained that his government’s position is that windfall taxes will not be instituted at this time. Windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above average or projected profits. Jagdeo, in response to a question posed by Kaieteur News on why the government is not implementing windfall taxes since it does not breach the existing Production Sharing Agreement (PSA) with ExxonMobil and its partners, said, “I have dealt with windfall profits in the past, and why we believe that windfall taxation should not be pursued at this time. I dealt with it in the past, if you go back and read.”

In May 2022, Kaieteur News questioned the Vice President on the issue and at that time he admitted that citizens in Canada, and the United States had forced their governments to increase their royalties charged to oil operators. In the United Kingdom, the government increased the one-off tax slapped on oil companies. At that time, this publication reported extensively on the changes in the fiscal regimes for the oil operators in those countries. Canada had moved its royalty charged between five and 40%; the US in December of 2021, raised its royalty rate higher than the 18.75% it had been receiving while the UK slapped a one-off 25 per cent tax on the oil companies there. Jagdeo had told the media that the windfall tax that some countries are exploring only came after intense pressure from their populations. However, he explained why the institution of the tax could not be replicated in Guyana.  “We are bound by a PSA (Production Sharing Agreement) with very specific terms on the taxation side.”

Meanwhile, only recently Trinidad and Tobago energy expert Anthony Paul said, “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, an international consultant, in a recent article, made the point that oil companies do not produce oil, nature does. The role of the oil companies is simply to extract the resource. He 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. “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.

(Jagdeo: ‘No windfall profits for Guyana from higher oil prices’)

---

• excess, Jagdeo, profit, PSA, windfall

---