Large discoveries must be managed for benefit of all – path ahead not without pitfalls

On December 20th, last, Guyana marked its one year anniversary as an oil producing state. And on that occasion, many regional, local and international stakeholders were keen to remind the new oil producer of the herculean task it faces in ensuring that it transforms its nine billion barrels of oil equivalent resources for the benefit of all.
One such person who sought to highlight the importance of this task was Exxonmobil’s Senior Upstream Advisor, Maria Guedez.

In her message to Guyana, Guedez stressed that the nation’s prominence on the world market is rapidly changing. She recalled that prior to oil, Guyana held a low profile in comparison to its South American counterparts. The Senior Advisor said that most folks who never heard about the country, struggled to pronounce its name and frequently confused it with Ghana or Guinea. This she said, changed since the rapid oil discoveries in the Stabroek Block by ExxonMobil. Guedez was keen to note, however, that while Guyana maybe well-endowed with natural gifts, it is a country where there can be limited opportunities.
Guedez then stressed, “…The path ahead for Guyana is not without pitfalls. Yes, large oil discoveries create opportunities, but only if the resources are managed responsibly for the shared benefit of all…”
The Senior Advisor is not the first to make this point over the past few years to Guyana.
In fact, The International Monetary Fund (IMF) has, on numerous occasions, pointed to the many loopholes the government needs to close in its governance framework so that the revenues of the sector can be spent for the benefit of all. But these recommendations are yet to be taken on board. For example, the IMF has stated that Guyana needs to strengthen its petroleum fiscal regime through the revision of the Petroleum [Exploration and Production] Act 1986 (PEPA), the Petroleum [Exploration and Production] Regulations 1986, as well as other tax laws and sector regulations.

The IMF has been keen to note that while the PEPA gives the government broad powers to grant petroleum prospecting and production licences, and to negotiate oil contracts, it is silent on processing and refining of petroleum products, pipelines and other modes of petroleum transportation, as well as how petroleum marketing arrangements are to be observed. In spite of this, the country has been pushing ahead with the marketing of its oil and plans to bring gas to shore.
Additionally, with regard to the lopsided oil deal, the IMF has expressed alarm over the opportunities Guyana gives Exxon Mobil and its partners to be abusive in the way they add interests to its expenses, all of which would be recovered in full.

Left unchecked, the IMF said that this can have a detrimental effect on the oil profits that would be left to share. In one of its reports, the IMF said it is a well-established industry norm to have limitations on how much interest can be charged and deducted on loans by oil companies. It noted that some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps.
Other countries, it advised, go the route of prescribing that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs. Interest on loans to finance exploration is not allowed. Considering the dire consequences this loophole can have for Guyana, the IMF said it would be appropriate for Guyana to limit the amount of debt for cost recovery purposes or disallow interest expense altogether.

Further to this, the IMF has called on Guyana to close other fiscal loopholes in existing Production Sharing Agreements; undertake a policy review of fiscal terms contained in existing PSAs to ensure that these are implemented appropriately, and assess areas of improvement for future investment; design a new generally applicable fiscal regime for upstream petroleum projects that increases the government take and limits the scope for individual negotiations; introduce a revised production sharing mechanism for new PSAs that provide the government with a higher share of profit oil as the profitability of projects’ increases; and publish a model PSA that includes the minimum fiscal terms accepted by the government for future contracts.

The IMF has also called on Guyana to apply tighter ring-fencing arrangements to contracts so that oil companies would be unable to deduct the costs associated with exploring other wells or developing other projects from another field that is producing oil.
The foregoing represents a mere fraction of the IMF’s recommendations which the nation’s leaders have failed to implement, yet continue to tell the nation that every possible measure is being put in place to protect the oil sector.