Why Ring-fencing matters and why it does not
Introduction
This column has had an extensive rest – more than half the year while more and more of the defects and inadequacies of the infamous “ExxonMobil” Petroleum Agreement (PA) have been exposed. Paradoxically, it seems that it is the Government which has been the one to make the admission by way of its engagement with the IMF while Minister of Natural Resources Mr. Raphael Trotman has blamed the Guyana Geology and Mines Commission for the Agreement which he claims he signed “on the advice and direction of the GGMC.” It must be only in Guyana can a senior Minister sign an Agreement mortgaging the future of this country without sanction or consequence.
The admission came in the wake of an IMF country report critical of the absence of ring-fencing in the Petroleum Agreement, a point made by several commentators on the PA but ignored by the same Minister and his Government. Indeed Column # 67 referred to non-ring-fenced cost but not a word was uttered by Trotman or the Agreement’s defenders. I therefore think this is a good point for the reappearance of the Column which it is hoped will run for the rest of the year.
Ring-fencing
This Column begins by a definition and description of the term and proceeds to consider, in the circumstances of the Agreement as a whole, whether ring-fencing really matters. I hope to show that it does and does not matter, paying particular attention to the experiences of Ghana which started oil production only in the last decade. Ring-fencing is neither a legal nor a technical term and different bodies have sought to define it in their own way. The Natural Resource Governance Institute describes it broadly to mean a “limitation on consolidation of income and deductions for tax purposes across different activities, or different projects, undertaken by the same taxpayer.”
In practice it means that in computing the profits of an enterprise, in this case one in oil activity, only the expenses directly referable to that enterprise or oil activity can be deducted from the income earned from that field. Where there is no ring-fencing the oil operator can use the profit/surplus from a profitable operation to carry out exploration activities elsewhere thus reducing the distributable profit/surplus. Let us look at an example of a hypothetical profitable field with a surplus of say $1000. In such a case, the Government and the Oil Company each receives $500 each (payable in oil).
Let us reflect the fear that in order not to share such a high surplus with the Government, the Oil Company decides to expend $400 on exploration activities unrelated to the productive well but within the Contracted Area. If that sum can be charged against the $1,000, the profit is reduced to $600 leaving $300 for the Government and $300 for the Oil Company. On the face, ring-fencing could have prevented the expenditure being charged and the Government would still receive its half share of $1,000, i.e. $500.
The wrong issue
I believe the IMF is worried about the wrong issue. The more serious and dangerous problem is that Trotman has given complete tax exemption to Esso and its partners for the eternity of Esso’s operation in the Stabroek Block. What Trotman has done is that he has crippled succeeding Parliaments and generations by a stability clause which will take expensive and heavyweight legal action to unshackle. Like Trotman sought to do with the 2016 Agreement he signed but which the Government hid from the public until the embarrassment of the paltry Signing Bonus he and the Government have again failed to share with the people of this country the Production Licence under which First Oil will flow early next year.
While there is nothing about Trotman’s competence