Key focus now should be how oil revenues accrued are spent

- IMF’s Chief of Mission to Guyana

Guyana’s Production Sharing Agreement (PSA) with ExxonMobil’s subsidiary is not very different from other frontier oil countries, according to the International Monetary Fund which says that a key focus now should be on how the revenues accrued are spent.

“The PSA is not atypical. There are quite a number of countries that have that. It is to allow the companies who took the risk and spent large sums of monies for the explorations and so on, to allow them a reasonable period for cost recovery…,” Arnold McIntyre, IMF’s Chief of Mission to Guyana said recently.

“I would say that there is nothing atypical here. Some countries have a little bit more than the share in the investment recovery period, some have a little bit less. But the important thing is the share that Guyana gets from the oil revenues, after the initial investment phase, revenue goes up quite substantially and the returns to the country are very significant,” he noted.

The IMF Chief of Mission explained to Caribbean Economist and Advisor Marla Dukharan, during an interview, that a lot of the monies go back to the companies to compensate for the risks and to allow them to recover cost and then profit oil is looked at.

But he reasoned that the ire expressed by some persons here was not unique and is understandable. “These things are always very difficult. You have a country that finds a very substantial resource dealing with a large international company that has come with all the technology”.

He reminded that in Guyana, profit oil is shared 50/50 so after cost recovery, Guyana will from the onset get about 12.5% profit oil and 2 percent royalty, for a total 14.5 percent. This figure has been challenged recently on the grounds of how the PSA has been drawn up and the access by Exxon to oil for its operational use.

Clarifying an error in the IMF’s report, McIntyre said, “There is a mistake in the table of our staff report, when we try to look at the present value because we look at the present value over the entire life of the project”. He said that it should be from first oil next year to about seven years after since after that time, “Guyana’s share goes up quite substantially”.

McIntyre also echoed elements of the IMF June report which said that government had expressed concerns about ring fencing for future contracts.

According to the Concluding Statement of the 2019 IMF Article IV Mission, “authorities have indicated their concerns that the absence of a ringfencing arrangement in the Stabroek (Block) Production Sharing Agreement (PSA) could potentially affect the projected flow of government oil revenues.”

Possible liability

The absence of a ringfencing arrangement in the 2016 PSA has for years been discussed as a possible liability of Guyana’s developing oil sector. Such an arrangement would’ve put “a limitation on consolidation of income and deductions for tax purposes across different activities or different projects undertaken by the same taxpayer.”

The admission of the ring-fencing lacuna was seen as a further indictment of Minister of Natural Resources, Raphael Trotman who presided over the renegotiation of the PSA with ExxonMobil’s subsidiary, EEPGL without addressing a range of key issues. Trotman had at one time described the new PSA as a tweaking of the earlier one but his handling of the process has come under severe criticism for not addressing matters such as ring-fencing, relinquishment of oil blocks, higher royalties and a bigger signing bonus. His being relieved of responsibility for the sector was seen in some quarters as a response to the various problems with the renegotiated PSA. Critics had said that the renegotiation was done without a single recognized expert on the Guyanese side capable of matching wits with ExxonMobil.

In a February 2018 column published in the Sunday Stabroek, economist Dr Clive Thomas noted that in the absence of a ring-fencing arrangement contractors such as Exxon are able to deduct exploration and development expenditures from each new project/well against income from those projects/wells already generating taxable income.

Further, he stated, as petroleum areas mature (because they are mined out), this discourages new investors entering the sector. Particularly, if those investors do not have income against which they can deduct their exploration and development expenditure.

McIntyre said that said that the focus for Guyanese now must be to hold government accountable that the revenue earned goes to enhancing the lives of the people.

“The arrangement is in place, the focus for Guyana now has to be on ensuring the returns it is going to get (which) are very substantial indeed are used efficiently to raise living standards and the level of development in Guyana. That has to be the focus,” he said.

Impressed by the vocal stance and concerns raised by the private sector, civil society and other groups, the International Monetary Fund plans helping to enhance the governance mechanism to ensure that the calls are not in vain.

“The opinions of the stakeholders in Guyana are very strong. I found the stakeholders; private sector, civil society, unions and others, very knowledgeable about their country …a common thread was the management of the oil revenues and ensuring that the people of Guyana benefit from this,” he said.

Both the David Grangerled APNU+AFC coalition government and the PPP/C opposition have given commitments to the IMF for the governancestrengthening policies and measures to be in place to ensure that the monies transfer into social and development uplifting of the populace.

McIntyre made reference to the strides made by Guyana already when it joined the Extractive Industries Transparency Initiative and would have already had one report submitted.

“We did not find any lack of commitment on the part of the government to strengthening the government apparatus. When we met with the opposition party, we heard similar sentiments expressed there as well,” he said.

“The governance apparatus is critical and it is not only the disposable income that is going to be important to the Guyanese but it is going to improving access to education and health that is going to be very critical as we see from the development needs,”