Category: The Road to First Oil

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 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 in 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 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 that can shock the public any further, that can be no excuse for the Government hiding the Production Licence. Not only must this Licence be released immediately but Trotman ought to tell the public whether it was the GGMC that advised on the Production Licence. The Petroleum Exploration and Production Act and Regulations allow for conditions to be imposed on both exploration and production licences, conditions such as local content and activities permitted to be undertaken by the Oil Companies. In my view, there should be far more intensive efforts and pressure on David Granger who seems to have abdicated all responsibility for the give-away of the Millennium by his Administration.        

Those who seek to protect Granger from this crippling Agreement are doing a disservice to this country and generations to come. If the Granger Administration were to spend a quarter of the time and effort on rectifying the weaknesses of this Agreement as they have spent on frustrating the National Assembly and the Courts on the question of elections, our country would have been in a stronger position by now in relation to Esso. My view is that the Government can easily control the adverse impact of ring-fencing by imposing conditions in each Petroleum Production Licence issued by the Minister under section 35 of the Petroleum Exploration and Production Act. I say each because in my view, the Operators cannot use the single, secret licence issued by Minister Trotman to carry out production in the entirety of the 6.6 million acres in the Stabroek Block. In further support of my contention, there is nothing in the Petroleum Agreement, no matter how liberally construed, which requires Government’s funds to be applied to Exploration Activities. That would be the effect if the Oil Companies were to seek to divert such funds and would be in violation of the Act and the Agreement. Hopefully Trotman has not sold us out on that avenue in relation to the Production Licences.         

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Introduction

This is the case for renegotiation of the Petroleum Agreements between the Government of Guyana and ExxonMobil (“Guyana-Exxon agreements”). In my article dated 8 December 2017[1], I wrote extensively on the nature and types of stability clauses and their pros and cons. Most notably, what the Model Petroleum Contract describes as a Stability Clause embodies the objective to provide assurance to international oil companies that they will be protected from any variation in fiscal or economic policies by governments for a period of as much as thirty years.

In the Guyana-Exxon agreements of 2012 and 2016, the Petroleum Prospecting Licence and Petroleum Agreement, respectively, modern stability clauses are contained in Clauses 32.1 and 32 respectively. In addition to barring the government from amending, modifying or negotiating for changes the agreement, the 2016 agreement purports to bind subsequent Parliaments from doing the same. This is contrary to the rule of law, separation of powers and common sense, and the Israeli decision of The Movement for Quality Government in Israel v Prime Minister HCJ 4374/15 demonstrated that stability clauses can be stuck down by courts if it is found that the clauses defy basic principles of the rule of law. This and other reasons motivated this case for renegotiation, which is both relevant and necessary, at this time.

Points to be considered

The case for renegotiation of the Guyana-Exxon agreements is based on the following facts:

1. The Minister of Natural Resources, Mr Raphael Trotman, had no power to bind the entire country to an unfair petroleum contract, that is, he acted ultra vires.
2. The Government of Guyana, through Minster Trotman, exceeded its powers by seeking to bind subsequent Parliaments.
3. The non-provision for local content is ultra vires the Act.
4. The provision for self-insurance is ultra vires the Act
5. The grant of addition blocks of petroleum by the Minister is unjustified.
6. The payment by the State of taxes payable for the oil companies is discriminatory.
7. The contract was made under duress.

On the first fact, the case for renegotiation contends that the stability clauses contained in the Guyana-Exxon agreements fetter Guyana’s sovereign legislative prerogative as well as Guyana’s permanent sovereignty over natural resources. Deloitte reported that governments in developed countries decline granting stability clauses on the premise that they cannot bind a future government to the policies of the current administration[2]. The Israeli decision referred to earlier, The Movement for Quality Government in Israel v Prime Minister HCJ 4374/15 27 March 2016, the main issue to be determined was whether the Government of Israel in its executive power, had the authority to commit a stability clause which had the effect of binding future Governments, especially where the composition and ideology are different than the current one[3]. The court held inter alia that the actions of government were an affront to basic principles of administrative law against shackling authorities ability to govern. In addition, the court found that the stability clause was ultra vires and therefore invalid, in that it unduly restricted future governments from regulating their own affairs and market thus making the clause undemocratic and unconstitutional.[4] How then do we reconcile the Government of Guyana’s conformity to the Guyana-Exxon agreements with a clause of this nature when legal authority suggests that principles of administrative and constitutional law are being abrogated?

In addition, the address the second issue, the Nigerian case of Niger Delta Development Commission v Nigerian Liquefied Natural Gas Company Limited, Suit Number FHC/PH/CS/313/2005, unreported Judgment, 11 July 2007, in addressing the issue of the legal validity of legislative stability provisions, held that it is unconstitutional for investment statutes to fetter the power of the National Assembly, that is the legislature, from making law, a right acknowledged by the Constitution.[5] In Guyana, Article 65(1) of the Constitution of Guyana provides that subject to the provisions of the constitution, Parliament shall make laws for the peace, order and good government of Guyana. Therefore, the principles of constitutional supremacy dictate that it is the power of Parliament to make law and this is subject to the constitution, and any provision contrary to this constitutional mandate ought to be deemed unconstitutional and invalid. It is therefore my submission that Clause 32 of the 2016 Guyana-Exxon agreement severely impinges on the constitutional powers conferred on present and future Parliaments of Guyana and as such, the case for renegotiation is open.

Special Rapporteur Victor Cedeno on Unilateral Acts of States reported that, in the interest of legal security, certainty, predictability and stability to international relations and to strengthen the rule of law, an attempt should be made to clarify the functioning of this kind of acts and what the legal consequences are, with a clear statement of the applicable law. It is my submission that the actions of Minister Trotman and the Government of Guyana are unilateral acts which purport to bind future governments to an unfair arrangement, and this should be renegotiated.

While certainty and predictability are important to oil and gas arrangements, it is submitted that law is intended to be fair, just and reasonable.  Oxford Institute for Energy Studies (2016) recorded that modern stability clauses are legally workable when they are beneficial to both the government and oil companies. However, the effectiveness of such post 1990-stability clauses in developing countries is questionable particularly where such countries lack the administrative capability, a non-discriminatory and fair tax system, and credibility in general government policy, investment laws and the judiciary.

Similarly, an article published by the Oxford Energy Forum by Curtis Chairman George Kahale on “The Uproar Surrounding Petroleum Contract Renegotiations” highlighted that petroleum agreements should renegotiated when:

1. the agreements were entered upon at a time when the host country was politically or economically weak, or was badly advised,
2. the consequence being a contract that put the host country at a clear disadvantage.
3. Later the country, usually under a new political regime, realizes the problem and seeks renegotiations

While the principle of pacta sunt servanda has often been raised by oil companies to justify the continued enforcement of unfair petroleum contractual terms, Skyes on Oil and Gas Law: Renegotiation notes that the inclusion of a renegotiation clause or negotiated economic balancing clause is important through the oil and gas cycle because it ensures that the parties are not put in to a position which exposes them to exploitation in an unconscionable manner.

There are three well-known renegotiations or industry restructurings in the oil and gas industry over the last few years involved the operating service agreements (convenios operativos) in Venezuela, the gas production contracts in Bolivia, and the renegotiation of the world’s largest production sharing agreement, the one covering the Kashagan field in Kazakhstan. However the case of renegotiation for Iraq left the Iraqi governments undertaking greater risks of compensation and infrastructure than they had before.

On the third fact of the non-provision of local content, it is submitted that as part of fair negotiations, the provision for the supply of only local content of host governments by oil companies is an essential feature of stability contracts. This ensures that on the balance in favour of the government, resources will be utilized by oil companies that can increase the revenue of locals. On the contrary, the Guyana-Exxon agreements demonstrate a deviation from this expectation in favour of all Guyanese. However, there has been no part of the clause that appears unfavourable to Exxon.

On the fourth point, again the Guyana-Exxon agreements is one of a kind in allowing Exxon Mobil to self-insure versus domestic insurance in Guyana, which is an affront to the entire system involved in regulating the business of oil companies and ensuring that Guyana is not exploited.

On the note of the discriminatory taxation provision as contained in the stability clause of the 2016 Guyana-Exxon agreements, the Government has undertaken to pay taxes for ExxonMobil that are otherwise payable for them. While oil companies are ordinarily responsible for paying their own taxes whether under a system of deferral or subsidy, there are no reported cases of governments paying taxes for oil companies. Thus, instead of Guyana earning extensively through taxing Exxon Mobil, the country is instead likely to run into high debt as early as 2020. This is quite unfortunate and beckons the call for renegotiation in a louder and more desperate way. Why should giant oil companies be allowed to rely on unfair terms which affect the economy of a nation? As alluded to earlier, common sense and good faith has been demonstrated in the cases of Venezuela, Kazakhstan and Bolivia to show that renegotiate is ideal is ideal and necessary in unfair petroleum contracts.  In addition, this raises a satellite issue that will be considered on another occasion, that is, the role of the Chief Inspector in ensuring that the Guyana’s oil sector is properly managed[6] and not expose the economy to sudden downfalls.

On the final note of the contract being made under duress, this further justifies that the contract in itself that not satisfy the elements of voluntariness and capacity that are essential features to agreements. The absence of voluntariness in this instance seriously undermines the capacity of the weaker contracting party and also makes the contract voidable.

The case for renegotiation has been considered by the competent courts and demonstrates that an order of court will allow defective petroleum agreements to be reviewable, modified and renegotiated. The case of Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch) considered whether to declare unenforceable a price review provision as an ‘agreement to agree’. Similarly, the arbitral tribunal in Ampal-American Israel Corp. et al v Arab Republic of Egypt (ICSID Case No. ARB/12/11) gave insight into the operations of the termination provisions in a gas sales agreement for non-payment. In these circumstances, it is evident that the Guyana-Exxon agreements cannot arbitrarily or unilaterally remove the jurisdiction of the courts to declare that the agreements are open for scrutiny and interpretation, and can be renegotiated. The question is, who will challenge these poorly drafted and unfair agreements between Guyana and Exxon Mobil, before a court of law?

Conclusion

It is my ultimate and concluding submission that the weaknesses in Guyana-Exxon agreements trigger the case for renegotiation. The stability clauses contained in these agreements are excessively favourable to the oil companies contracted at the expense of the rule of law, common sense and modern governance. Therefore renegotiation is necessary and relevant. This renegotiation is in lieu of the fact that the principles of common sense, the rule of law and pacta sunt servanda dictate that agreements of this nature should be fair, reasonable, non-discriminatory and equal, and observed in good faith. It is my submission that the only stability guaranteed under the Guyana-Exxon agreement is Exxon’s, and this is unfair, unreasonable, discriminatory, and inequitable to the people of Guyana. It is my submission that this agreement was not drafted or entered into in good faith and therefore a competent court should direct that this be done.  

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[1] Article 26

[2] Page 8

[3] The Movement for Quality Government in Israel v Prime Minister HCJ 4374/15 27 March 2016

[4] The Movement for Quality Government in Israel v Prime Minister HCJ 4374/15 27 March 2016

[5] Gjuzi, Jola. (2018) Stabilization Clauses in International Investment Law: A Sustainable Development Approach, Springer: Switzerland pgs 195-196

[6] Article 9