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The myth of equal share (Part 2).

The infamous tax certificates

We recall from Column 119 that while the tax is paid by the Government of Guyana, the oil companies receive from the Guyana Revenue Authority ‘proper tax certificates’ in their names. These certificates are not some paper transactions but grant to the oil companies real economic value and substance since they produce them with their tax returns in their home countries as evidence of having paid those taxes and received a credit therefore. Just as a reminder, the current tax rate applicable to oil companies as a non-commercial company is 25% of their taxable profit.

Other tax goodies

This brings us to another tax benefit. Under Guyana tax laws, subject to any Double Taxation Agreement – which in any case does not apply to any of the oil companies – the remittance or deemed remittance of profits is subject to a withholding tax of 20%. The benefit of the exemption from withholding tax – for itself and its affiliated companies, (cousins and all!) – which is seen from this simple example: a Guyanese resident abroad who owns and leases her house in Guyana for an annual rental of G$100,000 will have to bear Withholding Tax of $20,000 on that amount. If for some reason, the Government agrees not to enforce that obligation, that person benefits from $20,000 – without a receipt! The value of the receipt is an additional benefit.

The 2016 Agreement provides that the oil companies are not subject to any “tax, duty, fee, withholding, charge or other impost, applicable on interest payments, dividends, dim dividends, transfer of profits or deem remittance of profits from contractors, affiliated companies or non-resident subcontractors branch in Guyana to its foreign or head office or to affiliated companies.”

As shown in the table, the value of that benefit is 20% of the 75%, or 15% .

Exclusive of the corporation tax receipt to the Government (into the Consolidated Fund from the Natural Resource Fund), but inclusive of the tax benefits to the oil companies, the Government gets 39.5% and the oil companies get 90%. If we include the tax receipt to the Government, the Government gets 52% while the oil companies benefit to the tune of 90%.

Table of Benefits

	Government	Oil Companies	Total	Government	Oil Companies	Ratio
Share of Net Revenue	37.5%	62.5%	–			1:1.6
Tax Certificate	–	12.5%	–
Royalty	2.0%	–	–
Total	39.5%	75.0%	114.5%	8.6%	16.4%	1:1.9
WHT Waiver	–	15.0%	15.0%
Total	39.5%	90.0%	129.5%	7.6%	17.4%	1:2.3
Corporation Tax received from GRA	12.5%	–	12.5%
Total	52.0%	90.0%	142.0%	9.1%	15.9%	1:1.7

As the Table shows, regardless of what is included or excluded, the oil companies receive far more from their operations in Guyana than the Government of Guyana does, ranging from 1:1.6 to 1:2.3. Or we can put it another way. For every barrel of oil Guyana gets, the oil companies can receive twice as many. Regardless of how it is computed, or what is included or excluded, our total gross share is 9.1%. It is simply amazing that any Guyanese would accept, let alone defend this atrocity.

Net versus gross

One final point. The receipts by the Government are gross of expenses. The oil companies walk away with pure economic value, including the cash proceeds from their share of profit oil. Out of its earnings, the Government has to meet all the expenses of the administration and oversight of the sector. These include the Ministry of Natural Resources, the Environmental Protection Agency, the ministerial audit, the use of the court system to fight Guyanese seeking a fairer deal and better contract administration.

This in no way is intended to suggest that the country has not benefitted from the production of oil. One only has to look at the national budget of which oil revenue accounted for 36% of budgeted revenues in 2023, and significant foreign exchange earnings from which the country benefits. Against these, the economist would consider the externalities arising from oil production. But that is outside the scope of column written by an accountant.

The debate of 50:50 profit share has blinded Guyanese about the obnoxious scale of generosity offered to Exxon and why it is so resistant to talk of renegotiation. Not only do the oil companies not pay any Corporation Taxes, but they walk away with a certificate for the taxes and are exempted from any taxes in Guyana – right up to 2057! Given that this is a post-discovery contract which should not have been awarded in the first place, it might possibly be the worst oil contact ever!

When Exxon threatened Newell Dennison in April 2016 at its Texas campus with no investment without a new Agreement, these were the benefits it wanted to secure. When Brooke Harris, Exxon’s top official, was bombarding Trotman and Legal Officer Ms. Joanna Homer of the Ministry of Natural Resources Ministry, with emails, the objective was no different. When Harris drafted the Cabinet Paper for Trotman, it was no different. And when Exxon complained to Granger that Trotman was having “misgivings”, Granger was blind to Exxon’s objective and the consequences for Guyana.

Over time, the media have unmasked the travesty with which the Granger Administration has shackled Guyana for more than a generation. It can be no excuse that the model used for the 2016 Agreement originated from then President Donald Ramotar and Natural Resources Minister Robert Persaud. To overcome the inconvenience that no oil company could get a second agreement over blocks already relinquished, it is highly unlikely that Exxon and some of our own people, did not have a hand in the concoction called the bridging deed. On top of all of these, Trotman unwisely used a pre-discovery model agreement for post-discovery circumstances. That was a most unforgivable and catastrophic error by the APNU+AFC.

Conclusion

The advertisement by Exxon reproduced in column 119 is more than mere distortions and propaganda. It is an insult to the senses and sensibilities of Guyanese. Not even the British colonisers ever boasted of “building Guyana”. Here, the greatest coloniser of all, aided, abetted and enabled by the current Government telling us that they are building Guyana. They are indeed, if by “building Guyana they mean exploiting our country’s natural resources for a measly 2% royalty, paying no taxes, forcing our government into an international conspiracy to defraud the US IRS, demands absolute security and protection while posing grave risks to the environment and eroding the country’s reputation as a protector of the environment.

I close with this thought. Would a counter-billboard to that placed by Exxon to rebut Exxon’s deception be permitted by the Demerara Harbour Bridge?

The Myth of the equal share – Part 1

Introduction

On the occasion of the first column for 2024, I extend best wishes to readers for an informed and productive year and realisation of the hope of a fairer contract. Readers will recall the promise made in last week’s column to address the myth of the 50:50 share of profit oil under the 2016 Petroleum Agreement. For the research minded, please see sub-article 4 of Article 11 – Cost Recovery and Production Sharing of that Agreement.

Let us begin with the billboard below sponsored by Exxon and prominently displayed at the Demerara Harbour Bridge. It states that Guyana receives 52% of all profits from Stabroek Block – 50% profit share and 2% royalty. Let us forget for a moment Exxon’s reputation for fuzzy math and creative accounting, now adding two disparate and unrelated numbers – net oil profit and gross royalty – to arrive at Guyana’s share! What the billboard does not tell us is what Exxon and its co-contractors will be receiving from the Stabroek Block.

This two-part column will explore what Exxon and partners walk away with, in profit oil and tax benefits, compared with what the Government receives as net profit oil and royalty. Exxon would not admit, let alone publicise, an account of what it and its partners receive because that would expose the mantra of equal sharing of benefits and the information in its billboard as completely false and dishonest.

Guaranteed profit share

The 2016 Agreement sets a maximum 75% limit on recoverable cost in any year, leaving 25% to be shared 12.5% to the Government and 12.5% to the oil companies as a collective. In other words, for every barrel of profit oil accruing to the Government, the oil companies should receive not a barrel each, but one barrel to be shared among the three of them. However, the structure of the Agreement severely distorts this oversimplification being sold to Guyanese. A significant proportion of the costs expended in any period financed by the oil companies to be recovered from oil revenues. Additionally, the recoverable cost for any period includes unrecovered costs from previous periods.

Let us look at an example. If recoverable cost for any period amounts to say 60%, but there are unrecovered costs from the preceding period amounting to the equivalent of say 35% of revenue, 15% of those costs are recoverable in the current period with the remaining 20% carried forward to the next period.

This may help to explain why Budget Speech 2022 could report 69 lifts from the commencement of production in 2019 to December 2021 of which Guyana received only 9 lifts, or just over one for every seven received by the oil companies. In 2022, that situation remained the same, with the Guyana receiving 13 of 102 lifts. In percentage terms, Guyana received 13.04% in 2020/2021 and 12.74% in 2022. The Minister offered no explanation for these astounding numbers. The man who knows the reasons and who keeps the hard-to-audit books is Exxon’s Alistair Routledge, but his lips are sealed when it comes to facts.

Despite all the cant about transparency and accountability, neither the Ministry of Natural Resources, the financial statements of the oil companies nor the ministerial audits have given the public a running account of unrecovered costs. The public therefore is in the dark about how much of the 75% of recoverable costs in any period is made up of unrecovered costs from earlier periods. What the public has a general idea about is that the unrecovered costs are made up of significant pre-production costs, which this writer believes were fraudulently overstated by the oil companies, the low level of production in the early years (2020 – 2021), and the absence of ringfencing. In a ring-fenced environment, the cost in a single field or on a single project is recovered much faster, allowing for higher profits.

The situation is different when there is no ringfencing since costs will always be more than they should be as income is reduced by exploration expenses incurred on some other field or project. For better or worse, and if there are no further “force majeure” extensions of the relinquishments, exploration activities will cease on the expiration of the current prospecting licence in 2027. After that point, only the balance of unrecovered costs and production expenditure will be charged to oil revenue, resulting in higher levels of profit oil. Once this point is reached, Government revenue will increase but so too will the revenue of the oil companies, together with the unlimited tax benefits they enjoy.

First level benefits

As this column will show, even at the first level at which the Government pays the Corporation Tax liability of the oil companies in accordance with Article 15.4 of the Petroleum Agreement, the Government’s real or net share of oil revenue – what remains or ought to remain in the Natural Resource Fund – is 9.4 % (plus 2% royalty) while the oil companies get 15.6%. The money to pay those taxes comes from the Government share of profit oil, hence the deduction from Government and the addition to the oil companies.

The defenders of Exxon and the Agreement like to think, and go so far as to argue, against common sense, that this is all “massa cow and massa bull” stuff. They forget that like all companies operating in Guyana, the Agreement provides that Exxon and its partners are liable to Corporation Tax in Guyana, or that they do not recognise the difference between the Consolidated Fund and the Natural Resource Fund. Even as the tax is “payable” by the oil companies, the Government pays it on their behalf out of its share of oil revenues, while the GRA is required to issue the receipt in the name of the respective oil company, thus adding to their economic benefits under the Agreement. This constitutes an effective tax holiday until around 2057, that is eight times the standard tax holiday period allowed under the Income Tax (In aid of Industry) Act.

Friday’s column will look at other tax benefits including the tax certificate used to deceive the tax authorities in the home countries of the oil companies.