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Understanding, or not understanding Ringfencing

Introduction

Today’s column returns to the very popular topic of ringfencing in petroleum operations. Column 115 appearing in the Stabroek News of November 24 addressed how Belize, a mini-petroleum state, used the industry’s regulator, the legislation and the courts to enforce the principle, to that country’s great credit, quite the reverse in the case of Guyana. Ringfencing is not new to this column, having been the single issue addressed in Column 68 Why Ringfencing matters, and why it does not.

Not that our oil czars are particularly interested in such esoteric, finer point of the petroleum sector, or its administration. Even though they should. The Natural Resource Governance Institute, a non-profit independent organisation describes ringfencing 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.”

To put the concept of ring-fencing in a commonsensical context, it simply means that the revenue from one field, or such revenue earned under one production licence, cannot be used to finance exploration in other fields, even under the same agreement. In applying for a Petroleum Agreement, the oil company – in this case Exxon, Hess and CNOOC – gives an undertaking that it has the resources to explore for petroleum resources and uses this not only to magnify and inflate its risks, but to justify a range of concessions.

Government now investing in Exxon’s exploration activities

Guyana’s forgoing of profit oil necessarily adds to the windfall of the oil companies, allowing them the use what is properly Guyana’s funds to finance petroleum activities. In other words, the government is putting up 50% of the exploration investment – equal to the combined investment of Exxon, Hess and CNOOC – in the exploration, but has no seat at the table, and no say in decision making. And guess what? The Government cannot extract in return, a single change in the concessions available to the oil companies.

I am not sure that Raphael Trotman or Vickram Bharrat was alert to this, but Vice-President Jagdeo must hopefully understand the implications of the practice, beyond its superficiality. Now, if he does understand this but allows it to happen, then he is either reckless of the consequences or could not care less. Yes, we care about our whole country and as a nation are prepared to confront Maduro the Bully. Indeed, five of our finest gave their lives in the protection and defence of this country. This column thanks and salutes them and hopes that their survivors are properly cared for by the state.

Ceding sovereignty

Now, with all our love and respect for our country, its sovereignty and territorial integrity, we have stripped Parliament, the essence of our statehood and sovereignty of its most essential power and function, and that is the power to “make laws for the peace, order and good government of Guyana.” (Article 65 of the Constitution). And how do we do it? By the burdensome stability clause contained in Article 32 of the 2016 Petroleum Agreement.
Here is what that Article states in sub-Article .1 and .2:

“Except as may be expressly provided herein, the Government shall not amend, modify, rescind, terminate, declare invalid or unenforceable, require renegotiation of, compel replacement or substitution, or otherwise seek to avoid, alter, or limit this Agreement without the prior written consent of Contractor.

“After the signing of this Agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted thereunder any increase of or any new petroleum related fiscal obligation, including, but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imports.”

Note, not for one year, five years or ten years but for a minimum of forty years, or more than a generation of Guyanese. And that is without all the force majeure which Exxon will request and the Government will grant.

Conclusion

The Vice President might not have intended it, but every time he allows a variation of relinquishment, unjustified force majeure, or the use of government share of profit oil for exploration, he is effectively changing the spirit and provisions of the Agreement – practically renegotiating it. Yet the Government parrots the canard about the sanctity of contract.

There is simply no plausible excuse for the Government’s adamant refusal to have a Commission of Inquiry into the circumstances of the 2016 Agreement, especially in the light of the Clyde & Co. Report, Granger’s granting to Exxon permission to charge the costs of its Head Office to the Contract, the commingling of petroleum operations and the gas to shore project and the granting of a Licence under the Companies Act to hold land in Guyana, in violation of the Companies Act. With nothing gained in return.

The inevitable conclusion is that in standing up to Maduro, the Government has been commendably courageous, demonstrating fortitude and spine. But when it comes to Exxon, this Government is totally supine.

Belize imposes ringfencing on petroleum companies through its tax legislation.

Introduction

Let me confess to being as surprised as many of the readers of this column, on learning that Belize is in fact an oil producing state! Not a major one – it produces a mere 5,000 barrels of oil per day – following first discovery in 2005. Like Guyana, while Belize has a number of oil contracts, only one company, Belize Natural Energy (BNE), has found and is producing and exporting oil from that country. Just a quick comparison. Companies in that country have up to 8 years to explore for oil, and 25 years to carry out production and pump oil commercially out of the ground. If no oil is found within the eight-year exploration phase, the contract “self-terminates,” meaning it is no longer in effect. These terms are reflected in a Pre-discovery agreement.

In Guyana, companies have up to ten years for exploration, thirty years for production and, for good measure, our politicians think they have to plead with oil companies to give us back what represents our patrimony, and what the law requires them to relinquish, anyway. And of course, we pay the taxes for the oil companies – out of our share of oil production. And to give them a certificate stating that they have paid taxes here, to enable them to fraudulently claim a rebate in their home country! This is the gift that keeps on giving.

Banning offshore drilling

Here is some other interesting information: Belize has banned offshore drilling – by way of a referendum and later by a decision of the Supreme Court in 2013. In Guyana, our practice is to use Sarah Palin’s famous words, “Drill Baby Drill” and do not worry too much about flaring. But what should make our various petroleum czars look worse than amateurs, are the terms under which oil companies operate.

Under Belize law, the first charge on oil revenue is royalty of a minimum of 7.5% for oil and 5% for natural gas; next is the government’s total share of petroleum and then followed by allowable petroleum operation expenditures. That country also has a petroleum surcharge fixed to rising oil prices, and then, after all the above, the profit left is subject to tax at 40%!
Compare that with the outlandish fiscal terms Guyana extended to Exxon and Company in a Post Discovery agreement! And no one takes responsibility, except that one can say that Trotman and Granger were fired.

Back to a real country

But let us get back to a saner and more responsible country. This is how their Courts ruled in a case involving ring-fencing when the oil company sought to charge against the income earned under one agreement the exploration expenditure under another such agreements.

“When a contractor enters into a contract, he is taking a risk as there may not be any production. The expenses incurred for taking such risk cannot be imposed on other Production Sharing Agreements where there is Initial Commercial Production without specific provisions in the Act.”

The Court added: The Legislature would have been specific if it had intended for Contractors to recover expenses from Production Sharing Agreement where there was no ….Production”. The appeal brought by the oil company, Chx Belize Lp against the Commissioner of Income Tax against a demand by the Commissioner for quarterly instalments before including expenses for exploration on other wells, was rejected and thrown out. Accepting the logic of the court, and the basic accounting principle of matching expenditure against related income, the company accepted the decision and paid the amount demanded. Sadly, that would be unheard of in Guyana under these administrations.

Next week’s column will examine the generosity of our agreements and how those in charge seem to be clueless about the nature and impact of not understanding the logic of ringfencing.

Introduction

The Kaieteur News this past Wednesday reported that Minister of Natural Resources Vickram Bharrat as stating that the Government has written ExxonMobil directing that it relinquish portions of the Kaieteur and Canje Oil Blocks. There are two issues which arise from the news report. Exxon is not the Contractor for either of these Blocks. Mid-Atlantic Oil and Gas Inc. holds the Canje Block and Ratio Energy Ltd. and Ratio Guyana Ltd. Exxon is the Operator.

It is not particularly clear on what the letter requires Exxon to do, and why Exxon in the first place. Relinquishments are a function of application for extensions of a Prospecting Licence. If there was no application for extensions, then the full Contract area should be returned to Guyana. Not 20%, not 25%, but everything. These omissions appear to have eluded Minister Bharrat. Mr. Bharrat’s statement raises questions whether he understands what relinquishment is and how the relevant provisions of the respective Petroleum Agreements operate.

How relinquishment works

Each Petroleum Agreement allows for an exploration period of ten years broken down into an initial period of four years and two extensions of three years each. The 1986 Act provided that subject to a petroleum agreement, an applicant for the first renewal of a petroleum prospecting licence, i.e., after four years, was required to give up 50% of the blocks assigned to it, and on the application for a second renewal, i.e. after seven years, 50% of the balance, leaving for the final three years, 25% of the blocks for which the exploration licence remained valid.

Under Regulations made under the Act, the licence holder is required to apply for the extension at the latest within 90 days of the expiration of the prospecting licence. The application must state the work carried out and the amount expended, on the prospecting area for which renewal is sought. If it is for a first renewal, the information is required for the first four-year period and for the second renewal, the application must state the work carried out during the first renewal period.

The application must also contain adequate proposals for work and minimum expenditure in respect of the block or blocks specified in the application, and in particular, details of the programme of work to be performed in the first year of the renewal period.

Janet Jagan

The 1999 Agreement signed by former President Janet Jagan came closest to the law but then came the 2012 Model by President Ramotar and Robert Persaud, which is the cause of many of the problems confronting the country today. That model Agreement left the Regulations in place but set the stage for the agreements which followed, including the two which Minister Bharrat has confused out of all reason. The Model changed the period at which relinquishment kicks in and the percentage of the blocks to be relinquished. In fact, Ramotar and Robert Persaud left it to the oil companies to negotiate their own relinquishment terms and conditions which appear to have been blindly followed by Raphael Trotman.

It is unknown whether Trotman was aware that the 13,535 sq. KM Kaieteur Block was subject to the following relinquishments: 20% of the Blocks in 2017, 25% in 2019 and 20 % in 2022. Then for the 4,808 sq. KM Canje Block, relinquishments of 20% should have taken place in 2019 and another 20% in 2022. These of course, would have been subject to any force majeure applied for. Thanks to the generosity of Trotman, Exxon does not have to relinquish any of its Blocks until seven years plus one force majeure year after June 27, 2016.

The differences in the relinquishment terms are evident from the Table below.

What is frightening is that the 2023 Act leaves it to the Minister to set the relinquishment rules, which should send a chill through the spine of all Guyanese.

Something to think about

Let us look briefly at the overlapping impact of the recently enacted 2023 Petroleum Activities Act. Pre-2023 Agreements are protected by the Stabilisation Clause of which Exxon’s 2016 Agreement is well-known. The Act appears to be silent on its application and impact on petroleum agreements signed before it came into operation. We therefore have Agreements and Licences issued under the 1986 Act and will soon have some issued under the 2023 Act. So far, the 1986 Regulations remain in place but surely, if the Act needed modernisation, the Regulations do as well. That will be interesting, no doubt quite confusing and conducive to hanky-panky. It would be no surprise if the pre-2023 oil companies try to exploit our confusion. It also means that the playing field will not be level, with one law for one set of agreements and another law for another set.

Our politicians wait for problems to arise, rather than be proactive. It needs to think through the problem.

From Destiny to Prosperity Part 4.
Introduction

This column extends to Mr Trotman compliments and appreciation for his publication. It is not a major work and the ten chapters of the book cover just 50 pages. But he does have the distinction of being the Minister under whom Guyana became an oil producing state, and his version of the events leading up to that occasion in 2019, is a matter for current political discourse as well as the historical records.

Prior to the election of the current President, our country has had eight presidents and it is most unfortunate that none of them has had a biography or an autobiography, encompassing their presidency. The same holds true for our past Finance Ministers and foreign Ministers who have served through some momentous episodes in the country’s brief history. It would be edifying and instructive to have read the personal reflections of Burnham to Ramotar and Granger, from Frank Hope to Winston Jordan, and from Demond Hoyte to Moses Nagamootoo. Their contributions might have saved us from that national pastime of repeating the mistakes of the past.

At a broader level, If among our leaders we do not have the culture of writing, how do we encourage reading among the ordinary people?

Indeed, I take this opportunity to give a shout-out to former Ambassador Cedric Joseph, whose tome Anglo-American Diplomacy and the Reopening of the Guyana – Venezuela Boundary Controversy 1961- 1966 is a masterful work, relevant to our response to the wild threat from Venezuela. I would be pleasantly surprised if 10% of our leaders and MP’s have read that excellent 500 plus page book.

The burden

Trotman made it clear in the book that he was becoming tired “of carrying the burden of the agreement alone and wanted to speak out some more.” Apart from the interesting choice of language, in From Destiny to Prosperity, Trotman does more than speak out. He has shifted responsibility for the signing of the petroleum agreement to various persons including President Granger and Minister Greenidge; attributed responsibility for the contents of the 2016 Agreement to the GGMC, as well as seeking legal advice from that body. He does not stop there: for the tax concessions, he not only sought to share the blame with the opposition but suggests that Mr. Bharrat Jagdeo, Opposition Leader, somehow agreed to be silent on the tax concessions. As a result, the book has effectively neutralised and silenced any criticism from the PPP/C about the APNU+AF’Cs generous tax concessions.

Trotman puts a lot of store in honesty and integrity. In fact, the very first words in the book were a quote from the book of the prophet Zachariah “That you should speak the truth to one another…” It does not seem, however, that he held faithfully to the admonition of the prophet. For example, his praise of Minister Broomes and his suggestion that he and Broomes “never got an opportunity to gel”, appears to be in conflict with his having a hand in her being removed from his ministry.

Ignoring Clyde

To me, however, the greatest avoidance of the truth is the complete omission of any acknowledgement or reference to the Clyde & Co. report, which he commissioned, and which reveals that the Paper he took to Cabinet, seeking their approval of the 2016 agreement was written by an Exxon official and vice president Mr. Brooke Harris, who is the peers was one of the persons who bullied the GGMC technical team when it visited Texas.

If the PPP/C truly wanted to see how the 2016 Agreement came about, or wanted to embarrass the members of the Opposition, then the Clyde and Co report is the way to do it. unavoidable.

Trotman states in the book that he had difficulty finding a template for a production license. If that is indeed the case, then he clearly did not read the very Act and Regulations for which he was assigned ministerial responsibility. Those regulations spell out what an application for a production license should look like and what the license itself should contain. Instead, he relied on an unofficial copy “from an African state”.

Forgive the incredulity, but it is hard to believe that Trotman relied on non-lawyers for critical legal advice when he had at his disposal the expertise of Sir Shridath Ramphal and open access to the Attorney-General. Recall that it was Sir Shridath who acted as the guarantor of the Bridging Deed, the instrument used to revive the 1999 Agreement which would have finally expired in 2018. I maintain that that was not legally permissible and that’s what Trotman should have done, if he felt it expedient give Exxon a new Agreement, is that the government should have gone back to the National Assembly seeking a derogation from the requirement which allows only a single Agreement.

Sourced to the book, Column 112 identified what Trotman, with justification, referred to as achievements, of which production in about 4 1/2 years after discovery, and membership of Guyana in the Extractive Industries Transparency Initiative, are standouts. Trotman was clearly slow in moving to have an audit of the pre-contract costs and was badly advised in accepting Exxon’s incorrect total expenditure up to December 2015. But his most egregious failure was his inability to understand the difference in the risks between a pre- and a post discovery Agreement. Trotman ought too, to have moved far more quickly enforce the local content requirements of the 1986 Regulations, if in fact he did know about them.

Conclusion

To Trotman’s and the Granger’s Administration credit, their proposed independent Petroleum Commission would have been in place and the demonstration of incompetence and recklessness evident in the recent US$211 Mn. claim expense fiasco would have been avoided. It boggles the mind that we have a Forestry Commission, an independent Commission for gold, diamond and mining, a Broadcasting Authority, a Civil Aviation Authority, a Rice Development Board, a Livestock Development Authority and a Tourism Authority, while petroleum, which dwarfs all the other economic subsectors combined, is firmly in the hands of politicians, who seem unfamiliar with the basics of the sector. Not only should we not have been surprised at the fiasco in the Ministry of Natural Resources under weak ministerial leadership and political direction, but we need to lower our expectations.

My rather casual information is that very few of our decision-makers have bothered to learn from the experiences narrated in Trotman’s book. The mistakes during the APNU+AFC’s Administration were made by politicians, not technocrats. We should not be surprised if such incidents and failures recur with great cost to our country while the petroleum sector remains firmly under political control.