Author: Christopher Ram

This Article was Published on the 30 July, 2021

The Natural Resource Fund Act is not in operation

Introduction

Thirty months after its passage and assent by President Granger in January 2019, the only thing active about the Natural Resource Fund Act is that it continues to generate controversy. The Act was passed during the lame duck post-NCM administration, a session boycotted by the PPP/C which had successfully brought the No Confidence Motion.

Economist and SN Columnist Dr. Tarron Khemraj recently took the Government to task for its apparent preference for the model of National Oil Fund of Kazakhstan: a country described in a 2020 Freedom House report as a “consolidated authoritarian regime”, where freedom of speech is not respected and whose electoral laws do not provide for free and fair elections. To give some perspective however, that country’s SWF was inspired by Norway’s experience and is therefore not without any redeeming merit.

Oil and Gas Columns 57 and 58 in fact discussed in some detail the concept of the Natural Resource Fund, Guyana’s version of a Sovereign Wealth Fund. Then Finance Minister Winston Jordan was keen to emphasise in the parliamentary debate on the NRF Act that its drafting benefitted from expert international assistance and that it faithfully observed what are referred to as the Santiago Principles which “promote transparency, good governance, accountability and prudent investment practices whilst encouraging a more open dialogue and deeper understanding of SWF activities”.   

There is no argument either about the two most important functions of SWFs: their role in the stabilisation of key macroeconomic variables and the long-term investment of accumulated public savings. About this there should be no real dispute. Nor should the broad objectives be in dispute either: as a savings and investment mechanism; to facilitate diversification and thus avoid the Dutch Disease; and to allow a controlled flow of cash from natural resources into the national budget. As an earlier column had noted, SWF’s have the potential of growing into Sovereign Development Funds. But whether Guyana will ever get there is another matter, based not only on the volatility of oil prices or investment yields but also on the country’s politics which is always partisan and rarely national.

One year after the PPP/C regained power on August 2, 2020 and more than two years after its assent by then President Granger, the Natural Resource Fund Act is not in operation since no date has been appointed bringing it into operation. There is therefore there is no effective or legal requirement that the oil money or any part of it should go into the Account being held in the Federal Reserve Bank of New York. Such a vacuum is dangerous, irresponsible and raises some grave questions.

The Government has three principal options when it comes to the Act – appoint a date bringing it into operation, repealing it with no immediate replacement, or, to give effect to its own preference, repealing and replacing it with a Kazakhstan -type Act. Having not brought the Act into operation for an entire year, it is difficult to see the Government doing so now. And in any case, doing so has implications and consequences: not only to acknowledge and validate an “unlawful Act”, but agreeing to its restrictions on expenditure, which Governments generally regard with disfavour.    

The second option is not only not practical but is likely to cause some concern among the international community. If the Act is repealed with no replacement, the proceeds of royalty and profit oil would go straight into the Consolidated Fund, ready to be spent. That would defeat the whole purpose of inter-generation equity, a foundation principle of Sovereign Wealth Fund. That leaves us with the third option. But that can prove to be a political minefield. There is little in the country that passes for an opposition but Guyanese take their patrimony seriously and for a sizable part of the population oil has now replaced the Kaieteur Falls as our iconic national symbol – for better or worse.

This places the Government in a quandary. It cannot for much longer delay action on the Natural Resource Fund Act which it may want to think is really unlawful, having been passed by a lame-duck Parliament which it felt compelled to boycott. But there is another reason why the Government may not want this Act. Its expenditure controls are considered too restrictive. The President and the Vice-President have already signaled their disfavour with the Act and their preference for the Kazakhstan Model which many argue is too permissive and gives the politicians too much control. To date, the Government has not done any major acts of commission to arouse the ire and anger of the public at large. Having deprived the PPP/C of power for five months, the political opposition lost much credibility, with the corresponding gain going to the PPP/C.

That derived goodwill to the PPP/C is not however inexhaustible. The NRF Act is not only for a single party or a single generation. This contemporary generation owes it to those yet to come to ensure that there are inter-generational savings from oil. The NRF is too important to become a political instrument and must be protected and defended.

Ram’s Note: A number of editing changes were made to this piece subsequent to its appearance in the Stabroek News.

Article was Published on July 16, 2021

Gas to shore project – too many questions yet to be answered

Introduction

Over the past few weeks ExxonMobil has been holding public consultations on an application to the Environmental Protection Agency (EPA) for an Environmental Authorisation for what it describes as a Gas to Energy Project Onshore and Offshore. According to the Project Summary, it includes the construction and operation of a pipeline from the Liza Phase 1 and Liza Phase 2 Floating, Production, Storage, and Offloading (FPSO) vessels to an onshore natural gas liquids (NGL) and natural gas processing plant (NGL Plant). The summary also states that the power plant will be owned and operated by Government of Guyana.

At the same time, the Ministry of Natural Resources is advertising for expressions of interest for what it describes as Gas Related Investments which include:

• Joint participation with the Government of Guyana and Esso in designing or utilising the outputs from an NGL/LPG facility and related facilities.
• Design, construction, and financing of a power plant fuelled by natural gas, where the power will be delivered into the GPL grid.
• Industries that can utilize natural gas for “natural gas driven developments and growth.”

A reasonable reading of the two initiatives is that these are discrete and separate but yet interdependent projects with separate ownership, financing and operations, with their own economic, environmental and financial considerations. Esso is currently engaged in a series of public consultations in which the EPA and the Ministry of Natural Resources play an undefined but over-defensive role. The statutory basis of the consultations however is hazy at best.   

Back to the Agreement

Whether Guyanese is better informed after the consultation is left to be seen, but let us take a step back and look at the provisions of the 2016 Petroleum Agreement on gas. In fact, Column 43 (May 11, 2018) examined and commented on the Article from which this column now borrows. The Agreement provides that Associated Gas produced from any Oil Field within the Contract Area must first be used for the purposes related to the operations of production and production enhancement of Oil Fields, such as Gas injection, Gas Lifting and power generation.

One might be tempted to think that this refers to the purpose for which it is now proposed but this is doubtful. Indeed, power generation could refer simply to the generation of electricity by the FPSO’s and other vessels at the well sites. Further conflicting evidence is found in the Article which requires the Operator to include in the Development Plan of each Oil Field a plan for the utilisation of the Associated Gas. The Article goes on to provide that where there is any excess Associated Gas, the Contractor is required to carry out a feasibility study regarding the utilisation of such excess Gas and to include it in the Development Plan for the Oil Field.

The representative of the Ministry of Natural Resources has confirmed that there is not one but several such Development Plans. That would suggest that Esso has conducted a feasibility study and must have satisfied itself of its economic benefits of development of the gas resources. As a measure of the lack of any ringfencing of costs, the Article provides that all costs and expenses incurred by the oil companies in the product ion and/or disposal of the Associated Gas of an Oil Field and the costs incurred in the feasibility of the utilisation of the excess Associated Gas is Recoverable Contract Costs.

On the other hand, all costs incurred by the Government for the infrastructure and handling of excess Associated Gas not included in an approved Development Plan is at the sole risk and expense of the Government and will not affect the amount of the Cost Oil and Profit Oil due to the Contractor.

Our patrimony is in the hands of the oil companies

Article 12.1 (c) provides that where the Contractor believes that excess Associated Gas of an Oil Field has commercial value, the Contractor is entitled, but not required, to make further investment to utilise such excess Associated Gas subject to terms at least as attractive as those established for Crude Oil in Article 11 dealing with Recoverable Contract Costs. In any case in which the Contractor believes improved terms are necessary for the development of excess Associated Gas, the Agreement requires the Government and the three oil companies to “carry out friendly negotiations in a timely manner to find a new solution to the utilisation of said excess Associated Gas and reach an agreement in writing.” Over what is our patrimony, the Minister can only lay claim if the Contractor confirms to him by Notice to him that it will not include the development of excess Associated Gas in its or their Development Plan. Clearly, that is no longer the case. Esso is in the driver’s seat for gas as well.

This Article was Published on July 9, 2021

Introduction

The issue of taxation of the oil companies has aroused particular interest ever since it became known that the Government has to find some $5.391 billion to pay the tax liability of the two partners of Esso in the Stabroek Block – CNOOC and Hess – which reported pre-tax profit of the equivalent of $16.175 billion in 2020. For reasons identified in column 90, Esso, the senior partner and Operator of the Stabroek Block, reported a loss to be carried forward for recoupment in future years. Despite the industry’s well-known proclivity for financial engineering and creative accounting, at some point, Esso too will report a profit and will demand that Guyana pay its taxes as well.

Guyanese are not unfamiliar with the gay abandon with which our governments hand out tax exemptions to the powerful, the favoured, and the influential – the latest group to be rewarded with such fortune are shareholders of private hospitals, some of which are known for extortionate charges and dangerously poor service. But what Guyanese find hard to accept is that an agreement can state, as the 2016 Agreement does, that an entity is subject to the income tax laws of Guyana, including the Corporation Tax Act, and yet two paragraphs later, imposes on the taxpayers the burden of paying those taxes. But that is exactly what the 2016 Agreement and similar agreements have done. And which the Fiscal Affairs Department of the IMF, in a 2018 Technical Assistance Report, in a peculiarly didactic style, both asks and answers the questions whether post-tax sharing is unique to Guyana, and whether it has advantages.

Noise and nonsense purveyors 

The report’s authors – Thomas Baunsgaard, Honore Le Luche and Diego Mesa Puyo – are persons whose credentials cannot be summarily dismissed. At least two of them hold high office and would be the very opposite of noise and nonsense agents who according to our learned Professor “collude, connive and conspire to conceal the reality of today’s petroleum sector and pursues (sic) very outdated narratives.”

This column will examine what these distinguished and knowledgeable individuals wrote about “post tax sharing”, their description of the mechanism whereby the tax payable by the oil companies on their share of the profit under a production sharing agreement is paid by the Government out of its share. Here is their answer to their question about uniqueness and advantages:  

“No, this system is used in many producing countries such as Trinidad and Tobago, Azerbaijan and Qatar, just to name a few. Some advantages of the pay-on-behalf-of system is that it provides more certainty on the expected government revenue from oil projects and mitigates tax planning, while offering physical stability for both the government and contractor against changes in corporate tax rates.” 

This must rank as nonsensical a proposition as any that the IMF has published in its name for decades. How one might ask, does this giveaway bring certainty to Government revenue, or prevent tax planning, when the whole idea of pay-on-behalf-of (POB) is all about tax planning – to allow oil companies to receive a certificate issued by the tax authorities of a tax ostensibly but not actually paid by them so that they can claim a tax credit in their home country? And stability for Government? In fact, from all appearances, Budget 2021 does not acknowledge any awareness of this liability by the Government or make any provision for its payment. For the Government to meet this obligation to the oil companies outside of an Appropriation Act would be unlawful and may explain the silence of the authorities on this matter. 

IMF examples

The practical examples given by the IMF Team are only marginally more sustainable than their conceptual logic. The authors are right about Trinidad and Tobago but fail to acknowledge that this is a decades-old legacy which is no longer widely practised, and has never applied in a post-discovery Agreement. With respect to Azerbaijan, the assertion is effectively disputed by one of that country’s academics and by Deloitte, a Big Four Accountancy Firm. In an article in the July 2015 edition of Journal of World Energy Law and Business, Nurlan Mustafayev states that Contractors and sub-contractors are subject to taxes under the country’s Production Sharing Agreements. There is no pre-contract cost, capital expenditure is limited to 50% of gross production and the cost recovery base and taxes are ring-fenced. Deloitte goes further and gives a range of tax rates of 20% to 32% which petroleum operations must pay. They both note that each Agreement is the subject of a separate Act of Parliament and neither mentions the Government of that country settling the oil companies’ tax obligations.

And for Qatar, here is how PWC, another of the Big Four accounting giants, sums up that country’s tax regimes in respect of petroleum operations: “Generally, corporate income tax rate at a minimum of 35% is applicable to companies carrying out petroleum operations…” In fact, Qatar has moved away from Exploration and Production Sharing Agreements (PSAs) to Development and Fiscal Agreements (DFAs).    

The dangers of comparison

While comparisons can be useful benchmarks, they ignore the overall package and relevant local laws at their peril. In the case of Guyana, two such laws are particularly relevant: the Petroleum Exploration and Production Act Cap. 65:04 (PEPA) and the Financial Administration and Audit Act (FAA). Section 51 of the PEPA provides for the modification of four Acts in respect of licensees under a production sharing agreement. The Acts are the Income Tax Act, the Income Tax (In Aid of Industry) Act, the Corporation Tax Act and the Property Tax Act which extends to the Capital Gains Tax Act as well. In violation of section 10 of the PEPA which permits agreements not inconsistent with the Act, the minister went beyond his powers to extend concessions to persons who do not hold such licences, including persons not resident in or carrying on any operation or business in Guyana.   

The Granger Administration which signed the 2016 Agreement, and the PPP/C Administrations before and after it, will have an enormous task of justifying whether and how a modification or inapplicability of a tax law can amount to a reversal of a statutory obligation whereby a tax liability payable to the State ends up with the Government paying that tax. The FAA in particular appears to raise an insurmountable hurdle. It requires any remission, concession or waiver to be expressly provided for in a tax Act or subsidiary legislation. Seems that the oil companies might have thought that the vaguely worded Order No. 10 of 2016 to give effect to the Petroleum Agreement would allow the pay-on-behalf-of trick. But the FAA deals with that as well. It provides that no Order (or other subsidiary legislation) will be valid unless the Act under which the subsidiary legislation is made expressly permits the remission, concession or waiver. The Order is made under the PEPA which does not, even by implication, let alone expressly, permit[s] the POB formula.

Conclusion It seems clear that the taxation Article of the Agreement contains several provisions which do not meet the test of “not inconsistent” with the Act. The Government must surely be aware of this. In the final analysis, it has to decide whether it stands on the side of the law or with Esso and its partners. The choice should be an easy one. But logic and the law never apply to politics in this country, even when it involves substantial revenues to the State.

This Article was Published on July 2, 2021

This final column of this mini-series examining the financial statements of the three Contractors under the 2016 Petroleum Agreement, reviews their balance sheets, sometimes referred to as statement of affairs, as at December 31, 2020. The Table below is designed in a similar fashion as the summary income statement presented in Column 91. The comments on that Table applies to the Balance Sheet summary as well and readers might therefore wish to go back to that Column for a better understanding of this column.

Table

The total value of assets is $1,891 billion (approximately US$9.1 billion), of which $82.9 billion constitutes current assets, while non-current assets account for $1,808.6 billion, (approximately US$8,612 billion). The total “Equity participation” by the oil companies in the Stabroek Block is $1,128 billion (US$5.4 billion). Put simply, 60% of the assets of the three companies is financed directly by the entities. However, given the nature of branch accounts, this sum can be withdrawn at any time.  

Non-current assets

Esso accounts for 51% of non-current assets while Hess and CNOOC share the balance almost equally. Exploration and development assets ($1,727 billion) make up 91% of the total assets of the three entities. Of this, assets owned by the entities account for $1,522 billion (US$724.8) while $205 billion (US$976 million) is leased from third parties, which accounting rules require inclusion on the balance sheet, along with their corresponding liability. Of the owned assets, CNOOC contributes 29%, Hess 28% and Esso 43%, which also accounts for practically all the leased assets.   

Of the three companies, only Esso has any interest in buildings, its financials disclosing net book value of $574 million in buildings and vehicles – a highly unusual combination of two very different classes of assets. More importantly, in violation of the intent of the Companies Act to restrict the ownership of land by external companies, Esso has been awarded a long-term lease of a substantial parcel of land controlled by Ogle Airport Inc. which however, is not separately identified in its financial statements.  

CNOOC and Hess show as non-current assets some $450 billion and $469 billion, including, dubiously Deferred Tax Asset of $4.7 billion and $10.9 billion respectively. Since the 2016 Agreement relieves all three companies from any obligation to pay taxes on profits, the concept of deferred tax does not apply and should be disregarded for accounting purposes, as Esso does.  

Current assets and liabilities

Current assets, comprising mainly of cash ($13.7 billion), receivables ($24.7 billion) and inventory of unsold crude oil ($36.2 billion) account for 4% of total assets. Of the current assets, Esso accounts for 65%, Hess 21% and CNOOC the remaining 14%. Of the $53.99 billion of current assets of Esso, 55% was held in inventory and 20% in accounts receivable. For Hess, 65% of current assets is held in accounts receivable and 35% in inventory. CNOOC holds 77% of its current assets in cash and its equivalent and 22% in receivables.    

If one side of the balance sheet states the assets owned by the companies, the other side is made up of $695.8 billion in liabilities, $67 billion in provisions and $1,128 billion in what Esso describes as Equity contribution and Hess as Capital contributions, both terms being atypical of branches.   

Total current liabilities of the three amounted to $535.7 billion (US$2.6 billion) with CNOOC accounting for 79%, Esso 18% and Hess 3%. The single most significant debt owed by CNOOC is an amount of $406.2 billion (US$1.9 billion) owed to an affiliate. The amount payable during 2021 on leased assets is G$45.0 billion, all by Esso. Other liabilities of the three partners amounted to $84.5 billion of which Esso is shown as owing $50.6 billion, Hess $14.9 billion and CNOOC $19.0 billion.

The joint-venture partners have a total of $67 billion in provision for decommissioning expenses at the end of the project life – possibly 25 years hence. By contrast, there is no provision for any emergency event, such as an oil spill. In this regard, the Agreement provides for the Government to fix any environmental damage if the companies do not promptly do so and to bill the companies for “reasonable costs and expenses” – not for all costs incurred. It is truly ironic that banks, insurance companies and airlines have to give bonds or lodge deposits to secure potential claims against them while oil companies, arguably engaged in the riskiest business of all, has no such obligation.

Hess shows $441 billion (US$2.1 billion) in Capital contribution or 39% of total capital contributed by the entities while Esso shows Equity contribution of $700.5 billion, representing 62% of the value of its assets. Incredibly, CNOOC had negative shareholders contribution, its assets being financed by short-term liabilities owed to an unnamed affiliate. In its 2020 Annual Report, ExxonMobil reports that “In partnership with the government of Guyana, we are efficiently developing these resources while maintaining active exploration to test multiple prospects.”

We recall from Column 91 that Esso’s direct exploration expenses of $18,286 billion (24% of its revenue), excluding the portion of General and administrative expenses of $20.8 billion (27% of revenue) which would also be allocable to its exploration activities. The claim that this is being done in the name of a partnership, not with Hess and CNOOC, but with the Government of Guyana, needs some explanation.   

Conclusion

There is clearly an underlying agreement among the companies which is not available to the Guyanese public. Former Minister of Natural Resources Raphael Trotman might argue, as he initially did concerning the 2016 Agreement itself, that the confidentiality of such agreement is protected by law. There is no legal basis for such a position. And in any case, the financial statements of each of the companies should disclose, in sufficient detail, the nature of the relationship and the company’s rights, responsibilities and obligations. 

Both the principles underlying their preparation and the contents of the financial statements reflect major deficiencies, including non-compliance with accounting Standards, requirements of the law and the Petroleum Agreement under which they operate. Reconciling the statements reviewed in this mini-series and the requirements of the Petroleum Agreement, or with the tax laws, would be a challenging task for those concerned.

Significantly, the Act requires financial statements of external companies, and not just of their Guyana branch which is what has been presented; the annual returns of these companies filed at the Commercial Registry are similarly non-compliant; and the Registrar of Companies was generous, if not careless, in permitting names of external companies which include the word “Guyana”.

These financial statements have vindicated the initial fears expressed about the limitations and weaknesses of the 2016 Petroleum Agreement. Those limitations and weaknesses have been compounded by the multitude of combined fatal deficiencies by the three oil companies in their financial reporting in the first year of oil production, averaging less than 100,000 barrel of oil per day. The opportunities for manipulation will increase correspondingly as production increases by eight and tenfold. It is incumbent on this Administration to separate itself as a partner in the financial shenanigans being perpetrated by the companies, introduce modern petroleum legislation, appoint independent and competent regulators and ensure that our laws are respected.

The Government should expect resolute pushback. The oil companies do not comply with a weak Agreement partly written by them, let alone a regime of regulation meeting international standards.    

Finally, a word of appreciation to the several persons who shared their perspective with me on the last four columns. Next week’s column will respond to the IMF’s defence of the arrangement whereby the Government pays the tax of the oil companies.  

Every man, woman and child must become oil minded

Introduction

Each of the past three columns (#’s 88 – 90) reviewed the financial statements of one of the three oil companies which signed the 2016 Petroleum Agreement with the Coalition Government of President Granger. Today’s column compiles the income statements from the separate financial statements, making some minimal reclassification for the sake of convenience, comparability and readability. But first, a brief explanation of the Table.

The Table is expressed in millions of Guyana Dollars (GYD Million). The top line of figures is the revenue of the three entities while the percentages represent their share of total revenue earned. The line items of expenditure show for each of the companies the reported expenditure on the stated categories such as Production Operating Costs; Depreciation, depletion and amortisation; General and administrative; etc. The percentages in the first column following the numbers show the percentage which the expenditure bears to the revenue of the respective entity while the percentage in the next column is the proportion which the class of expenditure bears to the sum of that class for the three entities. To take one example: Production/operating costs for CNOOC accounted for 41.9% of its revenue but 37.4% of the total Production/operating costs incurred by the three companies.

Commentary on Income statement

Esso holds a 45% interest in the Stabroek Block while Hess has 30% and CNOOC holds the remaining 25%. The reported revenue approximates to those interests with Esso’s share of revenue (rounded up) accounting for 43%, Hess 34% and CNOOC 24%. The disparity in sales to the companies’ interest in the operations can partly be accounted for by the unsold crude oil at December 31: Esso had some $1.731 billion dollars’ worth of unsold crude while Hess had approximately $334 million. CNOOC had none.  

Given that the relationship among the three is essentially one of a joint venture, not only is income expected to reflect the respective interest but so too is expenditure. On a total level, reported expenditure by CNOOC was 19% of the total expenditure, Hess 31%, and Esso, 49%. It is either that CNOOC, the most profitable of the three companies, is underspending or Esso is overspending. But that too is not consistent – as the share of their revenue used in production cost shows. In the case of CNOOC it was 42%, Hess 33% and Esso a mere 12%, which is hardly plausible. This lopsidedness extends into the total expenditure as well: of the combined production expenses of the three entities, CNOOC accounts for 37%, Hess 43% and Esso 20%.

The reverse is true for Depreciation, Depletion and Amortisation (DDA) for which CNOOC incurs 36% of its revenue, but representing 23% of the total on this class of non-cash expenditure incurred by the three companies. For Hess it is 42% and 39% respectively while for Esso it is 31% and 37% respectively. It needs some explaining that Hess would incur a higher cost or charge on DDA than Esso, the much larger partner.  

The next two classes of expenditure take some believing. CNOOC incurs just 1% of its revenue and 2% of the total incurred by the three companies on General and administrative expenses. For Hess it is 7% and 17% respectively while for Esso it is 28% and 81% respectively. Esso has two functions under the Petroleum Agreement – as a joint venturer, and as Operator, but it appears that these functions are not only conflated but are confused. It is noted that general and administrative expenses of Esso have moved from $6.982 billion in 2019 to $20.829 billion in 2020, almost treble. The question arises whether this entire sum is incurred in its role as the JV operator, as a separate entity, or as is more likely, both.  

CNOOC did not incur any Exploration expenses in 2020 and its financials actually show a credit of $524 million. It is possible that this represents cost recovery but that is pure speculation. On the other hand, exploration expenditure by Hess of $1.361 billion represents 2.3% of its income and 6.7% of the total Exploration expenses incurred by it and Esso in 2020. For Esso, the corresponding percentages are 24% and 93% respectively.

Interest and finance costs incurred by CNOOC were negligible, again with a small credit, while the $520 million incurred by Hess represents 1% of its revenue and 6% of the total finance costs incurred by it and Esso in 2020. And for Esso, it is 10% and 94% respectively. It does need an explanation that interest cost derived from leases would arise out of capital leases which require the lessee taking the asset and the obligations under the lease on its balance sheet. It is this liability which gives rise to interest charge. Typically, as the lease obligations are reduced by payment, such interest costs also reduce but in the context of a giant licensed area and a gold mine of discoveries, this is unlikely to happen for at least another decade as expensive assets are leased under new production licences. These costs would not arise if applicants for production licences did in fact possess the financial resources which the law requires them to have, or if Guyana insisted on thin capitalisation restriction.       

Royalty and revenue

The two American Joint Venturers disclose the amount of royalty paid to the Government of Guyana for petroleum produced and sold – CNOOC does not. Royalty paid by Hess was $1.493 billion and by Esso $2.049 billion, a total of $3.542 billion (roughly US$16.9 million), representing respectively 2.52% and 2.72% of sales revenue of the two companies. In early 2021, the Government of Guyana announced that its revenue from royalty in for 2020 was US$21.2 million (G$4.410 billion). By deduction, this means that CNOOC paid roughly US$4.3 million (G$903 million), equivalent to 2.2% of its revenue, making the overall average royalty paid by the three companies as 2.5% of sales. The Petroleum Agreement stipulates a royalty rate of 2% which suggests that all the companies are voluntarily paying more royalty than they are contractually required to pay. This raises the question whether the revenue figure of all three entities is in fact understated. 

Similar uncertainty arises in relation to the oil companies’ revenue declaration and the Government’s share of profit oil. The Government has announced that the revenue earned in 2020 from its share of profit oil was US$184.9 million. At a rate of US$1 to G$210, this amounts to approximately G$38.9 billion which means that as a share of gross oil revenues Guyana received 18.1% which added to the royalty of 2.5% gives a total return of 20.6%, compared with the 14.25% which everyone, including senior Exxon officials, expected would prevail beyond 2025.  

Efforts to obtain clarification of these anomalies have proved futile, again inviting speculation for which there are a number of possibilities. The first is that the companies’ revenue figures do not represent the true value of sales, and that there is undisclosed income. Another is that Guyana may have received what in the industry is referred to as an overlift, meaning that there is an imbalance in its favour in the apportionment of production during 2020, to be evened out in subsequent periods. A single shipment one way or the other can make a huge difference and it is probably safe to say that any overlift would be in Guyana’s favour. While Guyana has disclosed its oil lifts and the revenues per shipment, none of the oil companies presented any such information. 

Another possibility is that the oil companies might have deferred some of the precontract recoveries to which they were entitled. This has been a controversial issue since the 2016 Agreement was first made public, and has caused the companies’ numbers being challenged on a number of occasions. A further explanation is that Guyana’s revenue is at full market value while the revenue earned by the oil companies is depressed by inter-company sales.    

Taxation

CNOOC and Hess include a taxation charge in their financial statements when in substance, they and Esso are not liable to pay no taxes in Guyana. Their taxes are paid for them by the Government of Guyana but the Guyana Revenue Authority issues them with a Certificate of Taxes paid to enable them to receive a credit in their respective home countries. That appears to be a fraud disguised as a feature of some old-fashioned production sharing agreement. Esso has chosen not to reflect a credit for what is referred to as deferred tax and one has to wait to see how it will treat taxation when it finally declares a profit in Guyana. Meanwhile, it and its JV partners studiously avoid any clear reference to their tax position under the 2016 Agreement.

Conclusion    

Not all the questions raised by the inadequate information presented by the oil companies in their 2020 financial statements are negative to Guyana’s interest. But they are all significant. And they demand proper answers.