Author: Christopher Ram

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Mr Nandlall’s response suggests he has found magic formula to overcome concerns about 2016 PSA

January 2, 2022

Dear Editor,

Mr. Anil Nandlall S.C. Attorney General and principal legal adviser to the Government has written rather disparagingly about comments I made in my last Friday‘s Stabroek News oil and gas column. Without naming me or addressing any of the extensive data, sources and arguments I used in arriving at my findings, he claims that my assertions were “grounded in a shocking misunderstanding and misinterpretation of the intendment policy and express provisions of the Natural Resource Fund Act 2021, as well as a misconception of certain elementary principles of law”. In his opinion, they were so serious “that to leave such legal fallacies untraversed on the public record would be a grave omission.”

Unwittingly acknowledging the ubiquity and the connection between actions of the Government and private and political corruption, Anil thought it necessary to point out  that I made no accusation about corruption. I apologise for disappointing him. More substantially, Mr. Nandlall seems to misunderstand the differences in the nature and functions between a Natural Resources Fund and a Consolidated Fund because “[the funds] will eventually be deposited into the Consolidated Fund”. At best, that is misleadingly simplistic.

The NRF is a sovereign wealth fund established under separate legislation to garner, manage, invest and use the proceeds from the exploitation of non-renewable resources for current and future generations. Its structure, objectives and management are vastly different from those of the Consolidated Fund. A properly managed NRF aims to use only the income generated from the investment of the funds in the NRF. On the other hand, the Consolidated Fund is effectively the operating fund for the day-to-day financial operations by ministries, departments and other budget agencies of the government. It is managed by public servants in a very decentralised framework.

Mr. Nandlall is not alone in confusing the two funds. That same conflation was made in a 22 June 2022 article in the Stabroek News quoting the Commissioner General of the Guyana Revenue Authority. One hopes that this misconception is not the reason for the confusion whether moneys were paid to the GRA for it to issue receipts and tax certificates to  Hess and Exxon to claim credit in the USA for tax “paid” in Guyana.

Anil’s volunteering that section 15 (1) and (2) of the NRF Act authorises petroleum revenues to be paid directly into the Fund is not relevant to anything in my column. The point the column made is that the NRF Act does not provide for the withdrawal of money from the Fund to pay the taxes for the oil companies, an omission I described as a disconnect, and for which I made a recommendation. Instead of acknowledging the omission and committing to fixing it, Anil cites the supremacy provision of section 45 of the flawed Act and that the “draughtsman’s mind was alive” to what taxes are to be paid directly to GRA – another irrelevant non sequitur.

More seriously, Anil asserts that the provisions in the Agreement on taxation have “obviously been overtaken by the Natural Resource Fund Act”. He has achieved by default – and unilaterally to boot – provisions which the Government has claimed are sacred and beyond renegotiation.

Anil also displays surprising carelessness when he claims as “a very rudimentary principle of law that if a contract conflicts with a Statute, the Statute shall prevail.” I need to remind him of the Rudisa v Guyana case [2014] CCJ (OJ) in which he was lead Counsel for Guyana. The judges lost no time in rejecting his argument that a failure by Guyana to honour its Treaty obligation was somehow excusable because of good faith efforts by the then PPP/C Government.

Ruling against Guyana, the CCJ unanimously re-affirmed the legal principle “pacta sunt servanda” (“agreements must be respected). Just in case Anil thinks that the reason for the CCJ’s decision was that the matter arose solely out of the Revised Treaty of Chaguaramas, it is in fact a long-standing principle laid down in Trendex Corporation v Central Bank of Nigeria [1977] 1 QB 529 that sovereign immunity, including lawmaking, does not generally apply to commercial cases.   

Anil’s argument that the NRF Act applies to the 2016 Agreement, and by implication with retroactive effect, is not without considerable difficulties. But even if those hurdles are crossed, it is unlikely that this extends to making the stability clause(Article 32)  in the Agreement inoperable. That clause, while not forbidding any changes in the law, provides, inter alia, that “the Government shall promptly take any and all affirmative actions to restore the loss or impaired economic benefit to Contractor, so that the Contractor receives the same economic benefit under the Agreement that it would have received prior to the change … “  

Prior to Nandlall’s statement, there was nothing in the public domain to suggest that the new legislation affects the 2016 Agreement in any manner, let alone requiring resolution. For example, the most recent audited annual financial statements of Hess and Exxon continue to reflect no change in their entitlement, or their understanding of the tax provisions. Mr. Nandlall’s reactive interpretation will certainly excite them.  

Meanwhile, Mr. Nandlall  can help Guyanese in providing answers to the following questions.

  1. Does his statement on his Facebook page represent his and the Government’s official position, or was it personal and unofficial?
  2. Did he or the subject Minister, at any time since the passage of the NRF in 2021, have any discussion with Exxon, Hess and CNOOC on his interpretation of the implications and consequences for the Agreement?
  3. Were his interpretation and its consequences accepted by the oil companies?
  4. Was there a resolution in accordance with Article 32 (3) and how was that resolution formalised? 
  5. Since he does not agree with my interpretation of Article 15 (4) (b) of the Agreement regarding Government’s obligation to pay the tax out of its share of profit oil, can he say what the correct interpretation is?
  6. By virtue of section 45 of the NRF Act to which he accords supremacy status, is Guyana now relieved of the obligation to pay the taxes of the oil companies?
  7. Would he be kind enough to provide a schedule, with particulars, of the Certificates of Taxes issued by the Guyana Revenue Authority under Article 15 of the Agreement?
  8. What was the source of the money used to pay such taxes for the oil companies?
  9. If no Certificates of Taxes were issued, were there any other receipts, acknowledgments, documents or confirmation from the GRA to the oil companies of taxes paid on their behalf?
  10. Given Anil’s assertion that the Agreement is overtaken by legislative changes, does he consider that further changes are within the exclusive powers of the Government, without restoration of benefits?   

I share with Guyanese three very fundamental concerns about the 2016 Agreement.

  1. The use of the Government’s share of oil profits to pay the taxes on behalf of the oil companies.
  2. The stability clause which effectively deprives Guyana of legislative sovereignty until 2057 – give or take a couple of years.
  3. The Government’s insistence on the sanctity and inviolability of the 2016 Agreement, making it beyond renegotiation.   

Mr. Nandlall’s response to the column suggests that he has found a magic formula to overcome those concerns. If  his statement represents the Government’s position, it is the best news for the country at the beginning of a new year. It also portends that Guyana can settle other concerns about the environment, insurance, level of royalty and allocation of profits in the Agreement without adverse implications.    

Finally, it would certainly be preferrable for the conversation I am having with Anil to take place more widely, including in the National Assembly. Currently, that is wishful thinking. But I do believe that Anil is committed to constructive dialogue and that he too recognises the benefit of our exchange.

I therefore welcome his response and look forward to his answers to my questions and confirmation of my conclusions.

Christopher Ram

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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Column 119 – January 09, 2024

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.

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Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 118 – December 29, 2023

Natural Resource Fund overstated by $274,765 Mn., should be addressed as a matter of urgency.

Among the several challenges facing the Natural Resource Fund (NRF) – also known internationally as a Sovereign Wealth Fund – identified in column 117 published on 22 December, was one which I described simply as “accounting”. Readers will recall that in the concluding sentence I opined that the balance in the NRF is overstated by “tens of billions of Guyana dollars”. To my horror, my research discovered that the overstatement at 30. June 2023 after the payment of 2022 corporation taxes for the oil companies, was $274.8 Bn. ($274,765 Mn.), representing 76% of the Fund balance at that date. The magnitude and significance of the error is evident from the 2022 financial statements of the Fund, which received a clean, unqualified opinion by the Audit Office of Guyana, showing the value of the Fund at that date of G$298 Bn. With taxes payable amounting to $49.7 Bn for the years 2020 and 2021 to be financed out of Guyana’s share of profit oil, the correct value of the Fund at 31st. December 2022 should have been G$248.4 Bn, the difference representing an overstatement of 20%. A similar overstatement for 2023 alone, amounted to a further G$225.1 Bn., hence the cumulative overstatement of $274.8 Bn.

Natural Resource Fund – Summary of Quarterly Reports

Source of Information: Bank of Guyana Quarterly Reports, *described as market value. Highlighted information from companies audited financial statements.

Summary of Contractor’s Income Statement (Exxon, Hess, CNOOC)

Source of Information: Audited Financials

As astonishing as it sounds, if just one of several persons or agencies involved – the Office of the President, the Ministry of Finance, including the Budget Office, the Ministry of Natural Resources, the Bank of Guyana, the Guyana Revenue Authority (GRA), the NRF Board and, I must say, the National Assembly and the Attorney General’s Chambers – had been paying attention to and discharging their respective responsibilities, this fiasco would have not arisen in the first place. What is worse, this situation has existed since at least 2021.

Relationship between NRF and the 2016 Petroleum Agreement

Let us look briefly at the operations of the NRF and its relationship to the 2016 Petroleum Agreement. The NRF receives three sources of income: royalty of 2% of all petroleum produced and sold (less cost of fuel used in production and transportation), the proceeds from the sale of the government’s share of profit oil and any interest received on investments, mainly cash balances held by the Fund. In accounting parlance, these are credits to the Fund account. Debits would represent withdrawals from the Fund, principally for two purposes. The first being transfers to the Consolidated Fund in accordance with sections 16, 19 and 20 of the NRF Act and second, money requested by the Minister of Natural Resources to pay to the Guyana Revenue Authority the taxes payable shown on the Company’s corporation tax returns for which the GRA issues certificates of taxes paid.

NRF Balances

Produced hereunder is a summary extract from the Audited financial statements of the three contracting oil companies for the years 2020 to 2022, highlighting the amount of taxes payable by them for each of those years. Those amount in total to a staggering G$274,765 Mn. If the transactions were accounted for in accordance with the Agreement, Corporation Tax receipts for the three years should have included $4,049 Mn. for 2020, $45,621 Mn. for 2021 and $225,094 Mn. for 2022, with corresponding reductions from the Natural Resource Fund for those years.

I am not asking cynics to believe me. They just need to look at Note 7 of the audited 2022 audited financial statements of Esso Exploration and Production Guyana Limited which states as follows:

“Under Article 15.2 of the petroleum agreement, the Company is subject to the income tax laws of Guyana with respect to filing returns, assessment of tax and keeping of records. (Emphasis mine). Under article 15.4 of the Petroleum Agreement, the sum equivalent to the tax assessed on [the] Company will be paid by the Minister responsible for petroleum to the Commissioner General, Guyana Revenue Authority and is reported as non-customer revenue.”

The observant reader will note the obligations of the three companies do not include the payment of taxes, which is done on their behalf by the Government. The reference to “non-customer revenue” is to comply with Article 15.4 (a) of the Agreement. For the answer to the question of the proper source of the money to pay the Commissioner General, one has to turn to Article 15.4 (b) of the Agreement. This agreement requires the tax to be paid out of the Government’s share of profit oil, the proceeds of which, under the NRF Act, are deposited into the Natural Resource Fund.

Screaming questions

The first question to arise is whether Minister Vickram Bharrat or Vice President Bharrat Jagdeo has ever read the financial statements of the company, which interprets for them the relevant provision of the Petroleum Agreement. Steve Coll’s masterpiece Private Empire ExxonMobil and American Power shows the oil giant at its ruthless and diabolical best when dealing with host countries whose governments are clueless, incompetent, malleable and spineless. They have found both the APNU+AFC and the PPP/C governments ticking all these boxes.

Like the majority of thinking Guyanese, I have always been offended by Article 15 of the Petroleum Agreement which the Granger/Trotman duo has locked us into until 2057, give or take a couple of years. And like the majority of thinking Guyanese, I feel painfully betrayed by the Ali/Jagdeo duo who now defend as sacred and inviolable an Agreement which they committed to “review and renegotiate” as part of their 2020 elections promises.

The next question is whether any, and if so what amount, of any actual tax payments made by Minister Vickram Bharrat to the Guyana Revenue Authority on behalf of the oil companies. That is a question which calls for an investigation in the absence of proper disclosure.

What I can state with a high level of confidence is that nothing emanating from several governmental agencies suggests that the Minister of Natural Resources has paid any actual cash to the Guyana Revenue Authority for which Certificates of Taxes Paid must be issued. These agencies include: the Office of the President, which has constitutional responsibility for the natural resources sector, the Ministry of Natural Resources whose Minister is responsible for the general oversight of petroleum and the mining sector, the Ministry of Finance which has responsibility for the Budget Office and for the annual Budgets, the Bank of Guyana which operationally manages the Natural Resource Fund, the Guyana Revenue Authority which is responsible for the collection of taxes and the Natural Resource Fund Board,

It is sad but not surprising that Minister Bharrat has once again failed in a major duty in his portfolio of responsibilities for which there will be no sanction, or consequence – not even the infamous two weeks salary deduction! If the Minister was familiar with the 2016 Agreement or has been following all the concerns in the press, he would not have been guilty of this grave act of omission. The oil companies of course, would know their entitlement and the procedures to access those entitlement. In other words, they would have had their tax advisers prepare their tax returns and deliver these returns to the Guyana Revenue Authority in accordance with Article 15.5 of the Agreement. The Article is carefully crafted with language like “properly prepare the receipts” and “proper tax certificates … evidencing the payment” by the Guyana Revenue Authority.

Conclusion

It is unquestionable that tax certificates evidencing receipt should have been issued. It is clear that no payment was made from NRF, nor was any such money accounted for in the Estimates of Receipts and Payments and paid into the Consolidated Fund. This omission reflects poorly on the Budget Office. The irrefutable but uncomfortable conclusion is that no money was paid to or received by the Guyana Revenue Authority. This is obviously a matter for the statutory auditors (the Auditor General) and the relevant government agencies, including the Natural Resource Fund Board. This Board needs a better understanding of the funds at its disposal to assure citizens that it is capable of defending and protecting the legitimacy, accuracy and integrity of the Fund.

Finally, having disparaged its predecessor’s Natural Resource Fund Act # 12 of 2019, both before and during the rushed parliamentary debate on its own NRF, the Government MP’s must be hugely embarrassed that not one of them understood the implication of the 2016 Petroleum Agreement on the Natural Resource Act. As a consequence, there is a clear disconnect between the Act and the Petroleum Agreement in that section 16 of the Act dealing with withdrawals does not include the taxes paid on behalf of the oil companies. That Act must therefore be amended urgently, to preserve the so-called sanctity of the 2016 “contract”. In doing so, the draftspersons would also have to address the overstatement of the Natural Resource Fund either by way of a belated cumulative transfer, or by some other legal device. While the parliamentary opposition had walked out the debate in protest about the allocation of speaking time, it appears that it too did not recognise the omission.

The overstatement of the balance in the Natural Resource Fund at the amount and in the current improper form must be addressed and corrected. This is not a “massa cow, massa bull matter”. They fall under separate legislation and the NRF is too important an inter-generational mechanism to this country to allow it to remain tainted.

Next week’s column will expose the myth of the 50/50 Profit Share.