Author: Christopher Ram

Natural Resource Fund faces institutional, Capacity, investment and accounting challenges.

Introduction

The International Monetary Fund and the Inter-American Bank have both expressed concerns about the structure and operations of the Natural Resource Fund, one of the PPP/C’s flagship projects directly associated with the oil and gas economy. This column would like to add a couple of problems it too has identified: the absence of any appropriate investment strategy and the rather more basic issue whether the balance shown in the Fund is accurate and legally correct.

Let us recall that the APNU+AFC Coalition had passed and began the implementation of a its own Natural Resource Fund Act in 2019 but this was strongly criticised by the then Opposition PPP/C as being too complex and involving too many people. It was no surprise then that the repeal and replacement of that Act was one of the first major pieces of legislation by the successor PPP/C Government in the first year of Irfaan Ali’s term of office. Just as a reminder, the most famous event concerning this Fund during the Granger Administration was the so-called signing bonus which the APNU+AFC Coalition had for a considerable time sought to hide from the people of Guyana. I describe this as a “so-called signing bonus”, because its real purpose was to pay legal fees.

IMF and IDB

Institutions like the IMF, the World Bank and the IDB, recognising that they have to maintain an ongoing relationship with countries, are always careful in their criticisms of host governments. Yet even this disguised language in the recent comments and recommendations emanating from the IMF and the Inter-American Development Bank (IDB) suggest that the replaced Act may actually have been superior to the current Act. Indeed, the IMF is encouraging the government to carry out an in-depth analysis, by an independent consultant, of existing absorbative institutional capacity constraints on scaling up of public spending. Whether the government will heed such advice is uncertain, if not unlikely, but any improvement in the process may not be welcome since it will impose curbs on runaway spending.

Clearly not impressed with the existing arrangements, the IMF is also advising the government to establish a “precautionary stabilisation fund” in the medium to long term as a hedge against shocks. What this seems to suggest is that the IMF is actually recommending a stabilisation fund within the Natural Resource Fund!

The IMF Report further notes, using the shorthand term fiscal policy, that government tax and spending policies have a direct impact on economic conditions and that in ensuring that Guyana’s oil wealth is managed effectively and equitably, the Government is advised not to ignore long-term fiscal and debt sustainability. The context of course is not only that petroleum is an exhaustible nature but also that it is famous for large and unpredictable swings in prices. It is not in the DNA of the PPP/C to prefer management to spending and one fears what is likely to happen in the final year and months of an election cycle. We are not quite there yet and already for 2023, the PPP/C has gone back to the National Assembly on five occasions supplementary funding.

Turning to its specific recommendation of a “precautionary stabilisation fund”, the IMF noted that it would help smooth the fiscal adjustment while allowing the government to make an informed assessment on the gravity and permanence of the shock.

The IDB country strategy took a slightly different approach pointing out the possible imbalance from an overvaluation of the real exchange rate. The issue of the exchange rate of course is a two-edged sword. If the foreign exchange earned is all remitted and injected into the economy, the impact on the exchange rate could have serious implications for the rest of the economy, including the Dutch disease, with direct consequences for the export products of the country.

The Fund

The Bank of Guyana publishes quarterly financial summaries of the NRF, the most recent being for Quarter 2, and Quarter 3 ended at 30 September. The summary shows that the Fund had an opening balance at 1 January 2023 of G$298 BN and at the end of September the balance had increased to G$391 Bn. The return on the Fund however has been negligible with only G$12.5 BN earned in nine months.

What is disturbing about the Fund is that the entire portfolio is held in cash and cash equivalents, although the latter term is not defined in the Summary. The 2022 financial statements of the Fund, audited by the Office of the Auditor General, show the entire balance comprising balances with foreign banks. Since the financial statements are not accompanied by a directors report or a governance statement, it is therefore not possible to determine what decisions the Investment Committee has so far made on an appropriate portfolio that can maximise investment income while securing that investment.

And it is here where I have my biggest problem. We know as a fact that the oil companies are issued with certificates of taxes paid by the Minister of Natural Resources to the Guyana Revenue Authority for the taxes computed as payable by the oil companies. To see where that money comes from to pay the tax, one must turn to Article 15.4 (b) of the 2016 Petroleum Agreement. The Agreement provides that those taxes are paid from the Government’s share of profit oil. The problem is that the whole business of the payment of taxes and the issue of certificates has been withheld from the public.

I find it difficult to believe that the Guyana Revenue Authority would issue a receipt for moneys it does not collect. Forget for a moment, that those oil companies claim credits in their home countries for taxes represented by the Certificates but which they did not pay. This column considers this whole question a complete cover up involving key agencies of the state and one can only speculate whether the reason for this cover up is to prevent the Guyanese public from knowing the annual amount of taxes paid by the government on behalf of these avaricious oil companies.

When it comes to withholding information from the public, the PPP/C is not an iota different from that of its predecessor.

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.