Category: The Road to First Oil

Sanctity of Contract vs Sovereignty over Natural Resources – Part 3 (Final)

Introduction

This is the final part of an adaptation of a talk I gave last July at a forum sponsored by the US NGO Oil and Gas Guyana Network (OGGN). The thrust of my contribution was that the Government’s excuse for reneging on its commitment to “review and renegotiate” the 2016 Petroleum Agreement is specious and opportunistic. Even more significantly, the Government ignores the sovereignty issue addressed in Column #134 and more devastatingly, the constitutional question which of course is related to sovereignty.

Today’s column looks at what is described as the Stability Article in the 2016 Agreement, generally referred to as a stability clause. In essence, this Article serves as a protective shield for the oil companies and is designed to maintain a stable legal and economic environment for their investment in Guyana. In effect, the clause freezes the law as it stood in 2016, ensuring that the conditions prevailing at the time the Agreement was signed, would endure until 2056 when the period of exploration and production ends.

Recall that the Agreement was signed by a Minister, and only its tax provisions were incorporated into subsidiary legislation – not the Agreement as a whole. I have always argued that the section under which a Licence could be granted did not allow for Exxon to be issued with another agreement after the 1999 agreement had expired, but that is neither here nor there now. Unfortunately, the APNU+AFC coalition government recklessly bowed to pressure from Exxon and gave them a further license in 2016 by an artifice called a Bridging Deed. Sadly, Guyana now has to live with that Agreement for the next 40 years or so.

Assessing the Stability Clause 

Yet, the fact that the Agreement may not now be set aside does not mean that every provision therein is untouchable. Indeed, any provision in the Agreement which violates the Petroleum Exploration and Production Act, if challenged, would be held to be invalid. But let us assess the Stability Clause against the following provisions of the Constitution.

Article 65 (1): Powers and Procedure of Parliament provides that “Subject to the provisions of this Constitution, Parliament may make laws for the peace, order and good government of Guyana.”

Article 8 which provides that “This Constitution is the supreme law of Guyana and, if any other law is inconsistent with it, that other law shall, to the extent of the inconsistency, be void.”

Articles or language similar to Article 65 (1) is common in many Commonwealth constitutions and is generally interpreted to confer plenary legislative authority, subject only to express any constitutional limitations. Such a provision is interpreted extremely widely, subject only to other constitutional provisions, including fundamental rights and the separation of powers. Article 8 on the other hand, establishes the Constitution as the supreme law, rendering any laws inconsistent with the Constitution void to the extent of the inconsistency.

Hierarchy

Here then is a hierarchy with the constitution sitting at the apex of the legal system followed by laws properly passed, international Treaties between States, subsidiary legislation and administrative powers and decisions. What this Stability Clause seeks to do is insulate the Agreement from changes, even made under the authority of the Constitution, a clear constitutional and statutory heresy. Here is how it does so.

1. It nullifies Parliament’s power to legislate granted by Article 65(1).
2. It violates the principle of constitutional supremacy established in Article 8.
3. It binds and disempowers future parliaments, as well as Permanent Sovereignty over natural resources, and in respect of fiscal and environmental matters. Such a situation would be completely unacceptable in the UK whose courts have consistently held that no Parliament can bind its successors. UK has parliamentary sovereignty whilst Guyana has constitutional sovereignty, which would mean that a stability clause, unless quite reasonable, will not be enforceable here.

Article 32 of the 2016 agreement is simply too wide and too long. No court can rule that a decision by a minister of government, even if acting within his administrative powers, could prevent successor ministers, Cabinet and Parliaments from carrying out their or its powers in future years.   

Changing judicial attitudes

It is true that the legal community has generally nodded in approval at Stability Clauses, with international arbitrators – often coming from the investor countries – upholding their validity. The trend in recent years, however, has been towards more nuanced approaches. The rigid freezing clauses of yesteryear are giving way to more flexible mechanisms that seek to maintain economic equilibrium rather than absolute legal stasis. This shift represents an attempt to balance the legitimate needs of investors for predictability with the equally valid requirements of states to govern in the public interest, to exercise sovereignty over their natural resources, and to exercise constitutional powers.  

And here is a great real-life example from 2015 in Israel concerning a 10-year stability clause for a gas deal, in which the Israeli Supreme Court ruled that the stability clause in the gas deal was unconstitutional because it limited the government’s sovereignty provides a strong precedent. Applying the same legal principles and logic, Article 32 in the 2016 Agreement will not prevail. Here is why.

1. Guyana’s Constitution has supreme authority. No agreement, regardless of its perceived importance or the principle of “sanctity of contract,” can supersede constitutional principles.

• Duration of the agreement: The 40-year timespan extends far beyond the term of any single government or minister, raising serious questions about democratic accountability and hobbling future governments from making decisions in the best interests of their citizens.

• Limitation on governmental powers: No current government should be able to bind successor governments over such an extended period.  

• There is simply no jurisprudential basis supporting the notion that contract sanctity can override fundamental constitutional principles and national interests.

Quite frankly, the current Government is fully aware that the stability clause is unconstitutional and would be struck down if an application was made to a court of standing. I began this (US) talk by quoting Irfaan “review and renegotiate” and “we will renegotiate” by Irfaan Ali and Bharrat Jagdeo respectively in statements prior to the PPP assuming power in 2020. Now we hear the  nonsensical and hypocritical cant  about sanctity of contract.

Dr. Maurice Odle in a recent autobiography who attributes the reversal to the PPP/C’s visceral fear of alienating America’s interest, mindful of the US’s role in the PPP’s removal from government in 1953 and 1964. Odle sums up the PPP by saying that “remaining in office is more important to the Party than the effective maximisation of benefits according to the people of Guyana.”

Not only is this explanation as plausible as any but more dangerously, the PPP/C is sacrificing both permanent sovereignty over natural resources as well as the our constitutional sovereignty.  

Sanctity of Contract vs Sovereignty over Natural Resources – Part 2

Introduction

This column is a continuation from last week which featured an adaptation of a presentation I made at an OGGN sponsored activity in New York last July 27. Recall that last week’s column described the meaning of sanctity of contract and the several exceptions which would negate the principle. The column showed facts and examples which stripped the principle of its relevance and application, a pointed response to President Ali and Vice President Jagdeo who embrace “sanctity of contract”, as an excuse for their refusal to honour their election campaign commitment to renegotiate. Today’s column looks at the principle of sovereignty, approaching it from two angles – the issue of sovereignty over natural resources, and second, sovereignty as a constitutional right and power of states.  

Sovereignty over natural resources

The Petroleum Production Act (now repealed and set out in the Petroleum Activities Act) addressed the question of sovereignty in the context of ownership by providing as follows: “The property in petroleum existing in its natural condition in strata in Guyana is hereby vested in the State, and the State shall have the exclusive right of searching for and getting such petroleum.” Put another way, the State has an inalienable right to the natural resources within its territory. That statutory provision goes back some eighty-five years, long before the 1962 UN General Assembly adopted Resolution 1803 which elevated the right to one recognised as part of the international legal framework, one that even trumps nationalisation, meaning that the only remedy available to any person would be monetary compensation, but not specific performance. I submit that no court or arbitral body would compel any state to return a concession.

A close look at the first three paragraphs of Resolution 1803 is most instructive. Summarised, they affirm a nation’s right to control its natural wealth while providing a framework for responsible development and attracting foreign investment, mandating that resource utilisation must foster national development and enhance citizens’ well-being. They also allow the state to set its own terms for resource management, to establish rules governing the exploration, development, and disposition of natural resources, including the regulation of foreign capital inflows and seeks a balance between foreign investment and national sovereignty.

The disagreers

Not everyone was happy with “allowing” sovereignty, let alone permanent sovereignty  to non-western countries. For example, in hardly disguised racist language, Henry Kissinger, the doyen of American diplomacy stated, “Oil is too important a commodity to be left in the hands of the Arabs”. To his hypocritical credit, Kissinger also said that “The contemporary world can no longer be encompassed in traditional stereotypes. The notion of the northern rich and the southern poor has been shattered. Mary Pillsbury Lord, the flour heiress, criticised the 1952 Resolution as “Unfortunate history”, while others went further, demanding equal terms to the trade and the raw materials of the world.

Sovereignty is no academic construct, but a foundational principle of international law recognised by a UN International Law Commission. Importantly, permanent sovereignty is intended to further national and collective interest. The very concept is designed to overcome economic injustice, the direct legacy of colonialism. Importantly too, is that economic sovereignty is the basis of political sovereignty. One does not exist without the other. Or as one of the original thinkers on the sovereignty question said: Sovereignty is or is not. There is no concept as partial sovereignty.

No silver bullet

It would be incorrect to identify the UN Resolution as transforming the international arrangements for the control of petroleum resources. The lock into which the West had gripped the Middle Eastern countries – colonial control, political structures and oil agreements – were shackles from which it was not easy to free themselves. Indeed, the 2016-type of Agreement signed by Guyana was certainly not atypical in the colonial era. We must remember too, that the West had installed leaders like the Shah of Iran who were favourably disposed to the American and British oil companies.

In fact, things really changed after the upheavals in the Middle East which eventually led to the OPEC countries flexing their muscles, taking control of the market via embargo and production and price fixing, all with grave consequences for the world economy. One undeniable consequence was that the countries exerted full sovereignty and control over their petroleum resources.

On the other hand, Guyana moved backwards, ceding sovereignty over its petroleum resources to two American and one Chinese companies. The shameful difference between Guyana and the OPEC countries is that our political leaders willingly sold us out (to use Jagdeo’s words), rendering irrelevant the UN Resolution on permanent sovereignty over natural resources. 

The final instalment on the subject will examine how we have ceded constitutional sovereignty to the oil giants.

Sanctity of Contract vs Sovereignty over Natural Resources

Introduction

This column is an adaptation of a presentation I made at an OGGN sponsored activity in New York last July 27. OGGN is a US registered NGO with its membership drawn from the Guyanese Diaspora in North America, Europe and the Caribbean. Dr. Vincent Adams and I were the two presenters. Adams spoke on the environmental implications of intensive fossil fuel production in a concentrated area of 26,000 km² and of his tenure as head of the (Guyana) Environmental Production Agency from which the PPP/C Administration removed him following the 2020 elections in Guyana. Adams was able to embellish his presentation with anecdotes, incidents and several confrontations he had in the EPA’s oversight of the much discussed and criticised 2016 Petroleum Agreement. That agreement was signed by the APNU+AFC Coalition Government and a consortium of oil companies headed by the American giant ExxonMobil Guyana Inc. a far-removed subsidiary of ExxonMobil Corporation of the USA.

The theme of the activity was Sanctity of Contract  versus Sovereignty. Let me begin this presentation by showing two clips that are widely available on social media, one by President Irfaan Ali and the second by Vice President Bharrat Jagdeo.

Having come into Government, both Ali and Jagdeo have left those commitments behind, now repeating the mantra “Sanctity of Contract” . So, for today’s talk, I will look at sanctity and argue that this is not an absolute rule of law but rather is one that is subject to a number of exceptions, anyone of which could cause a contract to be set aside. As I hope to show, the 2016 Petroleum Agreement can be set aside under several of these exceptions.

In this first part of the adaptation, I invite you to look first at the excuse being used by the PPP/C.

Sanctity of Contract

The sanctity of contract is a legal principle which states that agreements, once freely made, should be honored and enforced. It means:

1. Contracts are binding.
2. Parties must fulfill their promises.
3. Courts generally uphold valid contracts.

This principle is important, promoting trust and stability in business relationships. However, when called upon, the courts not only consider the exceptions such as fraud, duress, illegality and unconstitutionality, but may also balance “sanctity” with fairness and the public interest.

First and foremost, my view is that having exhausted an earlier 1999 Agreement between Esso and the Government, Exxon was NOT ENTITLED to a second Agreement. Section 10 of the Petroleum Exploration and Production Act of 1986 conceived of a single Agreement that is phased out after ten years, barring any production licences issued under the Agreement. In essence, section 10 grants the Minister the power to enter into an agreement not inconsistent with the Act with respect to any or all of four specified matters, namely, the granting of a licence, the conditions attaching thereto, the procedure to be followed in exercising any discretion granted to him under the Act and any matter incidental thereto.

Illegality

But this provision was turned on its head under a so-called Bridging Deed conceived by Houston Texas in which one of the recitals states as follows:

“Pursuant to section 10 of the Act, the Minister has entered into this Deed together with the Contractor Parties to set out the process whereby 1999 Licence and the 1999 Petroleum Agreement will be replaced by a new petroleum prospecting licence and petroleum agreement in respect of the Contract Area.”

It is ironic that the Exxon who is now hiding behind “Sanctity of Contract” described at the April 2016 meeting that “the current (1999) agreement with Esso was in several ways out-of-date with what prevails administratively in Guyana and that an approach to Esso in 2010/11 to deal with that was politely declined.” Exxon’s team added that their company was prepared to move to a new “current specimen format for their agreement,” prepared and ready for GGMC to review. Here for all to see is Exxon admitting that it wrote the 2012 Model Petroleum Agreement which was subsequently handed to then Natural Resources Minister and blessed by President Ramotar.

Of particular relevance too, is a report by Clyde & Co., an international law firm based in London, which discloses that Brooke Harris of Exxon was actively engaged in the drafting of the Cabinet Paper on the 2016 Agreement. To be clear, the illegality lies not in the Cabinet Paper but in the granting of a second Agreement and the infamous Bridging Deed. Drafting of the cabinet paper was a sovereignty issue.

Duress

In April 2016, a technical team from the Guyana Geology and Mines Commission visited Exxon in Houston to discuss technical matters relating to a first discovery of oil announced in May 2015. Exxon threatened the Guyana Team with withholding investment until they were granted a new contract. This is how the Head of the GGMC Team reported the threat.

“Esso then confronted with GGMC the matter of their Contract and Licence… For Esso to start spending, the replacement petroleum licence and agreement is needed, along with the undertaking that the Development Plan and permitting would be done in good time.”

Even the Minister whose signature appears on the 2016 Agreement had grave doubts about the Agreement, writing in a book published after he demitted office that he and his Legal Officer “harboured some discomfort about signing”, which he claims, “did not go down well with Exxon top brass”.

Fairness

On the question of fairness, here is how the 2016 Agreement has worked in terms of distribution of the number of millions of barrels of oil produced. Yes, the oil companies have a right to recover their costs but as the numbers below show, Guyana received 12 % of the total oil produced in the first four years of oil production. Twelve percent must rank as one of the lowest host Government take anywhere in the world. It seems that the 2016 Agreement effectively transferred Guyana’s patrimony and good fortune to Exxon, at the expense of its people.

Compiled by: Ram and McRae

Source of Information: Budget Speech

Next week’s column will discuss unconstitutionality as an element of sovereignty and ask which one the Government thinks ought to prevail.

Oil companies have earned five times more from oil than Guyana.

Modest investment, gargantuan returns

Last week’s column completed the review of the published financial statements of the three companies which signed the 2016 Agreement for the Stabroek Block. Table 1 is a summary of the Income Statements (Profit and Loss Accounts) of the three companies which operate as branches of external companies rather than as incorporated entities with their own share capital and directors. We were fortunate to have been able to access the balance sheet of the CNOOC intermediate parent showing that the Company has only US$200,000 in permanent capital invested in Guyana. But CNOOC, which has a 25% stake in the Block, is no outlier among the three.

That is a discredited narrative and myth. CNOOC is no outlier. Hess which owns a 30% interest, has permanent capital of US$50,000 or the equivalent of $10 Mn while ExxonMobil, the Operator and 45% holder, has permanent capital of US$500,000 and preferential capital of US$10 Mn. It is clear that those who have sought to justify the incredible, untouchable and sacrosanct tax concessions protected for forty years. Not only do they all operate in low or no tax jurisdictions, but the money that they themselves invest is negligible.

Back to the numbers

These are derived from the audited financial statements of the three companies for 2023. The total profit before the mythical tax for the three companies amounted to G$1,624,712 of which Exxon’s share is shown at 46%, Hess at G$526,236 Mn. or 32% and CNOOC of 21.8%. Readers can turn to Columns 129 to 131 for a review and commentary on the 2023 financial statements of each of the three oil companies, including both their income statement and balance sheet. I have commented in the past years about the lack of comparability of the financial statements and am amazed that the auditors appointed by the Government at considerable cost and amid big fanfare, never seem to have recognised this self-evident fact. But the leadership seems no less clueless.

Table 1.

Financing capital projects

I draw your attention to the line-item Depreciation, depletion and amortisation of $382,826 Mn. charged as an expense in the Income Statement, representing 53% of the total expenditure for the year. That is what is referred to as a non-cash expense and for the technically minded, that amount is a source of funds in the Cash Flow statement. But guess what? Guyana bears fifty percent of that cost, even as the funds are available to be used by the oil companies for further investment. Even after 25 years, Vice President Bharrat Jagdeo who was a key adviser to then President Janet Jagan when she signed the 1999 Agreement, does not seem to understand how that Agreement which has been “bridged” to the 2016 Agreement works. In fact, Mr. Jagdeo compounds that sad state of affairs by refusing to set any ringfencing conditions to any Production Licence. In that regard, he is in good company: Mr. Aubrey Norton, the Leader of the Opposition, is similarly in the dark.

What is clear too is that these companies have recovered their investments many times over while Guyana has to borrow billions to build roads and infrastructure, provide security, grant huge tax concessions, all because we love the foreign investors.

Taxation

As the Table shows, Guyana will be paying out of our oil fund $306,784 Mn. as taxes for the trio, plus giving the oil companies tax receipts so that they can double-dip. Another grand idea from Mrs. Jagan and Mr. Jagdeo and taken up by David Granger and Raphael Trotman in 2016. We seem to have created our own oil curse!

Table 2: Five Year revenue compilation 2019 – 2023

Five to One is highway robbery 

The above Table shows how lopsided the 2016 Agreement in money terms is. Over the years since production began, the oil companies have walked away with the staggering sum of $3,337,760 Mn, inclusive of the tax certificate to which they are entitled. The taxes nominally payable by the oil companies, are paid by the government of Guyana but the receipt is written in the name of the respective oil company so that they can then present them to get tax credits in their own country. What a farce, what a fraud?

But that is only part of the story. The line Royalties represent the compensation to Guyana for the petroleum extracted and sold. Even the quarries, the sand pits, the loggers and the gold miners are envious of a 2% royalty when some of them pay as much as 8%! A 2% royalty is one of the lowest in the world, but the Government claims without any serious understanding of contract law, that there is sanctity. Mr. Nandlall would tell them that such a principle is not absolute and that there are several grounds for setting aside a contract. That will be the subject for another column.

So let me point out that the oil companies have earned five times more than the Government under a 50/50 profit share Agreement. It is clear that the oil companies are engaging in lopsided front-end loading to grab as much as possible, as fast as possible. While draining the natural resources of Guyana, they are squeezing every ounce of flesh and drop of blood from the body of Guyana. The government likes to boast that in 2027 and beyond we will be producing substantially more oil than we do now. That is indeed true but all the evidence from all the experts is that oil prices will begin to fall in another couple of years.

Conclusion

President Ali has disowned responsibility and instead of a professional, competent Petroleum Commission he has Is delegated responsibility for the sector to Mr. Jagdeo. To say that this is a grievous mistake is an understatement, and grievously are we paying for it.

STABROEK’S JUNIOR PARTNER CNOOC MAKES G$355.7 MN ON SHARE CAPITAL OF US200,000. YES, TWO HUNDRED THOUSAND US DOLLARS.       

Introduction

Today’s column features the financial statements of the Chinese-owned CNOOC which holds a 25% working interest in the Stabroek Block, as a “non-operated joint venture partner”. CNOOC, like its other two partners, is a branch of a company incorporated outside of Guyana and traces its parent to the People’s Republic of China.

The Income Statement

For the year 2023, the Branch reports net sales of $513 million, an increase of 15% over 2022, and net income before income taxes of $355,694 million, an increase of 5% over 2022.

Expenditure on exploration activities is shown at $7,435 million, an increase of 38% over 2022. Given the company’s status as a “non-operated joint venture partner,” it has to be assumed that that expenditure is merely a share of such expenditure of the entire project of which Exxon is the designated Operator. Operating costs of $49,982 million represent an increase of $10,115 million, or 25% more than 2022. Despite the significance of these amounts, there is no note or explanation of what these line items comprise. Depreciation, depletion and amortisation is reported as $94,416 million, an increase of $37,274 or 65%. This is a non-cash cost and represents 18% of revenue and 60% of total expenditure.

From the net income, there is a deduction of $37,042 million, described as Deferred income tax. Note 8 on Taxation explains that exploration and development costs are capitalised and written off over five years and that deferred tax asset as disclosed is in respect of tax losses, recognised only to the extent of future taxable profits. Of course, taxation for the three companies is a fiction since the Government pays the taxes for the companies. This is acknowledged by the same note and confirmed by the branch’s Cash Flow Statement which shows as an add-back the identical amount deducted in the income statement.

It does not appear that the branch transfers its net income for any year was transferred to the parent company. As a result, the after-tax profits are added to the opening net income of $329,782 million, bringing the total net income at the end of the year to $648,434 million, as shown in the Balance Sheet.

The Statement of Financial Position  (Balance Sheet).

Turning to the Statement of Financial Position, total assets is made up mainly of Property, Plant and Equipment of $1,193,002 million, of which $1,176,600 million is invested in Development Assets, $204,022 million in Exploration and Evaluation Assets and $1,005 million is in Office Equipment and Others. Accumulated depreciation reduces the book value by $187,473 million, $771 million and $378 million, respectively. Accounts receivable reports a total of $9,161 million, an increase of $5,870 or 178%.

Current Liabilities mainly consist of Accounts payable and accrued liabilities of $64,596 million, an increase of $62,541million or 3043% over 2022.

Capital Expenditure in 2023 was $374,479 million, an increase of 42% over the amount expended in 2022. The provision for Decommissioning and restoration is shown at $118,773 million, an increase of $25,966 million which again is a strange item given that CNOOC self-describes as “non-operated joint venture partner”, since Guyana will have some legal barriers to holding a “non-operated joint venture partner” as a primary creditor for de-commissioning expenditure. As a practical matter, what if CNOOC pulls out of the venture before the end of the venture?

Unlike its two co-venturers, CNOOC maintains no inventory. It continues to sell its share of oil lifts to an affiliate in Singapore on a cargo-by-cargo basis. Despite this arrangement the company owes its related parties more than $258,000 million, the terms and conditions of which, including interest, are not stated. Unlike its co-venturers as well, the company’s financial statements do not disclose any royalty payment to the Government, which seems to violate the country’s Extractive Industry Transparency Initiative (EITI) obligations.

Conclusion

This columnist was able, by accident, to see the balance sheet of the company of which the Guyana operation is a branch. incredibly, that company has a share capital of US$200,000 or G$40,000,000. and for 2023 alone, it walks away with $355,694 million.  

The column has stated in the past – that most ordinary companies in Guyana produce financial statements that are more informative and reader-friendly that CNOOC’s.

Next week’s column will feature a compilation of the financial statements of the three companies and compare these with the takings of the Government, AND THE REAL STORY BEHIND CNOOC’S PAYMENT TO EXXON.