LOCAL authorities are working to implement clearer ring-fencing rules in future oil resources-related Production Sharing Agreements (PSAs) to safeguard the flow of Guyana’s oil revenues.

This was highlighted by a visiting International Monetary Fund (IMF) member of staff who was here from June 3–14 to discuss the 2019 Article IV Consultation.

In a subsequent Concluding Statement, the IMF staffer also spoke to the dangers of the absence of a ring-fencing arrangement in the Stabroek PSA. Ring-fencing occurs when a portion of a company’s assets or profits are financially separated without it necessarily being operated as a separate entity.

It can also be described as a limitation on consolidation of income and deductions for tax purposes across different activities, or different projects, undertaken by the same taxpayer.

It can assure government revenue when a company’s undertakes a series of projects hoping to deduct exploration or development expenditures from each new project.
It can also hamper the further exploration by companies due to their inability to claim deductions for such activities on new projects.

ExxonMobil’s affiliate, Esso Exploration and Production Guyana Limited (EEPGL), is the operator of the Stabroek Block offshore Guyana, holding a 45 per cent interest.

Hess Guyana Exploration Limited holds a 30 per cent interest, and CNOOC Nexen Petroleum Guyana Limited a 25 per cent interest. Speaking on the same, the IMF Staff stated that local authorities have raised concerns about the need for clearer ring-fencing rules and also detailed to the Fund their own plans to improve such.

“The authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues. The rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field,” the statement indicated.

It added: “The authorities are developing strategies to mitigate such a possibility, including a national oil depletion policy to guide extraction and production and clearer ring-fencing rules for new investments.”

Meanwhile, the IMF Mission also projects a real economic growth of 4.4 per cent for Guyana in 2019. This, it said, will be driven by continued strength in the construction and services sectors ahead of oil production in 2020, and strong recovery in mining.

It noted that this is not likely to be affected by the crisis in neighbouring Venezuela, as the IMF does not foresee any significant spillovers, although it does note that the influx of migrants into hinterland and rural areas could put a strain on the socio-economics of the local communities.

Also, examining the previous year, the IMF noted that Guyana’s economic growth strengthened in 2018 with “broad-based expansion” across all major sectors.
Meanwhile, it stated that real Gross Domestic Product (GDP) grew by 4.1 per cent in 2018, up from 2.1 per cent in 2017 which is primarily attributed to the construction and services sectors. At the same time, inflation remained steady at 1.6 per cent at end of 2018 as a result of stable food prices and exchange rate.

However, the Fund noted a weaker current account balance as a result of weaker export performance and higher imports driven by high value imports related to oil production.
Earlier in the month, reporting on similar developments in the economy, Finance Minister, Winston Jordan had urged the Caribbean Development Bank (CDB) to be at the forefront of Guyana’s transformation for the benefit of the Caribbean Region.

Such efforts, he explained, could assist the country in correcting the major capacity and capability gaps it faces heading in to the new sector.

Also attributed to the petroleum sector in the IMF’s findings, was the 2018 account deficit which rose to 17.5 per cent of GDP from 6.8 percent in 2017 largely financed by Foreign Direct Investment (FDI) related to the industry.
Nonetheless, the country’s reserves stood at US$528M in December 2018.