Dear Editor,

PLEASE permit me to respond to retired professor, Dr. Ganga Ramdas, who wrote a letter in the print media on June 2, 2021 that appeared in the Kaieteur News with the caption… “How much taxes should Exxon and the oil companies have paid?”
The retired professor’s analysis is unfortunately inherently weak with very poor analogies to substantiate the learned professor’s argument. Dr. Ramdas failed to acknowledge that the fiscal regime which Exxon enjoys, inter alia, the Production Sharing Agreement (PSA) – though outside of the normal (national) fiscal regime which other companies are subjected to – is so designed to cater for the nature of the industry. That is to say, it is a new industry for Guyana, one that is highly capital intensive, the scale of investment activities is many times larger than Guyana’s GDP: wherein, for example, Exxon’s projections for Guyana is US$60 billion over a period of 30 years – which is equivalent to 8.5 times 2020 GDP (inclusive of the oil economy) and 15 times Guyana’s non-oil GDP using 2018 real GDP.

Dr. Ramdas argued that should Exxon pay taxes on its share of profit oil – by applying the tax rate to companies involved in commercial activities of 25 per cent, “the oil companies should have paid approximately $62 million in taxes” contending that this is a revenue loss for Guyana. To put his argument into perspective, he implicitly argued that the taxes paid by pensioners and other companies subject to the normal income taxes applied to commercial and non-commercial firms in Guyana, contributes towards building the infrastructure that exist, such as airports, roads, hospitals etc., which everyone utilises and that effectively, the oil companies are using our airports and roads etc., for free by virtue of being exempted from paying corporate taxes. This is a very misleading and non-contextual reasoning by Dr. Ramdas, to say the least. To support this view, let’s understand the PSA and Guyana’s true potential profit share during cost recovery and post cost recovery.
Having said that, let’s look at some analysis using Liza Phase One project alone. Liza Phase One has a production capacity of 120,000 barrels per day, total investment cost of US$4.3 billion, and comprise of 450 MMbl.

Liza Phase 1 Projections Price (US$) Annual Revenue (USD$B) Annual production: 43,800,000 45 1,971,000,000 Recovery Cost (75%) 1,478,250,000 Investment Cost 4,400,000,000 Profit share 246,375,000 Royalty 39,420,000 Total Annual Revenue 285,795,000 Total Avg. Annual Revenue in first 3 years 857,385,000 Avg. Annual Revenue Post Recovery: Operating Expense (30%) 591,300,000 Profit share (50% = 35%) 689,850,000 Profit share for Liza 1 post recovery (7yrs) 4,828,950,000 Royalty 275,940,000 Total Revenue 5,104,890,000 Projected Avg Revenue for Liza 1 (10 yrs life) 5,962,275,000 Avg Revenue for 1st 5 years: 2,237,085,000 Exxon’s 2018 Operating Expense = 27% of total revenue Liza phase 1 = 450 MMbl NPV investment recovery @10% discount rate = 4 years Payback period = 3 years

Dr. Ramdas does not seem to comprehend that because of the 75 per cent cost recovery threshold, the recovery period for these investments will be very short. Liza phase One in the above illustration for example, using an average price per barrel of US$45 at an annual production capacity of 43.8 million barrels of crude, the investment cost of US$4.3 billion will be recovered within three years using the payback method. With the Net Present Value (NPV) investment appraisal method and a discount rate of 10 per cent, the investment can be recovered within four years. As such, from the Liza One alone, Guyana can earn over US$2 billion in the first five years and up to US$6 billion within 10 years – taking the post recovery period into the equation. In other words, Guyana’s projected earnings from the Liza One development alone over the first decade is equivalent to 120 per cent of current GDP; 3.5 times current level of total public debt and five times government’s revenue using 2019 figures.

The highest cost is usually the development cost and, therefore, when the development cost is recovered, the operating cost is typically minimal since the infrastructure to extract the crude is already in place. To substantiate this view with reasonable certainty, a perusal of Exxon’s 2018 annual report confirmed that total operating cost was just about 27 per cent of total revenue. Hence, this means that in the post recovery period, profit share will be greater, assuming for example, that operating cost will be 30 per cent of total revenue, then effectively there will be 70 per cent of revenue for profit share of which 50 per cent is Guyana’s share. Consequently, Guyana’s profit share can be as much as 35 per cent post recovery period plus two per cent royalty resulting in a total take of 37 per cent; up from 14.5 per cent during the recovery period in the first three to four years for Liza Phase One development alone; and greater than the 25 per cent corporate tax applicable to companies involved in commercial activities. Then there is Liza phase Two and many other FPSOs and development fields that will be operationalised over the decade.

Dr. Ramdas is also incorrect to assert that the oil companies are using the existing infrastructure for free, given the aforementioned analysis. Further to note, the revenues earned from Guyana’s oil resources will, in fact, be utilised to propel Guyana’s transformational development and in particular – infrastructure and education as alluded to by His Excellency, the President of the Co-operative Republic of Guyana. It should be noted as well that the administration of the day is keen on implementing a strong local content policy, which will ensure that Guyanese firms, professionals and the people at large – are given maximum benefit in the sector as well as the opportunity to participate in the emerging sectors. When more local firms participate in the sector, capitalising on the emerging opportunities as well as in the value chain and other sectors, the firms perform better – enjoy increase profits and in turn, pay more taxes – to put this simply.

It is against these backgrounds, that the analysis put forward by Dr. Ramdas is far from being credibly sound and robust – ignoring the ‘country and global contexts’ altogether.

Yours faithfully,

J.C Bhagwandin

Financial & Economic Analyst;
and Adjunct Professor, Texila American University, Business College