— financial analysist swats claims that addendum to PSA of 2016 equates to a form of renegotiation

FINANCIAL Analyst Joel Bhagwandin said the proponents of the argument that the addendum to the Production Sharing Agreement (PSA) of 2016 is a form of renegotiation of the contract are trying to create a storm in a tea cup by peddling a dangerously false narrative.

According to Bhagwandin, had this been any form of renegotiation, given the political circumstance that the previous government was surrounded by at the time of this addendum, it would have made absolutely no hesitation to politicise this as part of their campaign for the 2020 elections.

“It is logical to conclude, therefore, that they knew this was just a clarification and a non-issue, hence, it would have been silly to create a smokescreen out of this issue and to misrepresent what the addendum really meant to do in this particular case,” he said.

Prominent Chartered Accountant and columnist, Chris Ram, made the revelation that the PSA was renegotiated under the previous government back in 2019. The thrust of this revelation, Bhagwandin said, is being used by the proponents, Ram et.al, as the basis to make the case for the government to demand renegotiation of the PSA.

“In fact, the proponents have dangerously–whether with the intention to mislead–equated an ‘addendum’ to that of ‘renegotiation.’ Hence, the proponents have incorrectly, or arguably, intentionally sought to misrepresent what is an ‘addendum’,” the financial analyst pointed out.

UNDERSTANDING THE DIFFERENCES
In contract law, he explained that there are clear distinctions between an addendum to an existing contract and an amendment to an existing contract. An amendment to the term (s) of an existing contract can be more considered to be renegotiation of a contract, while an “addendum” is used to clarify and add things that were not initially part of the original contract agreement.

According to the Corporate Finance Institute, an addendum is defined as “… something added to a previously existing written document – usually a contract. Typically, it is either a more detailed explanation of something already noted in a contract or a proposed change to the contract.”

Ideally, Bhagwandin noted, an addendum is in the form of a separate, signed agreement that is attached to the original contract. Since the purpose of an addendum is commonly “clarification,” preparing a separately signed document helps to avoid any confusion.

With respect to the Addendum dated April 2019 to the 2016 PSA, he said it is nothing more than offering absolute clarity with regard to the treatment of royalty, wherein, the royalty ought not to be cost recoverable.

In fact, the addendum clearly stated that: “WHEREAS the parties further engaged in discussions, in the interest of the avoidance of all doubts, the parties have come to a mutual and satisfactory agreement that the payment of royalty pursuant to Article 15.6 of the Petroleum Agreement shall be borne solely by the Contractor.”

ROYALTY PAYMENT
It goes on to state that “the said royalty payment shall not be recoverable cost, in any manner or formulation under the Petroleum Agreement.

“In further substantiation of the foregoing argument, if one were to examine Annex C (sections 1 – 3) of the original PSA agreement of 2016, one will find that nowhere in the classification of recoverable expenditure that royalty is stated as a cost-recoverable item. In fact, royalty was also not listed as an expenditure under this section – that speaks to cost-recoverable items that are not subject to the approval of the minister. Section 3 (1) speaks to costs not recoverable under the agreement, section 3 (2) speaks to costs recoverable only with the approval of the minister and section 3 (4) speaks [to] other costs and expenses not covered or dealt with in the provisions of section 3 and which are incurred by the contractor in the conduct of petroleum operations are recoverable subject to the approval of the minister. Having regard to the language of these referenced provisions and the fact that word ‘royalty’ was not specifically stated in these provisions, the treatment of the royalty would have been under section 3 (4), where other costs and expenses not dealt with would be subject to approval from the minister. In other words, under the original contract, because royalty was not specifically mentioned in the list of cost-recoverable expenditure items, neither was it clearly listed under the cost items that are not cost recoverable, the addendum became necessary to provide absolute clarity that the royalty is not a cost-recoverable item,” he explained.

The financial analyst pointed out on the other hand, had there been an ‘amendment’ to the fiscal terms, say for example, a change in the royalty from two per cent to five per cent, this would have materially impacted the economic benefits towards the oil companies and in this instance, would have been regarded as some form of renegotiation of the PSA.

“It should be understood that in the circumstance, renegotiation of the fiscal terms as contained in the original PSA in any given situation will be intended to ultimately reduce the economic benefits that will be derived in favour of the oil companies [contractors] and increase the economic benefits derived for the country. This was not the case with respect to the purpose of the addendum and what the addendum [was] meant to achieve. The addendum was simply meant to offer absolute clarity that the royalty is not cost recoverable,” the release said.