More benefits for Guyanese
Vice President, Dr Bharrat Jagdeo
Vice President, Dr Bharrat Jagdeo

–increased royalty, corporate tax, 50 per cent profit among new fiscal conditions identified by gov’t ahead of auctioning of 14 oil blocks
–provisions in place to ensure there are consistent activities in auctioned blocks, Dr. Jagdeo says

THE government has agreed to auction 14 of Guyana’s remaining offshore oil blocks under new fiscal terms, which will subject successful companies to 50 per cent profit sharing, a royalty rate of 10 per cent, and corporate tax of 10 per cent, among other things.

The new fiscal terms and other conditions for future Production Sharing Agreements (PSA) were outlined on Thursday by Vice-President Dr. Bharrat Jagdeo during a press conference at the Office of the President.

Giving an update on the government’s progress regarding the imminent oil-block auction, Dr. Jagdeo noted that Guyana is among 65 countries that will be launching auctions of oil blocks, and as such the government worked along with international consultant, IHS Markit Consulting, to offer the best terms that will see the country remaining competitive while also getting a fair deal.

“These are key fiscal conditions. We know already funds are scarce [for oil-and-gas exploration], largely because of net zero targets. It is more and more difficult to finance the oil-and-gas sector. IHS Markit assured us at this level, although they [the conditions] may seem high to some people, that we will remain very competitive,” Dr. Jagdeo related.

He went on to say: “Some will believe we’re taking too much; others will complain we should have taken everything under the sun. We opted for a simple formula with fixed royalties. Some countries have variable royalty, depending on internal rate of return; we did not go with that complex system. We opted for a simple system which can be understood by everyone. The fixed royalty protects against when oil prices drop.”

The new fiscal terms and other conditions will not be applicable to existing contracts. Outside of the fiscal terms, there will also be other ways in which the government will be moving forward with a stronger PSA to derive lucrative benefits from the oil-and- gas sector.

“The strengthening will take place in the entire PSA. Laws of the country will also be amended where necessary to reflect anything inconsistent with that,” Dr. Jagdeo said.

The government will also be implementing stronger relinquishment provisions that will be part of a work programme, which each bidder will be required to submit. The work programme, along with the bidder’s price, will form the criteria that the government will utilise to assess the bids and determine the successful awardees.

In the work programme, the companies will have to outline spending commitments, and if the money is not spent, it will become a penalty that the company will have to pay to the government.

“It will prevent people from taking a block and sitting on it,” Dr. Jagdeo said.

RING FENCING  
The contract, according to the Vice-President, will also include ring fencing, which means that in computing the profits of an enterprise, only the expenses directly referable to that enterprise or oil activity can be deducted from the income earned from that field.

Based on the new conditions, the maximum amount that could be recouped as cost oil is up to 65 per cent of revenue.

“We were exploring two models for ring fencing; around the fields model or around the contract. We have decided on ring fencing around contract; this is because the area is small. So, you don’t need to ring fence around projects. We’re told it’s the most efficient way,” Dr. Jagdeo related.

With the conditions in place, it paves the way for the auction, which is expected to run for five months after its date of commencement.

The 14 blocks that will be auctioned range in size from 1,000 square (sq) kilometres (km) to 3,000 sq km.

According to Dr. Jagdeo, 11 of the blocks will be in a shallow area, while three of the blocks will be in deeper waters. Some of the requirements for the bidding process will be different for the three deep-water blocks, as opposed to the 11 shallow-water blocks.

In particular, winning bids for the three deep-water blocks will require a minimum signing bonus of US$20 million per block, while the 11 shallow-water blocks will carry a minimum signing bonus of US$10 million per block.

The separate types of blocks will also carry different relinquishment provisions: Shallow-water blocks will be given a period of five years, while deep-water blocks will get 10 years.

For both types of blocks, companies will have three years to conduct seismic tests, after which they will have to relinquish 50 per cent of the block.

“We are doing this because we want greater turnover; we don’t want people to sit on the blocks,” Dr. Jagdeo noted.

There will be two one-year extensions for the shallow blocks. For shallow-water blocks, the last two of the five years will be split into two one-year exploration periods, while for the deep-water blocks, their remaining seven years is also to carry out exploration.

Companies will be allowed to bid for as many blocks as they like, however, they would only be awarded a maximum of three blocks.

To make the bids more competitive, the government will be allowing both locals and foreign investors to bid.

Further, according to Dr. Jagdeo, there will be minimum technical and financial qualifications, which will be more stringent for three ultra-deep areas, since just few companies, globally, have the resources to work in such conditions.

Regarding arrangements for possible government-to-government partnerships, and or the establishment of a National Oil Company (NOC), Dr. Jagdeo noted that the possibilities are still being discussed, but there are still a number of offshore oil blocks outside of the 14 that will be up for auction.

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