SUMMARY
THE argument by the proponents for renegotiation that the oil companies are not paying any taxes in Guyana is a misconceived notion. The clause in the Production Sharing Agreement (PSA) that speaks to the government paying the oil companies’ corporate taxes from the government’s share of profit– following which the Guyana Revenue Authority issues a tax certificate to the oil companies is essentially a nominal tax. In other words, the normal corporate tax rate is not applied to the oil companies, but the oil companies benefit from this in the form of a tax credit in the case of ExxonMobil in the United States (U.S). While some analysts are critical of this provision, it is in fact beneficial for Guyana such that, the tax credit obtained in the home country is an incentive for the oil companies to ramp up future investments, inter alia, reducing their tax liability in the U.S while maximising profit.

It is worth noting that it is normal practice universally for petroleum producing countries to design a separate fiscal regime specifically for the oil and gas industry that is usually different from the mainstream fiscal regime applied to companies operating in other sectors. This is the case in the United Kingdom and in Guyana. There are different types of fiscal regimes that can be applied to the oil and gas industry. The reason for this is largely because of the highly capital-intensive nature of the industry, the nature of the project life cycle which spans about 30 years, 10 – 15 years of exploration, another five years developing the fields for production (provided that the fields are commercially viable), and another 10 years of productive life; the volatility of oil prices which is impacted by market conditions (demand and supply) as well as geopolitical tensions, and more so, the high-risk nature of the industry.

Guyana is poised to earn approximately US$49 billion from four approved projects by 2036. As more FPSOs come on stream, Guyana’s earnings will increase substantially. The criticisms concerning the current PSA which are often on the extreme end ignores many other practical variables. The government has done a commendable job in terms of maximising value for the country through better contract administration. Two critical elements in which the government has succeeded in this regard is (1) the local content legislation and (2) the financing of the gas to shore pipeline infrastructure from cost oil.

BACKGROUND
In part 1 of this series, the author examined the subject matter of this analysis from three dimensions, namely: (1) the project lifecycle, (2) the investment risks and capital-intensive nature of the industry, and (3) the impact of climate change policies and energy transition on the future demand for the global industry. In these respects, it was argued that the project full lifecycle of the oil and gas business is around 30 years or more. During the exploration and development stage which spans about 20 years before production, the oil companies continuously inject capital to explore and develop the resource.

The nature of the oil and gas business is one that is of high investment risks and capital intensive. The exploration and development cost for Liza 1 alone amounted to about US$4 billion, the total estimated development cost for Liza 1, Liza 2, Payara and Yellowtail is about US$29.3 billion, representing 100 per cent of Guyana’s pre-oil GDP in the case of Liza 1 and for the four approved projects combined represents 7.3 times Guyana’s pre-oil GDP. Many countries are already accelerating climate change policies, designed to transition from a fossil-fuel driven energy system to renewable energy with investments amounting to hundreds of billions in U.S. dollars which ultimately means, that these developments will have a direct impact on global oil prices which will be on a downward trajectory, at some point into the future.

That said, as the public debate continues, Professor Hunte in a recent missive to the local media argued that the lack of taxes and ring fencing shortens Guyana’s profits from the oil sector. Prof. Hunte went on to argue that by not renegotiating the deal before the end of the period outlined in the contract (2036), Guyana will essentially have “nothing to get”.  He explained, “Given this non-interference by Guyana; and in light of the fact that (Esso Exploration and Production Guyana Limited- Exxon’s subsidiary) EEPGL will be accelerating the extraction of Guyana’s oil by introducing several new floating production storage and offloading (FPSO) ships, it is conceivable that come 2036, EEPGL will be ready to shut-shop and leave, as all the commercially viable oil would have been extracted and Guyana will have nothing to get.”

DISCUSSION AND ANALYSIS
Oil and Gas Fiscal Regimes
The argument by the proponents for renegotiation that the oil companies are not paying any taxes in Guyana is a misconceived notion. The clause in the Production Sharing Agreement (PSA) that speaks to the Government paying the oil companies’ corporate taxes from the Government’s share of profit– following which the Guyana Revenue Authority issues a tax certificate to the oil companies is essentially a nominal tax. In other words, the normal corporate tax rate is not applied to the oil companies, but the oil companies benefit from this in the form of a tax credit in the case of ExxonMobil in the United States (U.S). While some analysts are critical of this provision, it is in fact beneficial for Guyana such that, the tax credit obtained in the home country is an incentive for the oil companies to ramp up future investments, inter alia, reducing their tax liability in the U.S while maximising profit.

Corporate Income Taxes are typically applied to the operating profit made by corporations at various rates in Guyana. Thus, in principle, the Government’s Take in profit oil at a rate of 50 per cent is no different from this basic fundamental in terms of the application of corporate taxes. The Corporate Tax rate applied to telephone companies in Guyana is 45 per cent on chargeable profits; 40 per cent on chargeable profits of a commercial company other than a telephone company; and 25 per cent on the chargeable profits of any other company.

With this in mind, it is safe to say that the oil companies are effectively subject to a higher tax rate than any other local and foreign company operating in Guyana under the regular national tax regime.
It is worth noting that it is normal practice universally for petroleum producing countries to design a separate fiscal regime specifically for the oil and gas industry that is usually different from the mainstream fiscal regime applied to companies operating in other sectors. This is the case in the United Kingdom and in Guyana.

There are different types of fiscal regimes that can be applied to the oil and gas industry. The reason for this is largely because of the highly capital-intensive nature of the industry, the nature of the project life cycle which spans about 30 years, 10 – 15 years of exploration, another five years developing the fields for production (provided that the fields are commercially viable), and another 10 years of productive life; the volatility of oil prices which is impacted by market conditions (demand and supply) as well as geopolitical tensions, and more so, the high-risk nature of the industry.

In the case of Guyana, for example, the projected investment by the co-ventures (EEPGL, Hess and CNOOC) for the Stabroek block is about US$60 billion of which US$29.3 billion have already been committed to develop and produce from four approved projects. The total projected investment (US$60 billion) is 15 times Guyana’s pre-oil GDP of US$4 billion.

Here is a different perspective based on some interesting facts:

a) Trinidad and Tobago (TT) which has been in the oil business for more than a century, hence, TT took this long (100 plus years) to attain a GDP of US$20 billion, just five times Guyana’s pre-oil GDP. In other words, TT was five times richer than Guyana before Guyana became an oil producing nation.

b) Guyana took two decades to move from US$200 million GDP to US$4 billion GDP. Therefore, all things being equal, and assuming Guyana never discovered oil resources in commercial quantities; at the same rate of development for the past two decades, it would have literally taken Guyana another 300 years to become a US$60 billion economy.

With this perspective in mind, from the US$29.3 billion which represents 49 per cent of the total budgeted / projected investment for the Stabroek block that has already been committed to develop the four approved projects, Guyana is projected to earn cumulatively by 2036 US$49 billion. Again, all things being equal it is safe to assume that from the entire Stabroek block investment which would amount to US$60 billion, Guyana is poised to earn about US$100 billion or more over the productive life of the Stabroek block. Put differently, this simply means that what Guyana would have taken 300 years to achieve, can be achieved in 50 years with the current PSA, all things being equal.

Of course, this level of investment comes at a cost and with certain risks that have to be borne largely by the oil companies. It is, therefore, a highly misleading notion as propagated by Professor Hunte et.al, that Guyana will earn “nothing” within the fiscal framework of the current PSA.

RING FENCING
The lack of ring-fencing provision in the current PSA framework was heavily criticised at the outset of oil production. In hindsight, however, the lack of ring-fencing provision is another form of incentive for the oil companies that is encouraging the scaling up of future investment to explore and develop new fields. Moreover, out of the 33 wells in the Stabroek block to date, there are only three dry wells of which the cost of exploration on the higher end is about US$300 million. Notwithstanding, the cost recovered from the dry wells as a percentage of total revenue from the approved projects is less than one per cent and therefore has an immaterial impact on the overall bottom line.

CONCLUDING REMARKS
Guyana is poised to earn approximately US$49 billion from four approved projects by 2036. As more FPSOs come on stream, Guyana’s earnings will increase substantially. The criticisms concerning the current PSA which are often on the extreme end ignores many other practical variables. The government has done a commendable job in terms of maximising value for the country through better contract administration. Two critical elements in which the government has succeeded in this regard is (1) the local content legislation and (2) the financing of the gas to shore pipeline infrastructure from cost oil.

(In part 3 of this series, the author will delve into the geopolitics of oil referencing the case of Venezuela versus ExxonMobil, the consequences that followed after ExxonMobil lost the legal battle against Venezuela, and lessons for Guyana. This will be examined in the context of the renegotiation debate of the current PSA and the stability clause. Finally, in part 4, the author will conclude the series with some considerations on the fiscal terms for the new PSA framework).