Every Man, Woman and Child in Guyana Must Become Oil-Minded – Part 76 – September 6, 2019
Introduction
For some time, questions have been raised about the royalty provisions in the 2016 Agreement under which Trotman/Greenidge/Granger partially signed away the birthright of all Guyanese past, present and future. This short column seeks to identify both the direct and indirect provisions on royalty found in the Agreement.
Before doing so however, it may be instructive to consider what a royalty is and how it arises. The word “royalty” has a host of meanings but in the business or commercial sense it is used to refer to moneys paid for the sale or use of a capital asset owned by another. It is not uncommon to see the word used in relation to intellectual property, including artistic and literary works, and in the mining sector, it is used to describe the payment made to the owner of resources for the extraction of some natural resource whether renewable – such as timber, or non-renewable, such as precious stones, bauxite, manganese or petroleum.
Is we own
To ascertain the owner of Guyana’s petroleum resources one has to look at a little considered, and ultra-short piece of legislation dating back to 1939. It is called the Petroleum (Production) Act and on the enactment of the 1986 Petroleum Exploration and Production Act, it is left with two sections, including the short title! It is good to be reminded however that section 2 (1) of the Act provides with clarity and brevity as follows:
“The property in petroleum existing in its natural condition in strata in Guyana is hereby vested in the State, and the State shall have the exclusive right of searching for and getting such petroleum.”
As Dave Martins will say, “is we own”
So here we have it: the non-renewable petroleum resources belong to the State and anyone seeking to exploit it must pay a royalty for that right. So we turn to the Petroleum Agreement to see how this commonsense, practical business matter is addressed. While the term is actually used a few times in the Agreement, Article 15 thereof is titled Taxation and Royalty which makes this Article of the Agreement perhaps the best place to start. Paragraph 15.6 provides as follows:
“The Contractor shall pay, at the Government’s election either in cash based on the value of the relevant Petroleum as calculated pursuant to Article 13 or in kind, a royalty of two percent (2%) of all Petroleum produced and sold, less the quantities of Petroleum used for fuel or transportation in Petroleum Operations, from all production licenses subject to this Agreement.”
The end of clarity
A plain reading of the provision makes it pellucid that the royalty payable to the State of Guyana for the alienation of a non-renewable resource is a mere 2%, which is hardly an improvement on Janet Jagan’s 1% Royalty in a 1999 Agreement! But clarity ends there. Production is in the form of crude oil and it is unclear – with no assistance from the Agreement – on resolving the confusion of measuring (raw) crude with fuel for transportation in petroleum operations. The confusion does not end there: a deduction from gross production for transportation is in respect of every production licence under the Agreement. And there will be many, many!
There is a further problem: quite what does “produced and sold” mean? Well, yes we know what “produced” means but sold? None of the oil companies described as contractors in the Agreement is likely to be selling crude oil so just when and in what form does the sale take place? Or what conversation factor does Guyana expect or will be prepared to accept as a reasonable application of the term “produced and sold”.
It does not end there. Article 14.1 provides among other things that:
“The Contractor shall have the right to use as much production as may be needed in any Petroleum Operations within the Contract Area and also within the transportation and terminal system. In the event of third party usage of the transportation terminal systems the quantities so used or lost outside the Contract Area shall be proportionate to aggregate use of that transportation and terminal system. All quantities so used or lost shall be excluded from any calculations of entitlement pursuant to Article 11.”
Generously misleading
In other words, Article 14.1 is more generous than the Taxation and Royalty Article by allowing deduction from gross production the fuel equivalent (my term) used not only in the Contract Area of 26,806 sq. km. but in an enlarged transportation and terminal system! With our petroleum people showing a frightening mix of unwillingness to learn with an apparent inability to learn, the Agreement sets us up for a very lopsided arrangement.
I am not entirely satisfied that these concessions are in fact permitted under the Petroleum Exploration and Production Act but who cares? We fight for political power but nonchalantly give away our patrimony.
Interestingly, the Agreement at Article 15.5 suggests that the payment of the royalty is by the Contractor but that is at best misleading. Royalty is not being paid by the Contractor but, like any other expense, is borne by the Government as well as the Contractor. Moreover, because royalty is a deductible expense to arrive at profit oil, the Government bears half the cost of the 2% royalty. In other words, for a non-renewable resource with implications for the environment, the economy and the society, the royalty the State gets is 1%! I do not think it is a stretch to suggest that the effect on the fishing sector will take up part of that royalty.
Renegotiating the royalty?
Now for those who have been calling for the renegotiation of the Agreement, here is what Article 32.1 has to say about that:
“After the signing of this Agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted thereunder any increase of or any new petroleum related fiscal obligation, including, but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imposts.”
This is the inheritance which Trotman, Greenidge and Granger have bestowed on Guyana. What a shame! All that is left for them to do to complete their generosity is to waive the royalty as they are permitted to do under section 49 of the Petroleum Exploration and Production Act.
By Chris Ram
Article originally published at: https://www.chrisram.net/?p=2133
