Guyana’s laws on petroleum exploration and production date back to the 1980s. The Petroleum (Exploration and Production) Act 1986 and its related Regulations form the main legislative and regulatory framework for the ‘exploration, exploitation, conservation and management of petroleum existing in its natural condition in land in Guyana, including the territorial sea, continental shelf and exclusive economic zone of Guyana’. The Guyana Geology and Mines Commission (GGMC) is responsible for planning and securing the development, exploitation and management of petroleum and to ensure that the citizens of Guyana derive the maximum benefit from such resource.
Following ExxonMobil’s discovery in 2015 of some five billion barrels of crude oil resources off Guyana’s coast, the Natural Resource Fund (NRF) Act was passed in January 2019. There was also a proposal to establish a Petroleum Commission to oversee the oil and gas industry. In this regard, the Petroleum Commission Bill was tabled in the National Assembly in 2017, and after its first and second readings, it was referred to a Select Committee for detailed scrutiny. Since then, there has been no further progress.
Petroleum (Exploration and Production) Act 1986
The Act was promulgated at a time when there was no evidence of the discovery of petroleum products in commercial quantities. It was amended twice, in 1992 and 1997. Since then, there have been no further amendments despite the fact that Guyana is now an oil producing nation with the discovery to date of nine billion barrels of crude oil resources. With the Government’s approval of Paraya project, the prospects of even more discoveries are more than likely.
In its 2017 report entitled “Guyana: A reform Agenda for Petroleum Taxation and Revenue Management”, the IMF identified several deficiencies in the Act and recommended that the Authorities consider reforming and modernizing the legal and fiscal framework for petroleum exploration and production. In particular, the fiscal provisions, such as royalty payments, profit sharing and taxation, are very discretionary in nature, leaving the specifics to be dealt within the various Production Sharing Agreements (PSAs) entered into with oil exploration companies. In addition, the Act grants the Minister responsible for petroleum, in consultation with the Minister of Finance, the authority to remit, in whole or in part, any royalty payable, upon application by a licence holder, or to defer payment. It also permits the Minister, subject to affirmative resolution of the National Assembly, to exempt the licensee from income tax, corporation tax and property taxes, among others.
The current PSA with ExxonMobil has been severely criticized for being too heavily weighted in favour of the U.S. oil giant, especially in relation to (i) the two percent royalty Guyana is receiving as well as the signing bonus of US$18 million, both of which many observers consider mere pittances compared with what other countries are receiving or have received; (ii) the 50 percent profit-sharing after the recovery of 75 percent of operating as well as exploration and development costs, without due consideration of profitability, the quantum of discovery and price fluctuations, among others; (iii) exemption from various forms of taxation; (iv) absence of ring fence provisions which have the potential for inflating costs; and (v) Guyana’s liability for pre-contract costs estimated at US$900 million despite the fact that Agreement defines recoverable contract costs to exclude pre-contract costs in the computation of profits. Given these concerns, there have been calls for the agreement with Exxon to be renegotiated so that Guyana can get a better deal but so far both the previous and the present Administrations have refused to entertain any thought of doing so. Few will disagree that the PSA with Exxon has resulted in Guyanese citizens not deriving the maximum benefit from the oil resources which, it must be emphasized, belong to them.
According to the IMF, most PSAs around the world usually have a formula in which the government’s share increases as a function of production, a combination of production and prices, or an economic variable such as the ratio of cumulative revenue to cumulative costs, or the project’s internal rate of return. In many countries, the top tier government share of profit oil could be as high as 80 or 90 percent. Considering that Exxon’s tax liability has to be settled from the Government’s share of profit oil, the fixed 50 percent share is considered relatively low. In addition, royalty rates vary from eight percent to 20 percent. For example, in Trinidad and Tobago the royalty rates are between 10 percent and 12 percent while for the United States, the rate is 16.6 percent. Columbia’s royalty rates are between eight percent and 25 percent while for Brazil and Peru, the rates are 10 percent and five to 20 percent, respectively.
The IMF expressed concern that although the Act provides for competitive bidding procedures to the followed in the grant of petroleum prospecting licences, the practice has been to grant such licences and to negotiate PSAs on a first-come-first-served basis. In addition, while the Act provides for the grant of petroleum prospecting and production licences, it is mostly silent on processing and refining of petroleum products and other associated activities.
Natural Resource Fund Act
The NRF Act provides for the transparency and proper accountability for oil revenues in order to ensure that such revenues are managed for the benefit of both present and future generations, and in a sustainable manner. The key provisions include:
(a) The Minister of Finance having overall responsibility for the management of the Fund, including the preparation of an Investment Mandate. He is assisted by a Senior Investment Advisor and Analyst, and Invest-ment Committee comprising six members having experience and expertise in financial investments and portfolio management;
(b) A Public Oversight and Accountability Com-mittee (POAC) to be established, comprising 22 members drawn from mainly civil society organisations, to monitor compliance with the Act as well as independent assessment of the management of the Fund and the utilization of withdrawals;
(c) The Bank of Guyana to be responsible for the operational management of the Fund, including maintaining proper books of account and preparing monthly and quarterly reports;
(d) A Macroeconomic Committee to be established to advise the Minister on the Economically Sustainable Amount. This is the maximum amount that can be withdrawn from the NRF in a fiscal year while ensuring the long-term financial sustainability of the Fund, a fair inter-generational distribution of natural resource wealth, and maintaining stability in the annual withdrawals from the Fund;
(e) The Bank’s Internal Audit to be responsible the internal audit of the Fund;
(f) The Auditor General to perform the external audit of the Fund and report the results not later than 30 April of the following year; and
(g) The Minister to table an annual report, including audited accounts, in the National Assembly.
To date, some US$140 million have been deposited in the NRF account at the Federal Reserve Bank in New York representing royalties and Guyana’s share of profits on the ExxonMobil PSA. There have been no withdrawals. However, the Investment Committee, the POAC and the Macroeconomic Committee are yet to be established. The POAC is responsible for monitoring and evaluating compliance with the Act and for providing independent assessment of the management of the NRF and the utilization of withdrawals, among others.
In December 2019, the Ministry of Finance and the Bank of Guyana signed a Memorandum of Understand-ing outlining the responsibilities of the Bank in relation to the NRF. These include: (i) receiving and accounting for all deposits into the NRF; (ii) investing the NRF in eligible asset classes; (iii) appointing private managers and custodians; (iv) reporting on the performance of the NRF on a monthly, quarterly and annual basis; (v) implementing management systems, procedures and risk management arrangements in accordance with international standards; and (vi) providing the public with information on the NRF, as required by law.
Observers are of the view that there is an over-concentration of powers in the hands of the Minister since: (i) the Minister he has overall responsibility for the management of the Fund; (ii) the Bank of Guyana as the operational manager has a reporting relationship with the Minister; and (iii) the Minister is responsible for appointing the members of both the Investment Committee and the Macroeconomic Committee. One way to address these concerns is to ensure that the positions referred are publicly advertised, applications are assessed by an independent committee, and appointments made by the Minister who is obliged to act on the Committee’s recommendations.
The NRF Act was passed at a time when the status of the then Administration was that of a caretaker one, pending the holding of elections, as ruled by the Caribbean Court of Justice. This implied, among others, that no new laws should have been considered during the interim period. In addition, the Act was passed without input from the Opposition because of its decision not to participate in a deliberation of the Assembly as a result of the successful passage of the no confidence vote. Had the Opposition done so, and given the importance subject matter, in all probability the Bill might have been referred to a select committee for detailed scrutiny before the Assembly’s approval.
Petroleum Commission Bill 2017
The Petroleum Commission Bill provides for the establishment a Petroleum Commission to oversee and manage the oil and gas industry to ensure, among others, compliance with the policies, laws and agreements relating to petroleum operations, including compliance with health, safety and environmental standards as well as local content and participation requirements. It will also be responsible for researching efficient, safe, effective and environmentally responsible exploration, development and production of petroleum in Guyana, including the optimum methods of exploring for, extracting and utilising petroleum and petroleum products.
The Commission will act as an advisory body to the Minister, and its board of directors will comprise experts in various fields as well as representatives of civil society and the parliamentary opposition. It will access the necessary bodies of knowledge into the industry so as to avoid dependence on petroleum operators for information.
The Bill, however, contains certain requirements that reflect not only a ministerial over-involvement but also overlapping responsibilities with those of the Guyana Revenue Authority relating to the collection of State revenues from petroleum operators. Some of the sections also conflict with another. The then Minister acknowledged these concerns and indicated that the Bill would be reworked and submitted to the Cabinet for consideration. He, however, stated that some of fiscal responsibilities of the proposed Commission would be retained.
Conclusion
It has been 23 years since the Petroleum (Exploration and Production) Act 1986 was last reviewed. With the discovery of massive crude oil resources in commercial quantities off Guyana’s shores as well as the commencement of production, the review of the provisions of the Act and its Regulations with a view to their amendment and modernization, is long overdue. As regards the NRF Act, most of the provisions are yet to be activated. The current Administration has expressed its unhappiness with several provisions and proposes to revisit the Act. This needs to be expedited.
The proposal for the establishment of a Petroleum Commission to oversee the oil and gas industry is a commendable one. The National Assembly should therefore complete its review of the related Bill, especially as regards the over-concentration of powers in the hands of the subject Minister, so that the Bill can enjoy smooth passage to enable it to become law.
The overlapping responsibilities involving the Ministry of Natural Resources, the GGMC and the Department of Energy at the Office of the President also needs to be addressed.
