Dear Editor,
Reference is made to Dr. C. K Hunte’s letter in the June 12th edition of the Stabroek News, with the caption “Royalty discrepancy in EMGL Annual Report”. Earlier this year, this author had addressed this issue already where it was demonstrated that there is no discrepancy with the royalty computation and payments received in the Natural Resources Fund (NRF). It appears that the author, who is an economist—lacks an appreciation and/or knowledge of the accounting method applied pursuant to the Petroleum Agreement (2016) (hereinafter “PA”) as regards royalty payments.
The reason (s) for the variances observed by Dr. C. K. Hunte are that (i) royalties are deposited every quarter into the NRF at the prevailing market price for crude oil, (ii) the financial statement is prepared based on the average price for the reporting period, (iii) there would be marginal variances in the exchange rate used for the conversion into the local currency by the oil companies in their financial reporting versus the exchange rate used by the Bank of Guyana for the conversion as per the NRF annual reports, and (iv) there is a timing difference based (accrual accounting) on when the royalty payments are made as explained hereunder.
Article 15.6 of the PA states that:
“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 Minister shall make its election in writing with effect ninety (90) days following such election and that election shall remain in effect for the latter one (1) year or ninety (90) days from the date the Minister notifies in writing that it elects the alternative treatment. Cash payment shall be due quarterly, thirty (30) days following the end of each calendar quarter. Within one hundred and eighty (180) days following the end of each Year, assessment receipts evidencing payment of Contractor’s royalty shall be furnished by the Minister to the Contractor stating the amount and other particulars customary for such receipts.”
Pursuant to Article 15.6 of the PA as highlighted above, the royalty payments are due in the ensuing quarter, and in the case of the year-end period’s production, royalty payments therefrom are due within 180 days in the ensuing year. For example, the royalty payments reflected in Q1 of 2023, would be in relation to production for the preceding year (2022 Q4).
With the foregoing in mind, as of the end of 2023, the total royalty payments since inception amounted to US$438.2 million (1.8%), total profit oil amounted to US$3.04 billion (12.5%), which would give rise to a total production from the inception of US$24.3 billion (100%). Thus, the royalty payments received for this period based on the total value of production was equivalent to 1.8%, resulting in a variance of 0.2%. This is because, as explained above, there were two (2) lifts which occurred in December 2023. Accordingly, the royalty payments in relation to the production that occurred in December 2023 would have been received within the first 180 days in 2024.
Evidently, Dr. Hunte did not consult the NRF reports because he would have observed in the footnotes on page 19 where it was noted that “profit oil payments for two (2) lifts which occurred in December 2023 of US$73.573 million and US$73.333 million are to be received on January 2 & February 14, 2024, respectively”.
In summary, the NRF’s accounting method is on a cash basis—whereas the financial statements for the oil companies are prepared on an accrual basis; herein lies the difference.
Sincerely,
Joel Bhagwandin
