Summary
During the consultation period on the recently passed Petroleum Activities Bill 2023, this author had submitted comments to the Ministry of Natural Resources (MNR) highlighting a number of observations; one of which was related to the recoverability of royalty.
To this end, this author noted that section 50 (1) of the bill refers to “recovery of royalty” and that “royalties can be recovered in the same manner as revenue due to the State”. Having examined the updated draft that was laid in the National Assembly, this concern was addressed whereby the section that stated, “royalty can be recovered in the same manner as revenue due to the State”, was deleted.
It is worthy of note that the draft bill laid in the National Assembly when compared to the original draft bill that was circulated for comments from the public, is significantly improved. This is demonstrative of the fact that the government has been extremely accommodative of comments and recommendations from the public and other stakeholders to shape this important piece of legislation―in the spirit of inclusiveness in policymaking.
Hence, now that the Petroleum bill is laid in the National Assembly, it follows that the Companies Act would also have to be amended accordingly in respect of the fiscal terms of the new PSA.
Introduction
Reference is made to a Kaieteur News article of August 8th, 2023, with the caption “oil companies could exploit loophole to recover 10% royalty for new blocks”. The article pointed out that the bill does not explicitly state that this cost cannot be recovered. The author also highlighted other costs that were explicitly stated shall not be recovered. The article was professionally written and actually pointed out a good observation. However, the concerns raised therein is more or less a non-issue which this article seeks to address.
Discussion and Analysis
During the consultation period, this author had submitted comments to the Ministry of Natural Resources (MNR) highlighting a number of observations; one of which was related to the recoverability of royalty. To this end, this author noted that section 50 (1) of the bill refers to “recovery of royalty” and that “royalties can be recovered in the same manner as revenue due to the State”. It was unclear whether the recoverability of royalties in this provision is the same as, or different from the cost recovery rules pursuant to the PSA. Consequently, this author went on to state in the submission that the drafters should be mindful that royalties pursuant to the PSA is not cost recoverable and therefore the provisions of the Petroleum Activities bill should not conflict with the non-recoverable terms of royalty as per the PSA.
With that in mind, having examined the updated draft that was laid in the National Assembly, this concern was addressed whereby the section that stated, “royalty can be recovered in the same manner as revenue due to the State”, was deleted.
It is important to note as well that section 33 of the bill establishes that “where an application is made under section 32 (1) for a petroleum production license, the Minister may grant the license, on such conditions as the Minister determines are necessary to give effect to this Act”.
Notably, the conditions referred thereto are those conditions established pursuant to the revised Production Sharing Agreement (PSA). The PSA is the instrument that ought to explicitly outline the accounting rules and items that are to be treated as cost recoverable and those that are not.
Having said that, hereunder is this author’s submission to the MNR on the draft new model PSAs.
Article 38 – Taxes & Royalty
Article 38.2 states that “except as provided in this Article, Contractor, Affiliated Companies, Sub-Contractors, and individuals who are expatriates shall be subject to the income tax laws of Guyana, including the Income Tax Act of Guyana (Cap. 81:01) and the Corporation Tax Act of Guyana (Cap. 81:03) and shall separately comply with the requirements of those laws, in particular with respect to filing returns, assessment of tax, and keeping and showing of books and records”.
Commentary
Article 38 did not explicitly state that the Contractor, Affiliated Companies, and Sub-Contractors are subject to a Corporation Tax Rate of ten percent (10%). Rather, the Article states that the Contractors, etc., are subject to the Corporation Tax Act. In this regard, it is understood that the Corporation Tax Act will have to be amended accordingly. However, since the Corporate Income Tax Act is not yet amended and considering that the draft PSA model is currently being utilized as the basis upon which companies decide to participate in the bid round for the new oil blocks; it may be worthwhile to insert a clause that expressly states that the “Contractors, Affiliated Companies, and Sub-Contractors are subject to a Corporate Tax Rate of 10% (unless this was an omission on the part of the drafters). In doing so, this may help to avoid any unforeseen adverse legal ramifications that may arise.
Article 39 – Import Duties
Commentary
Article 39 introduced a ten percent (10%) excise tax on any fuel imports to be used solely in carrying out Petroleum Operations within the Contract area. This is considered another major component of the fiscal framework which will optimize the government’s take. More so, since the PSA also allows the Contractor to exclude from the computation of cost oil/profit oil and royalty any Crude Oil and/Natural Gas used in Petroleum Operations, or which is lost.
It, therefore, follows that the tax laws will have to be amended to include the 10% excise tax on fuel imports.
Annex C – Accounting Procedures
➢ Costs Recoverable without further approval from the Minister
Annex C (3.1) (f): Rentals. Duties and Other Assessments― “All rentals, taxes, levies, charges, fees, contributions and any other assessments and charges levied by the Government in connection with the Petroleum Operations and paid directly by the Contractor”.
Commentary
The language of this clause suggests that it refers to duties and other assessments with respect to ‘rentals’ that are cost recoverable. The language explaining this clause seems to be ambiguous. Thus, provided that this interpretation is correct―then it means that the taxes, levies, charges, fees, contributions, and another other assessment levied by the Government referred to in the aforesaid section, are in respect of rentals in connection with the Petroleum Operations. If this is the case, then it is proposed that the language explaining Annex C (3.1) (f) be amended appropriately for the avoidance of any doubt or ambiguity.
Annex C (3.3) Costs not Recoverable under the Agreement
Commentary
Under this section, it is hereby proposed that the 10% Royalty, the 10% Corporate Tax and the 10% Excise Tax on fuel imports for Petroleum Operations―should not be cost recoverable.
Noteworthily, with respect to the Royalty under the existing PSA that governs the Stabroek block, there was an Addendum dated April 26, 2019, to the PSA dated June 2016. The addendum clearly stated that:
“WHERAS the parties further engaged in discussions, in the interest of the avoidance of all doubts, the parties have come to a mutual and satisfactory agreement that the payment of royalty pursuant to Article 15.6 of the Petroleum Agreement shall be borne solely by the Contractor.” It goes on to state that “the said royalty payment shall not be recoverable cost, in any manner or formulation under the Petroleum Agreement.”
The aforesaid amendment, inter alia, the Addendum dated April 2019, appears to be omitted from the new draft model PSA.
In light of the foregoing, the following proposals are put forward for consideration to be included under Annex C (3.3) of the Agreement:
• Amounts paid under Article 38.2 and 38.3 of the Agreement, and
• Amounts paid under Article 39 (1) (a) of the Agreement.
With respect to the aforementioned addendum of April 26, 2019, it would be unethical of this author to not mention that it was Christopher Ram who found out about the April 2019 addendum in the first place. So, credit goes to Christopher Ram on this front. But when he made this revelation to the public, he presented it in a way as though it meant that the contract was renegotiated, inter alia, the addendum. This was not the case however, and for those who may interested, this author had responded to Christopher Ram at the time on this issue, which can be found here for ease of reference https://oilnow.gy/featured/the-2019-addendum-to-the-stabroek-psa-does-not-equate-to-renegotiation/.
Concluding Remarks
It is worthy of note that the draft bill laid in the National Assembly when compared to the original draft bill that was circulated for comments from the public, is significantly improved. This is demonstrative of the fact that the government has been extremely accommodative of comments and recommendations from the public and other stakeholders to shape this important piece of legislation―in the spirit of inclusiveness in policymaking.
Finally, now that the Petroleum Bill is laid in the National Assembly, it follows that the Companies Act would also have to be amended accordingly in respect of the fiscal terms of the new PSA.
About the author
Joel Bhagwandin, MSc., is the Director of Financial Advisory, Market Intelligence, and Analytics at SphereX Professional Services Inc. He can be reached at [email protected].
