Guyana’s laws on exploration and production of petroleum date back to the 1980s. The Petroleum (Exploration and Production) Act 1986 and its associated Regulations form the main legislative and regulatory framework for the ‘exploration, exploitation, conservation and management of petroleum existing in its natural state in land in Guyana, including the territorial sea, continental shelf and Guyana’s unique economic zone. The Guyana Geology and Mines Commission (GGMC) is responsible for planning and securing the development, exploitation and management of petroleum and for ensuring that Guyana’s citizens derive maximum benefit from such a resource.
Following ExxonMobil’s 2015 discovery of some five billion barrels of crude oil resources off the coast of Guyana, the Natural Resources 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 introduced 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 published at a time when there was no evidence of the discovery of petroleum products in commercial quantities. It has been revised twice, in 1992 and 1997. Since then, there have been no further improvements 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 Government approval of the Paraya project, there are probably even more prospects for discoveries.
In its 2017 report entitled “Guyana: A reform agenda for Petroleum Taxation and Revenue Management”, the IMF identified several shortcomings of the Act and recommended that the Authorities consider revising and modernizing the legal and fiscal framework for exploration and production of petroleum. In particular, the fiscal provisions, such as royalty payments, profit sharing and taxes, are highly discretionary, allowing details to be dealt with within the various Production Sharing Agreements (PSAs) entered into with oil exploration companies . In addition, the Act gives the Minister responsible for petroleum, in consultation with the Minister for Finance, the authority to transfer, in whole or in part, any royalty payable, on request by a license holder, or to defer payment. It also allows the Minister, subject to the 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 harshly criticized for being overly weighted in favor of the US oil giant, especially in relation to (i) the two-percent royalty Guyana receives as well with the signing bonus of US $ 18 million, both of which many observers consider only payments compared to what other countries receive or have received; (ii) the 50 percent profit share after recovering 75 percent of operating costs as well as exploration and development costs, without due regard to profitability, quantum of discovery and price fluctuations, among others; (iii) exemption from different types of taxation; (iv) the absence of circular fence provisions that have the potential to inflate costs; and (v) Guyana’s liability for pre-contract costs estimated at US $ 900 million despite the fact that an Agreement defines recoverable contract costs to exclude pre-contract costs in calculating profits. Given these concerns, there have been calls for a renegotiation of the deal with Exxon so that Guyana can get a better deal but so far the past and present Administrations have refused to entertain any thought of doing so. Few will disagree that the PSA with Exxon resulted in Guyanese citizens not getting the maximum benefit from the oil resources they must emphasize.
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, combination of production and prices, or economic variable such as the ratio of cumulative revenue to cumulative costs, or the rate internal project earnings. In many countries, the government’s top tier share of profit oil could be as high as 80 or 90 percent. Given that Exxon’s tax liability of the Government’s share of profit oil must be settled, the 50 per cent fixed share is considered to be relatively low. In addition, royalty rates range 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 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 while the Act provides for competitive bidding procedures for those who grant petroleum exploration licenses, it has been the practice to issue such licenses and negotiate PSAs on a first-come, first-served basis. In addition, while the Act provides for the grant of petroleum exploration and production licenses, it is generally silent about the processing and refining of petroleum products and other related activities.
Natural Resources Fund Act
The NRF Act provides for appropriate transparency and accountability for oil revenues to ensure that such revenues are managed for the benefit of current and future generations, and in a sustainable manner. Key provisions include:
(a) The Minister for Finance has overall responsibility for the management of the Fund, including the preparation of an Investment Mandate. He is assisted by a Senior Investment Adviser and Analyst, and an Investment Committee consisting of six members with experience and expertise in financial investments and portfolio management;
(b) Establish a Public Oversight and Accountability Committee (POAC), consisting of 22 members of mainly civil society organizations, to monitor compliance with the Act as well as an independent assessment of the Fund’s management and the use 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) That a Macroeconomic Committee be established to advise the Minister on the Economically Sustainable Amount. These are the maximum that can be deducted from the NRF in a financial year while ensuring the Fund’s long-term financial sustainability, equitable intergenerational distribution of natural resource wealth, and maintaining stability in the Fund’s annual withdrawals;
(e) Bank Internal Audit to be responsible for the Fund’s internal audit;
(f) The Auditor General to conduct the Fund’s external audit and report on the results no later than 30 April of the following year; a
(g) The Minister to submit an annual report, including audited accounts, to the National Assembly.
To date, some US $ 140 million has been deposited in the NRF account at the Federal Reserve Fund in New York representing royalties and Guyana’s share of profits on ExxonMobil’s PSA. No money was withdrawn. However, the Investment Committee, POAC and Macroeconomic Committee have not yet been established. The POAC is responsible for monitoring and evaluating compliance with the Act and for providing an independent assessment of the management of the NRF and the use of withdrawals, among others.
In December 2019, the Ministry of Finance and the Bank of Guyana signed a Memorandum of Understanding outlining the Bank’s responsibilities in relation to the NRF. These include: (i) receiving and accounting for all deposits to the NRF; (ii) investing the NRF in eligible asset classes; (iii) the appointment of private managers and guardians; (iv) monthly, quarterly and annual reporting of NRF performance; (v) implement risk management systems, procedures and arrangements in accordance with international standards; and (vi) provide information to the public about the NRF, as required by law.
Observers believe that there is an over-concentration of powers in the Minister’s hands since: (i) the Minister has overall responsibility for managing the Fund; (ii) Guyana Bank as executive manager has a reporting relationship with the Minister; and (iii) the Minister is responsible for appointing members of the Investment Committee and the Macroeconomic Committee. One way of addressing these concerns is to ensure that the posts referred are advertised publicly, that applications are assessed by an independent committee, and that appointments are made by the Minister which must act on the recommendations of the Committee.
The NRF Act was passed at a time when the Ministry’s status at that time was sole carer, pending elections, as ruled by the Caribbean Court of Justice. This suggested, among others, that no new laws should have been considered during the interim period. In addition, the Act was passed without Opposition input because of its decision not to participate in Assembly debate as a result of the successful passing of the no confidence vote. Had the Opposition done so, given the importance of the subject matter, the Bill would probably have been referred to a select committee for detailed scrutiny prior to Assembly approval.
Petroleum Commission Bill 2017
The Petroleum Commission Bill provides for the establishment of a Petroleum Commission to oversee and control the oil and gas industry to ensure, among others, compliance with policies, laws and agreements relating to petroleum operations, including also comply with health, safety and environmental standards. such as local involvement and participation requirements. It will also be responsible for researching the efficient, safe, effective and environmentally responsible exploration, development and production of petroleum in Guyana, including the optimal methods of exploration for, extraction and use of petroleum and petroleum products.
The Commission will act as an advisory body to the Minister, whose board of directors will include experts in various fields as well as representatives of civil society and the parliamentary opposition. It will access the necessary information bodies for the industry to avoid reliance on petroleum operators for information.
The Bill, however, contains some requirements that reflect not only ministerial overreach but also overlapping responsibilities with those of the Guyana Revenue Authority in relation to the collection of State revenue by petroleum operators. Some of the sections also conflict with another. The then Minister acknowledged these concerns and noted that the Bill would be reworked and presented to Cabinet for consideration. He said, however, that some of the proposed Commission’s financial responsibilities would be retained.
It is 23 years since the Petroleum (Exploration and Production) Act 1986 was last reviewed. With the discovery of huge crude oil resources in commercial quantities off Guyana’s shores as well as the start of production, it is high time to review the provisions in the Act and its Regulations with a view to amending and modernizing them. With regard to the NRF Act, most of the provisions have not yet been implemented. The present Ministry has expressed its unhappiness with several provisions and proposes to revisit the Act. This needs to be accelerated.
The proposal to establish a Petroleum Commission to oversee the oil and gas industry is commendable. The National Assembly should therefore complete its review of the related Bill, particularly in relation to the over-concentration of powers in the hands of the subject Minister, so that the Bill can enjoy a smooth passage to enable it to become law.
The overlapping responsibilities that include the Ministry of Natural Resources, GGMC and the Department of Energy in the President’s Office also need to be addressed.