Chatham House advises Guyana on renegotiation, periodic review clauses in all Oil contracts
By Kiana Wilburg
Petroleumworld 05 07 2018
In an effort to ensure transparency and accountability, Chatham House has advised Guyana and other emerging economies in the oil sector to input renegotiation and periodic review clauses in all oil contracts.
Chatham House is London-based, a non-profit, non-governmental organization. Its mission is to analyze and promote the understanding of major international issues and current affairs.
In its 2016 report, Chatham House said that the aforementioned clauses would allow renegotiation when specific triggers are activated. It advised that such a move helps to maximize economic returns to the state.
Additionally, Chatham House advised that Guyana and other emerging producers should design fiscal terms that are aligned with a national vision and ensure clear fiscal priorities. It said that these must also clearly articulate the fiscal terms that govern upstream petroleum activity.
Chatham House said, “Emerging producers must also develop simple tax structures. Tax obligations should be defined in the tax code rather than in contractual agreements. This includes provisions for taxing capital gains earned by companies that sell or assign their rights or part of their rights before or during production.”
The London-based organization said, “New producers seeking capital for exploration should focus on requiring viable work programmes in order to encourage drilling activity.
To attract and retain investors, the use of progressive, flexible fiscal formulas and royalties that respond to changes in profitability is particularly recommended.”
It added, “Emerging producers must strive to reduce the knowledge asymmetries they encounter in negotiations with foreign oil companies. For example, Governments can engage consultants or technical advisors to evaluate the baseline conditions for the award of acreage.
To simplify negotiations, emerging producers should move as many contract elements as possible into laws and regulations that apply across licences.”
Chatham House said that new circumstances, such as a major discovery being made, or a rise in commodity prices, may prompt many producers to seek to change the terms of their contracts with foreign companies.
It said that similarly, low prices may prompt companies to ask Governments for revisions of terms. Chatham House said that Governments should respect existing contracts, and their first remedy when changes become needed should be to amend future licensing.
If Government so desires, it would be able to tap into the expertise of an international group which helps countries in the successful renegotiation of contracts on a pro bono basis. The group is called the International Senior Lawyers Project (ISLP).
Over the past 17 years, with support from law firms, foundations and government agencies, ISLP has mobilized hundreds of experienced lawyers to provide more than $100 million worth of pro bono legal assistance in support of just, accountable and inclusive development in more than 80 countries.
The Project was successful in helping Liberia renegotiate its contracts with ArcelorMittal S.A., a German-based steel manufacturing company and American company, Firestone Tire and Rubber.
According to the Project's website, former Board Chair and current Board Member, Joe Bell, received a letter from former President of Liberia, Ellen Johnson Sirleaf, thanking him for ISLP's legal assistance following her election and in the years that immediately followed.
The letter from the former President read, “When our administration commenced in 2006 and was faced with a collapsed economy and dysfunctional institutions, we reached out for support in evaluating and renegotiating concession agreements and contracts and we quickly received the assistance required.
“This resulted in the landmark renegotiation of the Firestone and ArcelorMittal Concession Agreements with significant improved benefit to Liberia.”
“Throughout the twelve years of the Administration, ISLP provided pro bono service as requested in a wide range of endeavors, including those that required a restructuring and regularization of the country's nascent petroleum exploration programs…
“Today, we have new petroleum exploration laws which meet the highest international standards in terms of transparency and accountability thereby ensuring the basis for renewed action in exploration.
“Thank you for helping Liberia to be what it is today, a peaceful nation with the foundation in placed to ensure sustained development.”
The group has also helped other countries across the world in the renegotiation of oil contracts.
ISLP is also no stranger to Guyana as it has provided support to the Attorney General's Office for the review of Guyana's Cyber Crime Bill and Electronic Transactions Bill.
CALL FOR RENEGOTIATION
Local commentators have also expressed concern over the lopsided deal Guyana signed with ExxonMobil, especially when it is compared with the agreement ExxonMobil signed onto with the African country, Ghana.
The glaring disparities between the two contracts also underscore the need for the Guyana-ExxonMobil contract to be scrutinised by Parliament, critics say.
The Ghanaian contract, for example, has an entire section dedicated to procurement laws, which ExxonMobil must follow at all times.
Those provisions are in place to ensure that a significant number of the local companies are able to benefit from the nation's oil sector. On the other hand, Guyana's contract mentions nothing about procurement laws.
Given the aforementioned and other factors, locals have been calling for the contract to be renegotiated.
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Story by Kiana Wilburg from Kaieter News
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