Guyana’s oil sector still without 100 plus safeguards recommended by IMF, UNDP
By Kaieteur News
Petroleumworld 10 11 2021
Over the last five years, the International Monetary Fund (IMF), the United Nations Development Programme (UNDP), the Inter-American Development Bank (IDB) and the World Bank have provided Guyana with advice on hundreds of safeguards it must have in place to insulate the oil sector from damning acts of corruption and opacity.
In spite of this, many of those safeguards are yet to be implemented. The IMF for example has been one of Guyana’s key partners in developing the technical capacity that is needed to properly govern the oil and gas sector. In addition to this, the financial institution has been at the forefront of highlighting many loopholes in Guyana’s oil deals as well as its legislative and regulatory framework, which can aid in mitigating significant value loss. In this regard, it has produced several reports between 2015 to now which offer critical recommendations that should be adopted. In spite of the prudent advice, it has offered in these documents, there has been no significant progress by Guyana’s political leadership on this front.
For example, on numerous occasions, the IMF has appealed to Guyana to strengthen its petroleum fiscal regime through the revision of the Petroleum [Exploration and Production] Act 1986 (PEPA), the Petroleum [Exploration and Production] Regulations 1986, as well as other tax laws and sector regulations. The IMF has been keen to note that while the PEPA gives the government broad powers to grant petroleum prospecting and production licences, and to negotiate oil contracts, it is silent on processing and refining of petroleum products, pipelines and other modes of petroleum transportation, as well as how petroleum marketing arrangements are to be observed. In spite of this, the country has been pushing ahead with the marketing of its oil and plans to bring gas to shore.
Additionally, with regard to the lopsided oil deal, the IMF has expressed alarm over the opportunities Guyana gives ExxonMobil and its partners to be abusive in the way they add interests to its expenses, all of which would be recovered in full. Left unchecked, the IMF said that this can have a detrimental effect on the oil profits that would be left to share. In one of its reports, the IMF said it is a well-established industry norm to have limitations on how much interest can be charged and deducted on loans by oil companies.
Furthermore, it has noted that some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps. Other countries, it advised, go the route of prescribing that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs. Interest on loans to finance exploration is not allowed. Considering the dire consequences this loophole can have for Guyana, the IMF said it would be appropriate for Guyana to limit the amount of debt for cost recovery purposes or disallow interest expense altogether.
Further to this, the IMF has called on Guyana to close other fiscal loopholes in existing Production Sharing Agreements; undertake a policy review of fiscal terms contained in existing PSAs to ensure that these are implemented appropriately, and assess areas of improvement for future investment; design a new generally applicable fiscal regime for upstream petroleum projects that increases the government take and limits the scope for individual negotiations; introduce a revised production sharing mechanism for new PSAs that provide the government with a higher share of profit oil as the profitability of projects’ increases; and publish a model PSA that includes the minimum fiscal terms accepted by the government for future contracts. The IMF has also called on Guyana to apply tighter ring-fencing arrangements to contracts so that oil companies would be unable to deduct the costs associated with exploring other wells or developing other projects from another field that is producing oil.
The foregoing represents a mere fraction of the IMF’s recommendations which the nation’s leaders have failed to implement, yet continue to tell the nation that every possible measure is being put in place to protect the oil sector.
In response to a request in 2016 to help Guyana arrive at good legal, regulatory, contractual and fiscal measures needed to keep corruption at bay, the United Nations Development Programme had commissioned an analysis to be done on the state of the nation’s governance systems.
The subsequent report on the review done was called “Rapid Analysis of the State of Readiness of Guyana’s Hydrocarbon Regulatory Framework.” It was produced by Trinidadian energy strategist, Anthony Paul.
But, after four years of being in possession of this document, which proposes close to 100 critical recommendations on how Guyana must safeguard itself, nothing had been done.
That document, which was reported on for years by Kaieteur News, was keen to note that the requirements and expectations of government to manage the sector, especially when one considers the magnitude of the resources discovered, are enormous.
It notes that requests for new licences and exploration have accelerated, in spite of the drop in oil prices. In light of this, Paul noted in his analysis that reviewing, approving, and overseeing the implementation of the field development plans for oil projects and subsequent production will require very significant human and other resources.
Paul pointed out, however, that Guyana has a very limited capacity in this area, while adding that its laws, contracts and institutions are outdated and under-resourced to meet the demands of upcoming activities.
The industry expert was keen to note that improving the foundational components of the country’s petroleum governance system, that is to say, its legal and institutional frameworks are fundamental to managing oil money successfully. If the country fails in this regard, Paul noted that Guyana would be left wide open to risks of corruption and abuse as well as losing very significant value.
Among his many recommendations was a call for the frequent use of Guyana’s parliamentary sectoral committees on natural resources and economics. Paul stressed that these committees can be effective regulatory tools for the sector.
In capturing value, Paul said that Guyana needs to implement systems, which will allow it to
make the proper decisions on various issues such as the right rate of production and depletion of the resources, getting the best possible contract terms for Guyana, ensuring the actions of companies are done in an environmentally and socially responsible manner, and ensuring there is maximum capacity development among locals to enable their participation.
In managing revenue, the Trinidadian Strategist said that Guyana would also have to put mechanisms in place urgently, which will allow for the effective collection of all oil revenue due to the State, while ensuring that there is prudent spending by enhancing infrastructure, services and capacity for future sustainability along with ensuring savings for future generations.
Further to this, Paul was keen to note that the authorities of the day must make every effort to ensure that it is informing Guyanese of how and when they are making decisions about the oil resources. He said that it is required of the citizenry to make sure that these decisions are in their best interest.
He said, too, that Guyanese must demand that the government implements systems to ensure transparency and accountability for each institution tasked with spending the oil money and regulating industry performance.
Overall, Paul’s report highlights the need for Guyana to make urgent reforms, otherwise, the nation stands to lose billions more, and that is outside of what is already lost by way of the lopsided Stabroek Block deal.