ABSENCE OF RING FENCING PROVISIONS…Guyana may end up subsidizing any unsuccessful exploration by ExxonMobil

Jan 03, 2018 News, https://www.kaieteurnewsonline...ation-by-exxonmobil/

By Kiana Wilburg
Governments which are new to the oil and gas industry are often obsessed with one thing—billions of dollars in revenue. With such clouded judgment, issues like adequate ring-fencing provisions quickly fade into the background of nothingness.
More than 80 countries worldwide have not only paid dearly for such a mistake, but the future of their governments and generations to come will be haunted by it.
The painful economic lessons learnt by these nations were adequately summed up by the World Bank in one of its many reports on the sticky issues of oil and gas exploration. In one of its documents, Fiscal Systems for Hydrocarbons, the World Bank explains that ring-fencing is an industry-specific feature. This refers to the demarcation of taxable entities.
The World Bank said that while corporate income tax normally applies at company level, in the petroleum sector the taxable entity is often the contract area or the individual project.
When ring fencing applies at contract area or project level, income derived from one area/one project cannot be offset against losses from another area/project. Another type of ring fencing separates upstream from downstream operations.
Usually, all costs associated with a given block or licence must be recovered from revenue generated within that block: the block is ring fenced.
The World Bank emphasized that the objective of ring fencing is to protect the level of current tax revenue and, to some extent, level the playing field by treating newcomers and existing investors equally. It noted that the disadvantage of ring fencing is that it does not incentivize exploration and investment activities.
The Bank stated however, “By allowing costs to cross the fence, the host government may end up subsidizing unsuccessful exploration.” (More in this regard can be read by following this link: https://openknowledge.worldban...closed0Sept0181.pdf? sequence=1).
ExxonMobil has already announced that Liza One was the discovery well in 2015. Since then, it has successfully drilled Liza Two, Three and Four which helped the company to understand the size of the accumulation of oil and gas and the size of the field. It has noted that Phase one of its production will include at least 17 wells. It said that this will help develop part of the Liza field. Additionally, in August 2016, ExxonMobil drilled its “Skipjack” exploration well but no commercial quantities of hydrocarbons were found.
CLOSING LOOPHOLES

The International Monetary Fund (IMF) has found a number of loopholes for abuse in Guyana’s Production Sharing Agreement (PSA) with ExxonMobil.
But the Government believes that there is no need for alarm or worry as several international bodies, the IMF included, are lending tremendous support to help Guyana remove every possible chance for exploitation by the operator.
This was noted recently during a press conference by Minister of Natural Resources, Raphael Trotman. He was at the time responding to a question from this newspaper which was based on the disturbing findings of the IMF.
One issue the IMF in a report points out is in relation to ring-fencing. This provision ensures that ExxonMobil cannot transfer the expenses incurred at one well to another.
The IMF said that in principle, the ring-fencing arrangement ensures that the government’s revenue from the Stabroek Block is calculated based on each field or well separately.
The Fund stated, “However, this is undone by the Production Sharing Agreement framework, allowing the contractor to allocate cost oil to any field within the contract area.”
To the aforementioned, Trotman said that on November 30, he and the Finance Minister, Winston Jordan, sat with IMF representatives and those issues were ironed out.
Trotman said, “We went through them with the Guyana Revenue Authority and others.
The answer is that we are working. IMF, World Bank, the Caribbean Development Bank (CDB) and the Inter-American Development Bank are giving us tremendous support. And we are building capacity on a daily basis and hiring capacity and ensuring that we cover all that we are supposed to…”
The Minister said that with the help of those international agencies, Guyana will be in a position to tighten all loopholes.
He added, “We invited the IMF to tell us what we are lacking in this regard, so Guyana is not alone in this.”