Prospects bleak for renegotiating deal with Exxon subsidiary – Tameshwar Lilmohan
-suggests `good faith’ review for more equitable terms
Tameshwar Lilmohan
Chartered accountant Tameshwar Lilmohan says that the prognosis for renegotiating the much-criticised 2016 Production Sharing Agreement (PSA) with ExxonMobil’s subsidiary is very bleak and Guyana’s best chance would be to seek a “good faith and conscionable review” for fair and equitable terms from the partners to the deal.
The 2016 PSA for the Stabroek Block was concluded in secret by the government with Esso Exploration and Production Guyana Limited (EEPGL). Its 2% royalty rate is among a number of provisions that have been deplored as the PSA was concluded after the major discovery of oil in 2015. Exxon is the operator of the block and multinationals Hess and CNOOC are its partners on it.
In research work that he concluded and shared with Stabroek News, Lilmohan said that a case could be made for the proposition that Guyana has a grossly unfair deal with EEPGL and would, therefore, wish to rescind or favourably amend the terms of the Agreement. He noted that Article 26.1 states that the Parties shall make reasonable efforts to resolve amicably all disputes by negotiation.
“However, a careful reading of the Stability of Agreement clause freezes the legal situation at the time of signing the contract. It provides no room for flexibility or an economic equilibrium in favour of Guyana. It states: Except as may be expressly provided herein, the Government shall not amend, modify, rescind, terminate, declare invalid or unenforceable, require renegotiation of, compel replacement or substitution, or otherwise seek to avoid, alter, or limit this Agreement without the prior consent of the Contractor. This will suggest that negotiation would cover matters relating to the performance of the contract only rather than the terms of the contract”, Lilmohan said.
His fellow chartered accountant and commentator, Christopher Ram in several columns for this newspaper has stated that the stability clause hamstrings Guyana from taking any steps to improve the deal. He had said “The Government’s hands are tied (by the stability clause) and it is effectively prevented from exercising one of the most fundamental and sovereign duties of any state in relation not only to the oil companies but also to their successors and assignees”.
Lilmohan noted that the Agreement provides for the Parties to submit any dispute to the International Centre for Settlement of Investment Disputes (ICSID) for arbitration before three arbitrators. In the event, the ICSID refuses to register a request for arbitration any Party may submit the Dispute to the American Arbitration Association (AAA). The AAA, he said, shall administer the arbitration pursuant to the rules of United Nations Commission on International Trade Law (UNCITRAL), including appointing three arbitrators. The seat of the arbitration shall be in Washington DC, USA and the proceedings conducted in English. Lilmohan said that the Govern-ment of Guyana will not be in a position to plead sovereign immunity. He pointed out that Article 26.3 of the Agreement states: The Government irrevocably waives any claim to immunity for itself, its agencies, its enterprises, and any of its assets with regard to any arbitration.
He said that the Agreement makes no mention of an ex aequo et bono (from equity and conscience) provision, which would have given the arbitrators the flexibility and freedom to avoid the rigidities of the law and entertain considerations of equity, justice and fairness.
“The prognosis for renegotiating the terms of the Agreement is very bleak. The water-tight freezing stability clause, the waiving of sovereign immunity, absence of an ex aequo et bono provision, and the commencement of the performance of the contract (the contract is in its executed/performance stage rather than at an executory stage), all weigh heavily against Guyana being successful at an Arbitration to rescind or modify the Agreement. Without a strong case, Guyana will be ill-advised to spend its scarce dollars and legal resources over a protracted period with little chance of a favourable outcome. Guyana would be better advised to seek a good faith and conscionable review for fair and equitable terms as a goodwill gesture from the multinational corporations”, Lilmohan contended.
Lilmohan, also a lawyer, said that international commercial contracts can involve complex business and legal issues, especially when they pertain to large engineering and natural resource industries over a protracted period. He contended that developing host countries are vulnerable when contracting with mega multinational corporations because of their inherent weak bargaining position.
He argued that the deal between Guyana and EEPGL represents a classic case of the Government’s missteps where a developing host country failed to negotiate and secure the best possible contract for its citizens.
“It contracted with the Multinationals’ paper companies with no assets and obtained no firm financial security for the performance of the contract and the abandonment and decommissioning of the project. It authorized the Contracting companies to pay no tax of any sort during the entire term of the agreement but will command its tax authorities to provide evidentiary receipts that the Contractors did pay assessed income tax. The Government waived its sovereign immunity while agreeing to the most draconian freezing stability clause that denies any renegotiation or modification of the signed contract. The only income from the project is 2% royalty of oil sales and 50% of the oil profit after costs which the Government has no control over”, Lilmohan lamented.
He said that many lessons can be learnt from the agreement but, perhaps, the most important is that Governments need to act responsibly within a comprehensive legal framework by seeking proper professional business and legal advice and be held accountable for their actions through democratic institutions and processes.
He added that Multinational Corporations also need to pay heed to the UN and the Organization of Economic Cooperation and Development Guidelines recommending that they conduct their operations in harmony with the national policies of the host countries and contribute to the economic and social development of the countries where they operate.
Zero capital
He charged that the multinationals (MNCs) involved in the Stabroek Block incorporated three paper companies with zero assets, zero capital, and zero employees in tax havens of Cayman Islands, Barbados and The Bahamas. These paper companies then registered three companies in Guyana.
“Thus, the MNCs are two levels removed from the legal arrangement. This arrangement has two distinct advantages for the MNCs. It provides for excellent tax avoidance vehicles and excludes any direct liabilities to the MNCs. The Contractors act as a conduit for transferring costs from the MNCs and repatriating profits to them. Unless they provide indemnities for the contracting companies, they are not directly responsible for their obligations”, Lilmohan asserted.
He added that the issue of indemnity is critical for remedial work such as abandonment and decommissioning of oil projects. He pointed out that the PSA at Article 20.1(d)(iii)(hh) states that the Minister within seven days after the date that an abandonment programme and budget are approved shall obtain an undertaking from an Affiliated Company of each of the Parties to ensure the provision of financial and technical resources necessary to conduct the approved abandonment.
“However, the Affiliated Companies are not identified nor are any standby letter of credit as a performance bond given to secure the decommissioning and abandonment.
Further, he said Article 26.6 refers to a Bridging Deed to facilitate the comprehensive resolution of related disputes.
“This Deed is a transition between the Agreement signed by the previous government in 1999 and the Agreement signed by the current government in 2016. The Minister has not provided an answer as to whether the Deed exists and whether it will be made available for examination. This can become a significant issue when wells are abandoned or decommissioned and for post-contractual costs, including environmental degradation. The Contractors would have repatriated all their profits to their holding companies up-line and have no assets to bear. Guyana would have to seek the Arbitrators’ consent to bring in the original parties with assets, namely, Exxon Mobil Corporation, Hess Corporation, and CNOOC Limited as parties to the dispute. It will then have to prove that they were in principle and fact, the alter egos of the contracting companies. This will involve a lengthy and costly process that Guyana cannot afford”, Lilmohan stated.
He said that the Bridging Deed would be useful to shed light on what financial arrangements were made for the transition from 1999 when little or no oil reserves were known to 2016 when large known oil reserves were confirmed. There is no indication that Guyana gained any substantial financial benefit from this new information when the Agreement was signed in 2016, Lilmohan contended. Further-more, he said that ExxonMobil sold off 55% of its oil blocks to other MNCs but Guyana did not receive any direct or indirect financial benefit from this transaction. The profits made by ExxonMobil on this sale completely avoided any taxation by the Guyana Government.
He also said that the taxation of MNCs is a serious concern as these companies are adept at shifting their tax bases to minimize tax liability. He lamented that the PSA has added egregious features to this phenomenon.
“The Agreement provides for the Contractors to pay no tax, value-added tax, charge or other imposts. The agreement makes provision for the Minister of the Government of Guyana to pay the tax on behalf of the Contractors and for the Commissioner-General of Guyana Revenue Authority to issue tax certificates to Contractors evidence of payment. This arrangement raises serious local and international concerns. Guyana is deprived of a major source of income. At the same time, it raises concerns about international tax evasion. The Contractors are provided with tax receipts for which no tax was paid but may be presented to other tax jurisdictions to avoid double taxation”, Lilmohan said.
