ExxonMobil-Guyana oil deal… Guyana should opt for revenue sharing rather than profit sharing – Goolsarran
Jul 14, 2017 , http://www.kaieteurnewsonline....-sharing-goolsarran/
Local intellectuals continue to question the direction in which Guyana is going as it relates to the management of one of the country’s most valuable natural resources—oil. Equally significant, is the fact that many continue to question the government’s silence on the deal secured with US oil giant, ExxonMobil, among other related issues.
Anand Goolsarran, an accountant and anti-corruption advocate, is one such individual who thinks that government should revise the direction in which it is going with regards to the profit sharing aspect of the oil deal (which is all the nation is aware of along with the two percent royalty).
The former Auditor General thinks that there is more to be gained by Guyana if better terms are negotiated. He said that it is not too late for the government to consider renegotiating to secure revenue sharing with ExxonMobil instead of profit sharing.
Goolsarran said that according to the government’s announcement, crude oil production will commence in 2020 with 100,000 barrels a day. He noted as well that Government will gain a two percent royalty rate as well as half of the yearly profit secured by ExxonMobil.
Using the current world market price of approximately US$50 per barrel, and assuming that production will take place 300 days per year, Goolsarran calculated the revenue derived from royalties per annum will be two percent of (100,000 x 300 x 50) = US$30M. This works out to just 2.4 percent of the 2017 National Budget of G$250 billion.
Goolsarran said, “This is not a significant sum as a measure of compensation for the extraction of one of the country’s natural resources, and therefore, Guyana has to rely on the profit-sharing agreement for a greater portion of its revenue from crude oil production.”
He then turned his attention to the other part of the deal which states that Guyana will get 50 percent of the profit derived. This, according to Goolsarran’s reasoning, is not the best direction to go.
PROFIT SHARING VS. REVENUE SHARING
Goolsarran said that a key concern relating to profit-sharing arrangements is that profits can vary significantly from year to year. He said that this would change, considering; the volatility of prices on the world market; and the need to recover the initial investment over a period of time.
The former Auditor General said that there are detailed accounting rules to be followed in relation to the recovery of the investment. “Generally speaking, the initial investment (i.e. expenditure not directly linked to production) is capitalized and shown as assets in the balance sheet of the oil company.”
He said that the expenditure on physical assets for example plant, machinery and equipment, is written off against revenue over the economic useful life of the assets. Similarly, Goolsarran said that intangible assets are amortized over the life of the investment, typically over a 30-year period, using predetermined rates. “Taking into account these considerations, it is entirely possible for losses to be recorded in the early years of operations.”
“Given the uncertainty of the extent of profits that is likely to accrue, there are strong arguments for there to be in place revenue sharing agreements rather than those relating to profit-sharing.”
Goolsarran said that a revenue-sharing agreement provides a guaranteed flow of income to governments once production begins, and can be monitored easily from the government’s perspective.
In that way, he said, there will no longer be a need for detailed and independent scrutiny of oil companies’ costs to ensure that only legitimate expenditure is charged against revenue. This is an area that has been the subject of intense disagreements between oil companies and governments.
An additional consideration is that oil companies can curtail production in anticipation of higher prices in the future, with consequent adverse impact on profits. It was mainly for these reasons that India has moved away from the profit-sharing model to one of revenue-sharing, based on a recommendation of the country’s Auditor General.”
