Understanding Production Sharing Agreements In Guyana

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The Government of Guyana has commendably begun GIM: Is there also a royalty?
making Production Sharing Agreements (PSA) publicly IMF: Yes. In addition to profit oil, the government will also
Tavailable. This is a big step forward to improve fiscal receive a royalty equal to 2 percent of the value of
transparency. However, there is a need to complement this production. This royalty is paid by the contractor out of its
effort with a concerted effort by the government to explain share of profit oil.
how the production sharing fiscal framework is applied and GIM: So, what is the “government take” in the Stabroek PSA
functions. This will be important to avoid misconceptions about that is under the control of USA oil giant, ExxonMobil?
the framework, which may undermine public confidence. IMF: In the Stabroek PSA, the combination of profit oil and the
In this article, the International Monetary Fund (IMF) royalty ensures that there is always a minimum payment
engages in a short Question and Answer segment that could be to the government equivalent to 14.5 percent of the total
used by investors seeking to understand the PSA framework of value of oil production. This is composed of two factors:
the country and what is in it for them. the 2 percent royalty, and 50 percent of profit oil, which at
Guyana Inc. Magazine (GIM): What is a Production Sharing a minimum is equal to 25 percent of total production when
Agreement (PSA)? the cost oil limit applies. In other words, the government
International Monetary Fund (IMF): It is an agreement will always collect the equivalent of 14.5 percent of the
between a host government like Guyana and one or more total value of production regardless of the costs incurred
oil companies to carry out petroleum operations and share by the oil company.
petroleum production from a specific area. PSAs have been GIM: What happens when a company recovers the initial
used successfully by many oil producing countries (over investment in the project?
seventy) for more than five decades. Many countries in the IMF: After the exploration and development costs are recovered,
region use this system, including Trinidad and Tobago, the required cost oil allocation typically becomes less than
Brazil, and Mexico. 75 percent cost oil ceiling of the value of production.
GIM: What are the risks associated with a PSA? As a result, the profit oil available to be shared between
IMF: In a PSA, an oil company agrees to cover all the costs the government and the company will increase. The
required to explore for and produce oil in return for a share government share in the production will usually increase
of production. In the event that the exploration work does sharply once the initial investment has been recovered.
not lead to the exploitation of a commercial discovery, the GIM: What about income tax? How does this work out for
oil company has no right to be reimbursed for the costs it the investor?
had incurred. For this reason, the oil company bears all of IMF: Guyana’s PSAs also provide for the payment of income
the exploration risks associated with an oil project. tax by the oil company, as well as other specified taxes
GIM: What happens if oil is discovered? applicable to sub-contractors and personnel. However,
IMF: If the company finds oil in commercial quantities, meaning the oil company’s income tax liability is included in the
that the project is economically viable, and decides to government share of profit oil, a system known as post-
exploit it, the contractor will recover the costs it incurred tax profit oil sharing or ‘paid-on-behalf’. In other words,
to develop the project from a portion of the total value the profit oil received by the government will include
of production. This amount of production used to recover a portion equivalent to the company’s tax liability. To
costs is called cost oil. The remaining oil is termed “profit illustrate this, each year the government will publish the
oil”. breakdown of the government revenue from the petroleum
GIM: How is cost oil and profit oil calculated in the Stabroek sector including royalty, income tax, government share
PSA? of profit oil and other charges (such as rental fees and
IMF: The main fiscal benefit for the government of Guyana subcontractors’ taxes).
will come from its share of profit oil. The Stabroek PSA

GIM: Is post-tax sharing unique to Guyana and are there any
places a ceiling of 75 percent on the value of production advantages? to be used as cost oil in each month. This means that every IMF: No, this system is used in many producing countries such
month, the profit oil to be shared between the government as Trinidad and Tobago, Azerbaijan and Qatar, just to name and the contractor amounts to at least 25 percent of the a few. Some advantages of the pay-on-behalf system is that total value of oil production. Once profit oil is determined it provides more certainty on the expected government for a month, the government and the contractor are each revenue from oil projects and mitigates tax planning, while entitled to 50 percent of profit oil. offering fiscal stability for both the government and the contractor against changes in corporate tax rates.

Article Categories:
Business · Business Industries · Issue 34 · OIL AND GAS

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