Dear Editor,
I applaud the government for announcing that ‘uncapped interests’ will not be recovered as expenses in oil and gas exploration and production (KN Sep 12). I salute the media and other forces for being vigilant on the oil industry exposing shenanigans and looking out for the country’s interests unlike some politicians who are only interested in their self-interests to enrich themselves off our new found fossil fuel. As I penned earlier, certain expenses (like uncapped interest rates) should not be allowed as expenses. I am pleased government is showing signs of listening and not coming across like it ‘hard ears’.
KN had reported (Aug 27) quoting petroleum expert Prof Mitro (of Texas) on uncapped interest rates being included as expenses of energy companies. This leads to all kinds of abuses, as Prof Mitro explained. Those of us who study economics (especially of operations of giant multi-nationals like energy companies) are familiar with their ‘unethical) practices to exaggerate expenses and to ‘double dip’ (expenses) including claiming expenses not related to operations so as to maximise their expenses and in so doing increase their own costs of doing business. Oversight and monitoring of energy companies and conduct of their business are critical to ensuring expenses are related to operations in Guyana and that the country is not robbed in broad daylight. As reported, Guyana gets 2% or 1% (depending on the company) in royalties after expenses and a small percentage of the profit. It is inevitable that companies would seek to pad their expenses so as to minimise the amount given to Guyana.
To understand the concept of uncapped interests rates, it is a higher than normal rate of interests paid when borrowing money for a business. When people or businesses are short of money for a project, they seek a loan. They get the loan from a lending institution such as a bank. A loan has to be repaid often with interests over a fixed period of time. The interest rate on a loan varies. Different banks charge different interests but they generally compete for clients offering competitive or the lowest rate in order to attract customers. Risky loans inevitably carry a higher interest rate – meaning if the bank feels the client will have difficulty to repay the loan, it will charge a higher than the going rate. The projected total interest is added on to the life of the loan. People make monthly payments (installments) to repay the total loan amount (plus interests) over its lifetime.
Borrowers shop for the lowest interest on a loan to reduce costs. Businesses in particular wish to reduce costs by borrowing at the lowest rate possible. But in the Guyana case regarding oil exploration and recovery, the oil companies were pursuing uncapped interest rates on loans that they expected to be considered as expenses of exploring, producing and marketing oil. This is unheard of. No company does business like this. No government signs contract like that. Uncapped means the rate can go sky high (way above normal rate) and such interests could benefit sister companies of the oil giants.
Guyana would be tagged with the loan and the high interests. Guyana has to repay the loans with the interests added on to it. So, for example, if Company X borrows US $100M at an interest rate of 10% which is probably 3% over the normal rate, then over $10 M (compounded) is added on to the loan every year; this could be some $3M high a year than normal amount. After ten years, A owes some $200M, which is more than $30M above normal amount. In other words, Guyana missed out on US $30M, which could pay the salaries of over a hundred workers. The country loses a lot of money on this uncapped interest rate.
All expenses of exploring and recovery of oil are deductible from royalty and profits of the government (not from the profits of the company). Loans are recoverable regardless of interest rates. In effect, the oil companies pay no expenses and have no costs. In short, the nation hardly gets anything from the recovery of oil. Even in the areas of loans taken by the oil companies, Guyana has been shortchanged or given small change.
Uncapped interests are subject to abuse. The energy companies have kinship financing companies (with which they are affiliated). A similar relationship was uncovered with respect to American Airlines that charged Exxon US$2000 a ticket when the normal rate should have been $500. One needs to also verify that interest costs from loans are not mixed in from other business relations. One must seek to prevent fraud, which will be a perpetual challenge.
Energy companies should not be allowed to benefit from the production oil with loans or benefiting from interests on loans for exploration and recovery. Those of us who study oil exploration know that countries don’t allow interest rates to be deducted as expenses. In addition, companies should not borrow heavily to fund exploration and production. Companies should have enough of their own capital and business capacity or else Guyana will be a victim of uncapped interests as has been the case with countries in Africa with limited benefits redounding to the population.
Yours truly,
Dr. Vishnu Bisram