It has been reported that Guyana receives 52 percent of oil profits from ExxonMobil Guyana Limited (EMGL) oil extraction operations. Given that Guyana is not a shareholder in EMGL, this is overly generous of a company that is expected to minimize cost and maximize profits for its shareholders. In fact, nowhere in the Production Sharing Agreement (PSA) is there any mention that Guyana will receive 52 percent of the profit (OGGN: https://www.tiktok.com/@oggn_/video/7339658873780882694?_r=1&_t=8kBk1ad1Vtr). Therefore, EMGL must take down the billboard which falsely advertises that Guyana receives 52 percent of the profit, for this outcome is not included in any of the Articles of the PSA.
So let us examine the correct distribution of the total oil sales. According to the PSA, 75 percent of total sales is first extracted as costs, and EMGL has full control of this amount; and without real-time audits, Guyana cannot verify these expenses. And even when discrepancies are observed, the correction process is expensive; and it must be funded 100 percent by Guyana through an arbitration process in the United States of America, with Guyana having to pay the cost of the EMGL’s lawyers. Additionally, the PSA requires that the remaining 25 percent of total sales, called profits, must be shared at a rate of 12.5 percent each for Guyana and EMGL. Furthermore, the PSA also stipulates in Article 15.6 page 39 that: ‘The Contractor shall pay, … a royalty of two percent of all Petroleum produced and sold, …’. This implies that the 2 percent royalty must be sourced from the total sales and not from the profit share of EMGL In the circumstances, it is contended that this act by EMGL, which uses its profit share to pay Guyana’s royalty, violates the condition of Article 15.6 in the PSA; it robs Guyana of its correct royalty payment; and this approach by EMGL generates a smaller share of total sales for Guyana.
So here is the derivation of Guyana’s profit share. After taking out 75 percent as cost from total sales (TS), profit is equal to 25 percent of total sales; and this is specified as: Profit = (1-75%) TS = 25%(TS), with Guyana’s profit share being defined as 50 percent of profit; that is: Guyana’s profit share = 0.5 x 0.25 = 12.5% (TS). Royalty is specified in Article 15.6 as 2 percent of total sales (TS); and this is defined as: Royalty = 2% (TS). Adding Guyana’s profit share (12.5%TS) and royalty of 2%(TS), this will yield a total oil share of 14.5% (TS), as defined in the PSA.
Now here is the royalty deception. Instead of EMGL paying Guyana with 2 percent of total sales, EMGL smilingly presents the 2 percent of its profit to Guyana. But remember the Guyanese proverb: ‘“All skin teeth nah laugh”. In fact, this EMGL’s methodology of paying 2 percent from its profit understates the correct amount of Guyana’s royalty. Notably, this understated royalty (UR) amount is specified as: UR = 2% (profit) = 2% (25%) TS = 0.5% (TS). Therefore, Guyana’s share of total sales (TS) is not 14.5%(TS), but it is only 13 % (TS); that is: profit (12.5 %) plus royalty (0.5%). The outcome in this approach is that Guyana is being blatantly robbed of 1.5 percent of its share of total sales. Incidentally, a comparable analysis by Christopher Ram (https://www.stabroeknews.com/2024/01/09/news/guyana/the-myth-of-the-equal-share-part-1/ ) indicates that Guyana’s share of total sales could be no higher than 11.37% which is below the 13 % derived above.
Meanwhile, some might think that 1.5 percent of total sales is insignificant, but when managing billions of dollars, the shortfall can be significant. And in this regard, examining the crude oil and other commodity export data (Bank of Guyana, Annual Report, 2022, page 21, Table VII) will provide a useful example. Oil exports during the period 2020 to 2022 amounted to US$13.9B, and 1.5 percent of this amount is US$208.7M (Table 1).
Source: BoG: https://bankofguyana.org.gy/bog/images/research/Reports/ANNREP2022.pdf
In contrast, when Guyana is shortchanged by 1.5% in oil sales (US$208.7 million), this loss is greater than the total export earnings from sugar and timber in the amount of US$137.47M. Moreover, the undisputed US$208.7M (or G$41.6 billion), along with the millions in uncollected profit taxes can make a significant contribution to our deserving teachers, who provide a key corner-stone in Guyana’s foundation. Additionally, the profit tax payment should not be sourced from Guyana’s share of oil revenue in the Natural Resource Fund (PSA Article 15.4 b; and 15.5), but it must originate from a direct EMGL disbursement to the Guyana Revenue Authority. Otherwise, the current tax payment transaction will only result in the Government just moving its own money from one account to another account, while EMGL will be laughing all the way to the bank for the next 20 years. Similarly, all royalty payments must not be based on ‘so-called-profits’, but only on total sales.
Editor, it should be pointed that EMGL does not reply to queries from civil society; but they conveniently leave that task to the Government of Guyana, who, unfortunately, provides no comprehensive answers, and appear unwilling to do so. For example, the discovery of the additional seven oil reservoirs and how much oil has been found is still a secret to the Guyanese public. This is indeed most troubling, because the right to information that is related to our natural resources, must be available to both the public and foreign investors.
Finally, I end with this question: Does contract sanctity include a free-pass for foreign investors, while it imposes ‘eye-pass’ on the Guyanese people? No contract should supersede the requirements of the Constitution of Guyana. The plundering of our non-renewable resources must stop. And in the words of brother Bobb, “Get-up, stand-up, stand-up for your rights’. Wake-up Guyana!
Dr. C. Kenrick Hunte
Professor and Former Ambassador
Article Originally Published At: https://www.kaieteurnewsonline.com/2024/03/03/paying-2-percent-from-its-profit-emgl-robs-guyana-of-its-correct-royalty-amount/
