Disposal of Production
Recall that under a production sharing contract, costs are deducted from the value of production to arrive at profit oil to be shared between the contractor and the Government of Guyana in the proportion set out in the contract: Article 11.6. The contractor is also permitted to use as much production as needed in the operations and within the transportation and terminal system.
If the reader thinks that the system is becoming complicated and therefore subject to dispute, it gets even trickier since there may also be some third party usage of the transportation terminal systems. Where there is such third party usage, the quantities so used or lost outside of the contract area is proportionate to the aggregate use of the that system and the value is excluded from any calculations under Article 11.
Minister’s share
The quantity of production to which the Minister is entitled is measured and delivered to the Minister at the delivery point, defined as the free on board point of export either onshore or offshore as agreed by the Minister and the contractor. Article 11.6 referred to above, is subject to Article 14 which provides that each party has the right to take its share of the profit oil at the delivery point and to separately dispose of its share of the total quantities of production under the Agreement.
The Agreement provides that within twelve months of the approval of a development plan or such later date, but no later than three months before the lifting of the first scheduled lifting of crude oil, the contractor may propose to the Minister off-take procedures governing the methods whereby the Parties nominate and lift their respective shares of crude oil, such procedures being subject to discussion and agreement between them.
Article 14.2 sets out as the principles governing such procedures that the lifting will be so carried out so as to avoid interference with the petroleum operations; that if any party is unable to lift such quantities for any reason, it must notify the other party forthwith; and in the absence of any agreement to the contrary, the Government and the Contractor will share in each type of grade of crude oil in proportion to their respective lifting entitlement.
Challenges to the Government
It seems clear from the two immediately preceding paragraphs that the Government is more than unlikely to take up its entitlement and will have to rely on the Contractor to dispose of its share. Such a possibility is provided for under Article 14.3 which allows the Minister to notify the Contractor to use reasonable efforts to market abroad on competitive terms all or part of Guyana’s lifting entitlement. This is not done for free. The Minister has to pay the Contractor the costs normally borne by the seller in such transactions and other terms to be agreed, including an agreed marketing fee.
Further pressure is placed on the host country by requiring the Minister to give no less than six months’ notice before changing between the right to receive payment in kind and agreeing with the Contractor to market his lifting entitlement. Curiously, the 1999 Agreement (Janet Jagan’s Agreement) does not contain any similar provision for switching between marketing the lifting entitlement and receiving payment in kind. Of course in so far as the Esso Agreement is concerned, the point is moot because Minister Trotman has chosen to replace that Agreement with his own, for reasons best known to him.
Contractor’s rights
Article 14.4, which is subject to Article 17 gives the Contractor the right to export at the export point all petroleum to which it is entitled free of any duty, tax or other financial impost and to receive and retain abroad all proceeds from such petroleum. Readers of this column may recall that the Minister’s share of profit oil includes not only royalty but also certain other taxes – (a) the Income Tax Act; (b) the Income Tax (In Aid of Industry) Act; (c) the Corporation Tax Act; and (d) the Property Tax Act will not apply. The contracting oil company may not be entitled to any tax holiday but by the same token it will not be liable to Property Tax and other forms of taxation on its income.
Article 14.4 therefore rounds off the exemption. Of course, if oil prices fall below the cost of production and Guyana will in any case be entitled to a 14.5% share of the revenue (2% royalty plus 12.5% of guaranteed profit oil), the oil company will bear an annual loss.
Another right the 1999 Agreement allowed Esso was the freedom to sell, or deliver or sell and deliver petroleum to third parties in the United States of America.
Part 20 next week will set out a practical example of these provisions.