Playing with fire: The hidden cost of unilaterally renegotiating the 2016 PSA

Since oil production began in December 2019, Guyana has received over US$5 billion in revenues. But could the country get more if it were to renegotiate the 2016 Production Sharing Agreement (PSA)? What would be the hidden cost?

Following the release of the 2016 PSA for the Stabroek Block, there has been an outcry for the fiscal terms to be renegotiated so that Guyana could receive a higher return for the exploitation of its resources by an ExxonMobil-led consortium.

The fiscal terms of the contract were sharply criticised – the extremely low 2 per cent royalty, the high 75 per cent cost recovery figure, and the zero-rated corporate tax for oil and gas companies topped the list of concerns.

Almost every Guyanese, including the ruling People’s Progressive Party/Civic (PPP/C) government, lambasted the contract as being one of the worst that has ever been seen. Despite these calls for renegotiation, the government has maintained that renegotiating the contract is not as easy as it seems.

Upon signing the PSA, Guyana was bound by clauses that prevented the unilateral alteration or renegotiation of the contract. The government has also argued that any push to renegotiate the fiscal terms of the agreement would shake investor confidence in Guyana, ultimately affecting any new agreements that would support future development.

In this article, we will highlight the specific clauses in the contract that support the view that Guyana’s best course of action is to focus on improving contract administration rather than renegotiating the 2016 PSA.

Written Consent – A non-negotiable!

Article 32, which focuses specifically on the “stability” of the contract, pinpoints critical reasons why contract renegotiation does not rest solely within the remit of the Government of Guyana. Article 32.1 explains that the government is not allowed to renegotiate, or in any other way attempt to “avoid, alter, or limit” the conditions of the agreement without written consent from ExxonMobil Guyana Limited and its partners Hess and CNOOC (hereinafter referred to as the Contractor). This strips Guyana of the ability, despite the zest and vigour of some, to pursue any form of unilateral renegotiation.

Would Exxon and its partners be willing to renegotiate? The answer is no. President of ExxonMobil Guyana, Alistair Routledge, at a press conference late last year, reiterated the company’s unwillingness to give its consent for renegotiation.

No new taxes, or else

The 2016 PSA also restricts the government from imposing any new taxes on the oil companies. The clause immediately after Article 32.1 says that no form of taxes or fees must be instituted that will increase “the economic burdens” of the contractor while operating in the block. Even if the government implements any such fee that indirectly affects the economic benefits of the companies, the agreement itself instructs the government to immediately take every action necessary to “restore the lost or impaired economic benefits” that the contractor may face.

Now, suppose this is not possible through the stipulated terms of the contract. In that case, the contractor is allowed to proceed with arbitration with the sole aim of modifying the agreement to ensure that the previously identified economic benefits are returned to the contractor. If this is not successful, the tribunal is empowered to ensure that the oil companies are compensated for both “historical and future losses”.

Tanking the economy

Currently, Guyana is on the hook to ensure ExxonMobil receives its returns for six approved projects. This amounts to approximately US$54 billion worth of investments. That’s nearly 54 times the size of Guyana’s entire foreign reserves! Should Guyana seek to amend the contract or increase Exxon’s financial burdens, the baseline compensation the country would have to pay will ultimately tank the economy.

Why sanctity is important

Apart from the fact that the contract itself disallows any type of unilateral renegotiation, senior government officials have repeatedly explained the importance of maintaining the contract to ensure investor confidence remains high.

The Harvard Business School, in a 2022 article, points out that multinational corporations will always consider the political climate of a country before deciding whether to invest there. If policies and legislation continue to change when governments change, these organisations cannot be sure if their investment will be safe and secure.

“Political leaders often make decisions that impact labour laws, education, transportation, and taxes, which, in turn, influence business,” the article pointed out.

Vice President Dr Bharrat Jagdeo has also pointed out on numerous occasions that this “non-capricious” approach has encouraged more countries to respect Guyana as a stable business partner.

“We pride ourselves in being predictable, fair, and working with the companies in partnership, but looking out for national interests,” Dr Jagdeo said. “I think the industry appreciates…predictability and non-capricious behaviour…so they have a clear direction as to how we operate,” he explained.

President Ali, addressing this very issue two years ago, shared the same sentiments.

“A country does not turn off when one government comes in and another government comes out…we understand that we’re obligated to act in good faith in honouring [the contract],” President Ali noted.