By Johnny West, OpenOil
This post originally appeared on OpenOil.net on March 15, 2018
This analysis was referenced in an April 8, 2018 Bloomberg article "Exxon Sparks IMF Concern With Weighty Returns in Tiny Guyana."
Guyana’s first and major oil deal, with ExxonMobil, produces results for the government which are outlier low, an OpenOil financial model reveals. Over the life of the project the government should expect to see from 52% to 54% of profits, compared to well over 60% in a cluster of comparable projects signed in other frontier countries.
The gap could cost the small South American country billions of dollars, as successful drilling continues apace in the Stabroek field, and recoverable reserves figures climb into the billions of barrels.
The relatively low performance of the Stabroek terms, first signed in 1999 and renegotiated in 2016, following the first significant discovery the previous year, holds under a wide variety of market and field size conditions.
There is also a significant possibility, as reserves growth gathers pace, that Exxon and its partners Hess and Nexen could achieve “super profits”, rates of return of over 25% and edging considerably higher under certain conditions, as this profit map of the project shows.
The agreement has become controversial in Guyana in the past year or so and the contract was published by the government at the end of 2017 to allow public scrutiny. The financial model and this accompanying narrative are based on that contract, as well as public statements and media reports giving details of reserves, development lead time and costs.
Even under conservative assumptions, Stabroek will transform Guyana. Government revenues could hit a billion dollars a year by 2024 – more than the entire current government budget.
The 52% Average Effective Tax Rate (also known as “the government take”) is lower than a general rule of thumb of 60% to 80% government take in oil projects, and also from a range of frontier projects in Ghana, Senegal, Papua New Guinea, Mauritania and Guinea, which were comparable at the time of signature. A more detailed description of the comparison methodology is laid out in the Annex to the narrative report.
What is significant here is to understand the role reserves growth scenarios could play in increasing company rates of return. At the currently stated field size of 450 million barrels in Stabroek, for example, the company does not reach “super profits”, defined here as an Internal Rate of Return (IRR) of 25% or more, until a price point of $75 per barrel for oil. But this field size relates only to the first stage of development of the field now underway, with first oil anticipated for 2020. A second phase is now under active consideration by the companies, with a projected production plateau which could be twice as high as in the first phase. If the amount of oil produced rose only modestly, compared to Exxon’s declared reserves, to 750 million barrels, the superprofit level (25% IRR) could be reached at $50 per barrel – below today’s prices. At a billion barrels, that stage could be reached with prices in the $40s per barrel.
The FAST-compliant financial model and accompanying report are part of OpenOil’s public interesting financial modelling library, part of a practise as commercial and financial analysts to governments and public policy makers.
A second stage of the model will be published in the coming weeks, to incorporate feedback from interested parties, and quantify how revenue streams could play for both investors and the government under a modified fiscal regime.
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By Scott Sellwood, Oxfam America
This post originally appeared on politicsofpoverty.oxfamamerica.org on September 20, 2017
New research from Oxfam’s partners in Peru shows – yet again – how hard it can be for governments to protect the tax base over the life of a mining project (and hold mining companies accountable).
For many countries, tax and other payments from oil and mining companies represent an important source of government revenue. A case in point is Peru, where the government receives billions each year from companies in the extractive sector. But is Peru receiving all that it should be from these companies?
Last month, Peru’s Supreme Court ruled that its tax regulator (SUNAT) could finally recover millions in lost revenues from Peru’s largest copper mine, Cerro Verde. For the last six years, SUNAT has fought to recover $250 million in unpaid mining taxes between 2006 and 2009. Of this, $140 million is due to be paid to the local government of Arequipa – the region where the mine is located – under Peru’s decentralized mining, oil, and gas revenue sharing rules. These payments will help pay for urgently needed public investments. The Supreme Court appeal was the latest attempt by Cerro Verde to avoid paying what the government says is due.
Oxfam’s partner, Grupo Propuesta Ciudadana (GPC), has followed the Cerro Verde case closely and analyzed the publicly available data. At the center of the now six year fight to recover the lost millions is a tax stabilization agreement signed by then-President Alberto Fujimori in 1998, who is now imprisoned for corruption and gross human rights violations. The company argues that this agreement entitled it to tax exemptions related to its first major expansion investment in 2006 when it invested $900 million to nearly triple its annual production. Peru’s tax regulator disagrees, as do their courts.
Peru is right to be pursuing these unpaid taxes—but what if this is just the tip of the iceberg? GPC argues that they should be trying to recover more from the Cerro Verde mine. Their analysis shows that between 2006 and 2011 the mine failed to pay an additional $200 million in taxes. Cerro Verde, in their own financial statements, state that if they lose all the appeals they will owe $544 million in unpaid taxes between 2006 and 2013.
Further, between 2005 and 2012 (the “boom” years for mining companies around the world) GPC estimates that Cerro Verde generated upwards of $5 billion in tax credits, as a result of overly generous fiscal terms. And last year, a second major investment by Cerro Verde allowed copper production to further double (500,000 tons in 2016). This is a major concern for the tax justice groups in Peru. Basically, despite production increasing and commodity prices recovering, a second tax stabilization agreement signed in 2015 (allowing for accelerated capital depreciation) is likely to mean that Cerro Verde’s taxable income for the next few years is effectively zero.
These discretionary tax exemptions are already having a huge impact on budget transfers to Arequipa: since 2012, subnational transfers from mining have collapsed (from an average of 70 percent in 2012 to just 2 percent in 2016). GPC cautions that these revenues are unlikely to recover until 2019 or 2020, at the earliest.
In just the last two years Oxfam has commissioned similar case study research in Cambodia, Kenya, Malawi, Zimbabwe, and Niger—which each map government risks to revenue. Understanding oil, gas, and mine economics at the individual project level allows us to understand how national tax policy, royalty policy, subsidies and other investment incentives affect the amount and timing of revenue being produced by extractives projects for government coffers – and then into investments that yield inclusive human development outcomes. For our partners and allies, it is at the project level where revenues are secured or lost and it is where the real transformative potential for those revenues to support pro-poor development outcomes rests – as opposed to “economic growth,” and its often false promises of sustainable and inclusive jobs, infrastructure, or voluntary corporate social responsibility commitments.
Like the Cerro Verde case, these case studies show how countries that are heavily dependent on minerals or hydrocarbons for government revenues lose taxes from a combination of poorly negotiated, overly generous, and secretive contracts, and weak fiscal regimes vulnerable to abuse. Unlike Peru, not all governments have the wherewithal to audit multinational mining companies, and stay the fight through years of appeals.
But it’s not all doom and gloom. Despite the seemingly infinite ways large mining, oil, and gas companies can avoid paying taxes in countries where they work – as new research from PWYP Canada shows – the pathways are not unlimited. There are clear patterns and concrete legal, policy, and administrative solutions that can minimize these risks.
In Peru, for example, the government should:
Peru’s fight to recover lost revenues is not unique. Too often, countries with significant mineral, oil and gas resources fail to secure a fair share of the revenues generated by these projects. Such losses (which some global estimates put in the billions) are, quite simply, a matter of life or death. The lost billions represent money that should have been spent on building schools and hospitals, paying teachers, doctors and nurses, and providing equal access to safe drinking water or health care, among other urgent development priorities.
For more than ten years, Oxfam has fought for law and policy reform to require public disclosure of project-by-project payments, contracts, and beneficial ownership. We continue to defend anti-corruption laws like Section 1504 of Dodd-Frank and are now seeing a flood of new disclosures from laws in the EU and Canada. These long fought for gains are now allowing us to better understand how individual mining, oil, and gas project revenues are lost and we are ramping up our campaigns to stop them.
Scott Sellwood is a Program Advisor for Extractive Industries at Oxfam America.
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