Beyond Contract Renegotiation, How Can Guyana Claw Back Value?

Jan 01, 2025
News

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By Anthony Paul

Energy Governance, Strategy and Policy Specialist

Question:

Mr. Paul, as you are aware, Guyana has a contract with ExxonMobil and partners (The Contractor) which contains stabilization clauses which many people believe to be extraordinarily disproportionate, benefiting the foreign investors far more than the country. You have been involved in the operational and governance issues of the oil and gas industry around the world for many years and you have some familiarity with the situation in Guyana. What avenues do you see for the government and people of Guyana to address these inequities?

Answer:

I’ll share some information and give general insights, which I hope might be useful to your audience in forming their own opinions of the issues at hand. I shall stop short of giving advice, as that will require a lot more engagement, explanation and delving into supporting evidence than time and space will allow for this interview.  I’ll address your question in two parts.

Cautionary Note

Let me start by putting on record two factors:

1. I am not a lawyer, nor am I an economist, But I have worked with oil and gas legislation, regulations and contracts for over 45 years, advising on and negotiating their design and implementation, as well as in the technical and commercial interpretation and operations of these, for governments, as well as for State-owned and multinational companies. Where I make comments on or express an opinion on the interpretation of matters related to laws, contracts or economics, please be aware that this is an informed layman’s perspective.
2. For the past 17 years I have supported the work of the Natural Resources Governance Institute (NRGI), a highly respected international NGO, which was previously called Revenue Watch Institute. I am currently a member of its Governance Board and Chair of its Nominations and Governance Committee.
3. In that role and in some of the roles I have played in my time with multinational companies and governments, including my own in T&T, I have come to realise that there are many views of industry practice, which people take for granted, but may in fact be flawed and can be successfully challenged or rewired. I have also learnt that no law or contract is 100% bullet proof. There are always loopholes to access opportunities for variation of interpretation, and additional value-capture, for both investors and governments, if they have the experience, skills, knowledge and desire to do so.
4. Companies routinely exploit those that benefit them, to enhance the benefits to their shareholders.
5. Governments tend to be much more cautious in taking this approach, wary of pushing companies, often fearful of the bogeymen of “affecting investor confidence”, “becoming less competitive”, “stability of business environment”, and “sanctity of contract.” This is often driven by a lack of experience (which can migrate towards to a lack of self-confidence), and the inability to engage and adequately utilize external supporting expertise, because of limited financial resources or experience/know-how/“savvy”.
6. In the end, some countries are prepared to give away value, rather than fight to retain it, perpetuating the “race to the bottom,” as economists call the phenomenon of countries competing for investors, without fully understanding the value of their resources to these investors.

The Real World

2. secondly, as a consultant, I give the best technical and commercial advice that I can, using all the information and experience available to me, while recognizing that my client may have information, perspectives and/or objectives to which I may either not be privy or not ascribe the same level/weighting of importance in decision-making.
3. I have seen many occasions where some of the most successful companies and their leaders have made decisions that are counter to common-sense technical or commercial evaluations, but which may fulfil what they perceive to be an over-arching “strategic objective.” In these cases, revenue or cost may play second fiddle to some other performance metric, designed to give confidence to stakeholders.
4. That is why we have leaders. To weigh all the considerations, then make the decision that they feel is the best interest of their stakeholders.
5. When governments act in this way, we tend to change the decision descriptor of their over-arching objectives from “strategic” to “political.” Over time, that has come to be seen in a negative context.
6. So, while I may give private, specific advice to clients, I also put general information into the public domain, which is meant to promote understanding and discussion among a broader cross-section of stakeholders. I mustrespect the decisions made by those whom I advise.
7. I know this question is meant to address decisions made by the Government of Guyana, which I am sure were made based on their understanding of the specific circumstances in Guyana. It’s not for me to agree or disagree with that.
8. I will say that I have not yet met a government, politician or public servant who overtly wishes to deliberately do his country and his people harm. That doesn’t mean that there aren’t those whose actions would have that result.
9. Decisions that defy “common-sense” or “logic” may well have a rationale, beyond those “strategic” or “political” ones.
10. Sometimes they may be made out off-ear, because a party may assign a high weighting to the likelihood or impact of an undesirable impact. It may be argued this is a risk management strategy.
11. Other times it may be inexperience or lack of knowledge, where a party may make a decision without completely understanding the risks involved, the potential outcomes or the alternatives or mitigating factors and the ramifications should one of those risks materialise.

iii. A third scenario is one in which there may be “trade-offs” where some quid-pro-quo negotiations may have taken place but may not be placed in the public domain. Given that in extractives (oil, gas and minerals) these typically involved public assets, transparency if often cited as a means of ensuring those making the decisions can be held to account. Lack of transparency an lead to suspicion that the trade-offs are not in the public interest, eroding trust between government and citizens.

1. One-sided outcomes of negotiations between governments of poorer nations and rich multinational companies (MNCs) are usually skewed, as the MNCs have a lot of money to engage high level specialist support for legal contract, commercial and advisory services. Government tend not have that luxury in their budgets.

On Economic Sanctity

Now to the second part, and the area I believe is your primary interest.

Judging from the commentary in the media in Guyana and from among my peers and colleagues in the industry, it is clear that there are 2 or 3 clauses in the Production Sharing Agreement (PSA) being discussed that are by international norms, so one-sided and disproportionate that they may be considered “unconscionable” or “odious.”

I’ll leave it to the lawyers and international trade negotiators to discuss the meaning and implications of these terms, in the context of international agreements.

As an example, in one of the clauses, the Minister has agreed not to change fiscal (tax) terms. This typically does not fall under the control of a Minister responsible for extractives butis the responsibility of a Minister of Finance. That said, the minister for extractives acts on behalf of the government and would have had the approval of the Cabinet to agree to the terms of such an Agreement.

Everywhere in the world, all contracts or Agreements are subject to national law, so if a contract contains terms that are at variance with national law, those terms may not be enforceable. In other words, no Minister can legally enter into a contract that contravenes an existing law.

Similarly, can a Minister or government can bind Parliament to not change laws in the future. In some cases, international trade dispute resolutions authorities have taken a different view, basing their rulings on the legitimate expectations of investors. Given what has happened on the international scene in recent years, it appears there are different rules for different players.

In the case of this Agreement, the Minister of Finance placed the Agreement before Parliament for its ratification. In so doing, Parliament effectively made the Agreement law and may have amended or repealed existing statutes, just for this Agreement.

In discussing whether the conditions in the Agreement can be unilaterally changed, the question therefore arises whether a Parliament can bind future Parliaments and prevent it from amending or repealing laws in the future.

This is where another of those contentious clauses kicks in. Should any change be made in the future, the Minister has agreed to make up any perceived shortfall in return on investment that the Contractor may have reasonably expected. As a layman, that suggests to me that a Minister would have to get prior Parliamentary approval of a budget to allow for that.

The language in this clause is very cleverly drafted, but not necessarily bullet-proof.

One question that has arisen is why the Minister would agree to such terms.  That was answered by the Minister, in testimony before a Parliamentary Committee, in response to a question posed by none other than the Minister of Finance.

In my research, I have come across a body of work on the unenforceability of unconscionable or odious contracts and have been intrigued by the treatment of cases, including where negotiators have been deemed as “lacking the capacity to contract.”

Although no party wants to renegotiate a contract without cause, renegotiation of contract terms in the industry is routine, particularly if there is a material change in conditions like geological understanding or markets (costs of services, prices of product, etc.) from what was expected at the time the contract was negotiated. It is also not unusual if one party wants to open a specific clause or condition that it finds particularly unattractive, that the other party may likewise open for negotiation a different clause which it may find unattractive. This is the nature of give and take in negotiations.

The desire to revisit the terms of the agreement hinges on the concept of economic stability. Simply put, this means that an investor has an expectation and, in this case, is given a guarantee, that it will achieve a specific return on its investment. This is typically premised on costs, production levels and market prices, while providing for risks and some level of variation. these would have been agreed upon and documented on the approval of the Field Development Plan, by the government, and the Final Investment Decision, by the respective boards of the partners who make up the Contractor.

In an earlier article, I made the case that Windfall Profits Taxes, which will only apply when revenues far exceed expectation because of an external impact, such as world market price increases, may not alter the economic stability provision of a contract, which is based on an agreed expectation of return on investment, and so not at variance with existing contracts or laws. In that case, the onus to prove a variation may fall on the party making the claim.

Keep Thinking, Keep Working, Keep the Prize in Sight

The magnitude of revenue from the sale of its resources that is denied the people of Guyana is so great that it demands an ongoing discussion of the opportunities and avenues to rebalance the scales.  Circumstances have and will continue to change. It is in everybody’s interest to address the contract asymmetry for a harmonious, long-term relationship.

The parties to the PSA place a lot of confidence in the institutions and conventions of the United Nations, including in the mechanisms for disputes and arbitration. Two resolutions of the UN, aimed to assist in decolonisation, address the concerns being articulated today in and about Guyana in connection with the provisions of the PSA.

1. Resolution 1803 (XVIII) of 14 December 1962, also known as the “Resolution on Permanent Sovereignty over Natural Resources” (RPSNR); and
2. Resolution 3281 (XXIX) of 12 December 1974, also known as the “Charter of Economic Rights and Duties of States” (Charter).

The first of the two resolutions (RPSNR) focused on “reinforcing the sovereignty of developing countries and securing for their peoples the benefits of natural resource exploitation within their territories.” Even so, it recognised and encapsulated the rights of investors, paving the way for a system of investment protection and international investment agreements – “foreign investment agreements freely entered into by or between sovereign States shall be observed in good faith.”

Perhaps inspired by the oil embargo of 1973, the second (Charter of Economic Rights and Duties of States) was an attempt to realign economic relations between developed and developing countries – “New International Economic Order”. The Charter reinforced the RPSNR ‘s fundamental principle of permanent sovereignty over natural resources.

In 2017, Tanzania codified those resolutions into legislation, to address what were considered asymmetric contracts:

1. Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (Permanent Sovereignty Act) and the Natural Wealth, and
2. Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act 2017 (Review Act).

Some of the provisions of the first Act may resonate with the ongoing discourse in Guyana:

1. “the People of the United Republic shall have permanent sovereignty over all natural wealth and resources”,
2. “the ownership and control over natural wealth and resources shall be exercised by, and through the Government on behalf of the People and the United Republic”,
3. “the natural wealth and resources shall be held in trust by the President on behalf of thePeople of the United Republic.”
4. “it shall be unlawful to make any arrangement or agreement for the extraction, exploitation or acquisition and use of natural wealth and resources except where the interests of the People and the United Republic are fully secured”.
5. “in any arrangement or agreement for extraction, exploitation or acquisition and use of natural wealth and resources, there shall be guaranteed returns into the Tanzanian economy from the earnings accrued or derived from such extraction, exploitation or acquisition and use”.
6. “any authorization granted for the extraction, exploitation or acquisition and use of natural wealth and resources, arrangements shall be made or given to ensure that the Government obtains an equitable stake in the venture and the People of the United Republic may acquire stakes in the venture.”
7. “no raw resources are exported for beneficiation outside the United Republic”
8. “there shall be commitment to establish beneficiation facilities within the United Republic”.
9. “all arrangements or agreements entailing extraction, exploitation or acquisition and use of natural wealth and resources may be reviewed by the National Assembly”

Although these have had mixed impact in Tanzania, where the circumstances are quite different from Guyana’s, the intent and design of these pieces of legislation may be useful in the ongoing discussion about increased value retention in Guyana.

I leave this to those more capable than me to consider.

In considering any change to the status quo, the factors underpinning the current circumstances must be faced. No doubt, “fear” (not in any way to dilute the courage of those who have stood up for Guyana, but as a term to describe an uncertainty about the likelihood of an outcome that may make the situation worse) has to be overcome. With the PSA making provisions for arbitration, and the reputation of some industry players for a propensity for drawn-out litigation, with much deeper pockets than the State, such a sentiment is justified.

Fortunately for Guyana, there are multiple alternative options to claw back value, beyond renegotiation and legal provisions. Localising the supply chain has been targeted as a major source or additional in-country revenue capture through the Local Content Act. The announced update of the legislation and necessary enhancement of implementing methodologies have the potential to give the economy a big boost.

A lot of work remains to be done and time is not on Guyana’s side. Given the motivation and with the support of partners with the right experience, skills, knowledge and desire to do so, these fruits can be ripened and picked to feed the Guyanese people.

Anthony Paul is neither a lawyer nor an economist. He studied English Comprehension at Woodbrook Presbyterian School and is Chairman of the Board of the Lloyd Best Institute of the Caribbean (https://www.thelloydbestinstitute.org) and a member of the board of the Natural Resources Governance Institute (resourcegovernance.org).

(Beyond Contract Renegotiation, How Can Guyana Claw Back Value?)

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