Under the proposed model Production Sharing Agreement (PSA) for the oil industry, operators after being issued with their licenses would be required to submit work programmes and budgets for approval by the Minister who holds responsibility for the Petroleum Sector.
According to the draft agreements, which were released by the Government on Tuesday, the contractor would be required to submit annual work programmes for each of the petroleum operations to the Minister for approval.
The proposed contract states that within a period of 45 days, the Minister is expected decide on the future of the proposed work programmes, which must contain a detailed list of the individual activities the contractor plans to conduct, the estimated expenditure, and the estimated time for each of the activities.
“During the Exploration Period, the Work Programmes shall comply with the Minimum Work Programme, and the Exploration Plan, and during any Development Period, the Work Programmes shall comply with the relevant Development Plan. All Work Programmes shall comply with the Applicable Laws, the Environmental and Safety Management System and the other terms and conditions of this Agreement and Best International Industry Standards and Practices,” the model PSA for the Deepwater Blocks states.
Importantly, the contractor is also mandated to submit to the Minister for approval, its Budget for each Work Programme, in accordance with standard accounting procedures. Once all requirements are met, the Budget and Work Plan will be approved simultaneously.
“All proposed Budgets shall be commercially viable, reasonable and consistent with the requirements of this Agreement,” the model PSA states, adding further that the proposed Budgets must include a detailed estimate of costs necessary to implement the Petroleum Operations described in the Work Programme, and must be backed by supporting documents.
“The proposed Budgets shall be consistent with the relevant Exploration Plan or Development Plan, as the case may be, and the relevant Work Programme,” the document reads.
Under the proposed PSA, the Government has proposed that the royalty on all petroleum produced and sold by the contractor be increased from 2%, as embedded in the Stabroek Block PSA, to 10%.
Further, the contractor will be required to bear the costs incurred during its petroleum operations, however, that contract cost would be recoverable only from Cost Oil and or Cost Gas.
“All Recoverable Contract Costs incurred by the Contractor shall be recovered from the value, determined in accordance with Article 37, of a volume of Crude Oil and/or Natural Gas (“Cost Gas”) produced and sold from the Contract Area and limited in any Month to an amount which equals sixty-five percent (65%) of the total production from the Contract Area for such Month excluding any Crude Oil and/or Natural Gas used in Petroleum Operations or which is lost,” the draft document states.
The balance of the Crude Oil and or Natural Gas will be shared equally, with the Government receiving 50% and the contractor the remaining 50%.
But the actual royalty and profit to be received by the Government will be dependent on the price of the crude oil.
According to the document, once the Contractor moves to production, the Minister will be required to set reference prices for crude oil so as to determine the taxable income of the contractor; the value of royalty payments made to the Government, the value of cost oil; and the Share of Profit Oil.
“The market price of crude oil shall be equal to the Realized Price or the Crude Oil Basket Price. The reference price, established quarterly by the Minister upon consultation with the Contractor, shall reflect the price that could have been achieved between independent parties in arm’s length transactions,” the model PSA explains.
But in order to arrive at the price, the Minister will be required to meet with the Contractor at least six months before the projected start-up date of production with the hope of arriving at an agreement on the Crude Oil Basket.
In the event that the two sides are unable to reach an agreement on the Crude oil Basket, the matter will be referred to independent expert for determination.
Also, under the proposed PSA, the Contractor, Affiliated Companies, Sub-Contractors and expatriates will be required to pay income tax in keeping with the country’s Income Tax Act and the Corporation Tax Act.
However, the Contractor, under the proposed agreement, would be exempted from the Property Tax Act pursuant to Section 51 of the Petroleum Act.