Monday, September 26, 2022

The 2019 addendum to the Stabroek PSA does not equate to renegotiation

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OilNOW
OilNOW is an online-based Information and Resource Centre

By Joel Bhagwandin – OilNOW

Summary

The proponents who are propagating the argument that the Addendum to the Production Sharing Agreement (PSA) of 2016 is equated to a form of renegotiation of the contract; are peddling a dangerously false narrative and are seeking to create a storm in a teacup. Had this been any form of renegotiation, given the political circumstance that the previous Government was surrounded by at the time of this addendum, they would have made absolutely no hesitation to politized this as part of their campaign for the 2020 elections. It is logical to conclude, therefore, that they knew this was just a clarification and a non-issue, hence, it would have been silly to create a smoke screen out of this issue and to misrepresent what the addendum really meant to do in this particular case.

Background

Prominent Chartered Accountant and columnist, Chris Ram, made the revelation that the PSA was renegotiated under the previous Government back in 2019. The thrust of this revelation, however, is being used by the proponents, Ram et.al, as the basis to make the case for the Government to demand renegotiation of the PSA. In fact, the proponents have dangerously – whether with the intention to mislead, equated an “addendum” to that of “renegotiation”. Hence, the proponents have incorrectly, or arguably, intentionally sought to misrepresent what is an “addendum”.

Understanding the differences: Addendum, Amendment and Renegotiation in Contract Law

In contract law, there are clear distinctions between an Addendum to an existing contract and an amendment to an existing contract.  An amendment to the term (s) of an existing contract can be more considered to be renegotiation of a contract, while an “addendum” is used to clarify and add things that were not initially part of the original contract agreement.

According to the Corporate Finance Institute, an addendum is defined as “…something added to a previously existing written document – usually a contract. Typically, it is either a more detailed explanation of something already noted in a contract or a proposed change to the contract.”

Ideally, an addendum is in the form of a separate signed agreement that is attached the original contract. Since the purpose of an addendum is commonly “clarification”, preparing a separately signed document helps to avoid any confusion (Corporate Finance Institute).

Addendum No. 1 dated 26th April 2019 to the Production Sharing Agreement Dated June 2016.

With respect to the Addendum dated April 2019 to the 2016 PSA, it is nothing more than offering absolute clarity in regard to the treatment of royalty, wherein, the royalty ought not to be cost recoverable. In fact, the addendum clearly stated that:

“WHERAS the parties further engaged in discussions, in the interest of the avoidance of all doubts, the parties have come to a mutual and satisfactory agreement that the payment of royalty pursuant to Article 15.6 of the Petroleum Agreement shall be borne solely by the Contractor.” It goes on to state that “the said royalty payment shall not be recoverable cost, in any manner or formulation under the Petroleum Agreement.”

In further substantiation of the foregoing argument, if one were to examine Annex C (sections 1 – 3) of the original PSA agreement of 2016, one will find that nowhere in the classification of recoverable expenditure that royalty is stated as a cost recoverable item. In fact, royalty was also not listed as an expenditure under this section – that speaks to cost recoverable items that are not subject to the approval of the Minister. Section 3 (1) speaks to costs not recoverable under the agreement, section 3 (2) speaks to costs recoverable only with the approval of the Minister and section, and section 3 (4) speaks other costs and expenses not covered or dealt with in the provisions of section 3 and which are incurred by the Contractor in the conduct of Petroleum Operations are recoverable subject to the approval of the Minister. Having regards to the language of these referenced provisions and the fact that word “royalty” was not specifically stated in these provisions, the treatment of the royalty would have been under section 3 (4) where other costs and expenses not dealt with would be subject to approval from the Minister.

In other words, under the original contract because royalty was not specifically mentioned in the list of cost recoverable expenditure items neither was it clearly listed under the cost items that are NOT cost recoverable, the addendum became necessary to provide absolute clarity that the royalty is not a cost recoverable item.

On the other hand, had there been an “amendment’ to the fiscal terms, say for example a change in the royalty from 2% to 5%, this would have materially impacted the economic benefits towards the oil companies and in this instance, would have been regarded as some form of renegotiation of the PSA.

It should be understood that in the circumstance, renegotiation of the fiscal terms as contained in the original PSA in any given situation will be intended to ultimately reduce the economic benefits that will be derived in favor of the oil companies (Contractors) and increase the economic benefits derived for the country. This was not the case with respect to the purpose of the addendum and what the addendum meant to achieve. The addendum was simply meant to offer absolute clarity that the royalty is not cost recoverable.

Concluding Remarks

In view of the explanation and contention contained herein, the proponents who are propagating the argument that the Addendum to the PSA of 2016 is equated to a form of renegotiation of the contract; are peddling a dangerously false narrative and seeking to create a storm in a teacup. Had this been any form of renegotiation, given the political circumstance that the previous Government was surrounded by at the time of this addendum, they would have made absolutely no hesitation to politized this as part of their campaign for the 2020 elections. It is logical to conclude, therefore, that they knew this was just a clarification and a non-issue, hence, it would have been silly to create a smoke screen out of this issue and to misrepresent what this addendum really meant to do in this particular case.

About SPHEREX Analytics

SPHEREX Professional Services is an indigenous business intelligence and analytics firm in Guyana that specializes in financial and economic analysis and corporate finance and economic advisory services.

About the Author

Joel Bhagwandin is a finance professional and researcher, a junior business executive and entrepreneur, lecturer and thought leader. Joel is actively engaged in providing insights and analyses on a range of public policy, economic and macrofinance issues for the past 5+ years. In this regard, he has authored more than 300 articles covering a variety of thematic areas in public policy and macrofinance. Joel has more than fifteen years’ experience in banking, corporate finance, management, consulting, and academic research. Academically, Mr. Bhagwandin is the holder of a MSc. in Business Management (Banking) from Edinburgh Napier University. His specialties and skills include Corporate Finance, Banking, Capital Markets & Securities, Financial Risk Management, Business Intelligence & Data Analysis. Joel is currently pursuing his second MSc. in Finance (Economic Policy) through the University of London – and simultaneously several professional financial analysts’ and risk manager certifications through the Corporate Finance Institute (CFI) and the Global Association of Risk Professionals (GARP), respectively.

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