Wednesday, September 25, 2013

...the financial terms that currently exist between Bahamas Petroleum Company (BPC) and the Bahamian government are “nonsense”

Govt urged to address oil terms

Senior oil sector source calls financial benefits ‘a give away’

By Alison Lowe
Guardian Business Editor

The government is being advised to move quickly to update the terms of its agreement with Bahamas Petroleum Company (BPC), which have been dubbed by BPC itself, in addition to by local and international oil industry watchers, as extremely favorable to the company.

Earl Deveaux, former minister of the environment under the Ingraham administration, told Guardian Business that he agrees with BPC Chief Executive Officer Simon Potter’s assessment expressed at a recent London energy conference that the terms on which the government and BPC and its partners would share any oil revenues would appear to be “second to none” in the world for their generosity to the oil company.

Deveaux told Guardian Business that these terms and many other issues should be subject to greater public discussion.

In an address to the London Global Energy Conference on September 16, Potter said that the financial terms surrounding any potential oil discovery in The Bahamas are likely to be “music to people’s ears” given that they revolve around a “simple royalty” payment to the government of 12.5 percent, increasing to 25 percent if oil extraction reaches over 350,000 barrels a day.

Potter noted that the government could seek to change the terms, but highlighted that the Privy Council in London “ultimately remains the final court of appeal” in The Bahamas, suggesting that a legal challenge could be launched were the government to seek to change the terms.

Yesterday, a senior oil industry source in Trinidad and Tobago, which has long benefitted from its own highly-developed oil sector, told Guardian Business that the financial terms that currently exist between BPC and the government are “nonsense”.

“It would amount to a giveaway of the oil sector,” said the source, speaking on condition of anonymity.

He noted that while Potter highlighted a zero income, corporate or capital gains tax environment in The Bahamas from which the oil company would also benefit, in Trinidad and Tobago royalty payments are accompanied by a production levy on gross income from crude oil, a supplemental petroleum tax based on oil prices that range from zero to 35 percent, a petroleum profits tax or corporation tax charged at 50 percent of gross revenues from all sources less deductible expenses and allowances, and an unemployment levy of five percent.

“Trinidad and Tobago has applied a high taxation regime and has been very successful in doing so,” said the source. “They should think about making changes sooner rather than later.”

Deveaux agreed it would benefit the government to address the financial terms in the short term, rather than waiting until BPC has secured its drilling partner, which it is seeking to partner with to undertake the exploratory well, or until after exploration occurs.

“I would agree that the terms of the petroleum leases are very generous and I have no idea what he’s offered to his prospective investors, but if it reflects what the government has provided for in the lease I expect it would be among the most generous in the world.

“I’ve always maintained publicly and privately that if we were to ever go down the road of exploiting oil reserves in The Bahamas, we would have to sit down and renegotiate those things.”

“I think it is infinitely easier now for the government to undertake any contemplated change that it may wish than if it waited until an exploratory well is drilled or a commercial discovery is made.”

Deveaux said that he sees a broad-ranging discussion about many aspects of what it means for The Bahamas to develop an oil industry as necessary and lacking at present.

“There hasn’t been any discussion, and it’s unfortunate,” said Deveaux.

“We have plenty reasons to review the overall regime and legislation. It was done at the time when certain things were not a part of our reality. We didn’t have Exxon Valdez, the BP oil spill, deep sea drillings off Mexico or Brazil and we didn’t have prospect of rising sea levels from temperature increases. We have to factor in today’s realities, and there are compelling reasons to review it.

“I think the financial reasons are important (reasons to review the terms), but I don’t list them as any more important than others. I would be engaging BPC in discussions about how we would manage this resource for all the reasons I listed and how we would create capacity in The Bahamas.

“There’s the whole review of how natural resource contribution of The Bahamas’ environment is now comprised; We have fishing, recreational tourism, aragonite and pristine waters that have been the host of world wide research in a number of areas. How do you factor that in with a companion oil industry?”

In his address to the Global Energy Conference, Potter described efforts to “bring the (Bahamian) government along” with respect to the development of an oil sector.

This included describing the differences that would exist between any oil extraction that would occur in The Bahamas versus the operation that was undertaken in the Gulf of Mexico prior to the 2011 oil spill, in light of differences in the depth of the drilling, the rock formations in The Bahamas, and the equipment that would be used, among other factors.

The company has completed an environmental impact assessment (EIA) and has an environmental management plan currently being developed. The government has committed to updating oil sector regulations in short order, although it has not indicated if this would include any changes to the financial terms specified by Potter in his address.

Efforts to reach Minister of the Environment Kenred Dorsett were unsuccessful up to press time.

September 24, 2013