Summary points

A windfall tax for Guyana is not suitable at this time, given that the additional benefits derived therefrom could be offset by the need to grant additional fiscal incentives when oil price falls below a certain level, to attract new and continued investments in the sector, as is the case in other jurisdictions such as the United Kingdom and Suriname. In other words, Guyana’s fiscal model that constitutes fixed fiscal terms throughout the life of the production license, would not necessitate the need to provide excessive fiscal incentives when the commodity price for crude oil is low.

• Guyana’s fiscal model already ensures that the government secures windfall earnings when price levels are high, while ensuring at the same time that the percentage of revenues collected when price levels are low, remains the same.
• Contrastingly, in the case of Suriname, which has a built-in provision for windfall profits of up to 80% when the price is high, when the price is below a certain threshold, Suriname’s profit split reverts to a lower split of 20%-25% pursuant to the R-Factor formula. Even at the current price of $80, the maximum profit split is 25%. According to the formula, the profit split could only reach the higher end-of 65%-80% at a price of US$150-$200.
• In the case of the United Kingdom, the 25% windfall tax was levied in 2022, largely because the UK’s Petroleum Revenue Tax of 50% that was in place since 1993, was reduced to 0% in 2016.

Introduction

The publisher of Kaieteur News (KN), who announced that he will be contesting the 2025 general and regional elections―has been advocating―for a “windfall tax” to be applied to the oil and gas companies. This advocacy was inspired by a few countries that had introduced windfall taxes a few years ago, case in point, the United Kingdom in May, 2022. Since then, the advocacy for a similar tax in Guyana continues to dominate the headlines.

It is important, however, to understand the mechanics, design, purpose and suitability of a windfall tax, which was evidently ignored by the proponents in Guyana. The Government of Guyana (GoG) has stated that it is not interested in imposing any such tax at this time, a position that was met with criticisms by KN’s publisher, his technical advisors, and anonymous writers alike.

Discussion and Analysis

Windfall tax is typically applied in times of high oil prices. In the case of the United Kingdom (UK), when a windfall tax was introduced in 2022, it was done because the UK’s fiscal regime over the years had undergone several changes aimed at making the industry more competitive to attract new investments in the industry. For example, the Petroleum Revenue Tax (PRT) was reduced from 50% in 1993 to 0% in 2016. In addition, the UK’s fiscal regime contains a number of built-in incentives by design, where for instance, the 25% tax levy or windfall tax includes an additional investment allowance of 80% that can be claimed at the point of investment. Resultantly, the tax relief oil companies receive from qualifying expenditure in the UK has nearly doubled from 46p for every £1 to 91p for every £1.

Another example is Suriname, whereby Suriname’s fiscal regime for their petroleum industry, by design includes built-in provision for windfall profits of up to 80% as oil price increases but guarantees a minimum of 20% profit when oil price is below a certain level. This, in turn, guarantees a higher profit of 80% to the oil companies when oil price falls below a certain level, vis-à-vis, the R-Factor Formula (Cum. Revenue. – Cum. Royalty. Cum. Tax/Cum. Costs).

Suriname’s R-Factor Formula Explained

The Suriname Government’s profit oil split is calculated in accordance with the R-Factor formula, which ranges between 20% to 80% profit oil.

The R-Factor essentially guarantees the foreign oil companies or contractors a higher profit split when oil prices are lower, and with higher oil prices, the government is guaranteed a higher profit split, capped at a maximum of 80%.

However, it is highly unlikely that Suriname will be able to cash in on the maximum guaranteed profit split of 80%―after studying the historical trend in oil price movements―coupled with the long-term forecasts for oil prices. Of note, this is after accounting for the potential impact of the global energy transition agenda and climate change policies.

To illustrate how the R-Factor calculation is applied, various scenario analysis were performed in a financial model accounting for price sensitivity of the commodity, to wit, at current price, which is averaging around US$80, the R-Factor is 1.5, which guarantees a 25% profit share. To achieve the 30% profit split, oil price would have to surpass US$100-US$120 boe; to achieve the 40%-50% profit split, oil price will have to surpass US$150/boe, and to achieve the 80% profit split, oil price will have to surpass US$200/boe. Nonetheless, these higher profitability outcomes in favour of Suriname are highly unlikely. Therefore, the maximum profit split Suriname is guaranteed is more likely to range between the 20%-25% R-Factor rates in the medium to long-term.

Guyana’s Fiscal Model Guarantees Windfall Profit and Royalty

Guyana’s fiscal modelalready ensures that the Government secureswindfall earnings when price levels are high, while ensuring at the same time that the percentage of revenues collected when price levels are low, remains the same.

In 2023, Guyana produced 142.9 million barrels of crude, of which, Guyana’s share amounted to 20.7 million barrels. At current average price of US$80, Guyana earned US$1.658 billion. Conversely, in the pre-pandemic period, oil price averaged US$50, which means at that price level, Guyana’s earnings in 2023 would have been US$1.035 billion. Therefore, Guyana earned a windfall profit and royalty of US$623 million in 2023.

More importantly, in the case of Guyana considering that Guyana’s fiscal model of a fixed fiscal termsthroughout the life of the production license, it would not be necessary for the government to grant any additional incentives to the oil companies to secure future investments.

Conclusion

Against this foregoing background, a windfall tax in Guyana’s case is not suitable considering that even if it is to be introduced, the price level will have to be determined, and, the oil companies may argue that when oil price fall below a certain level, investments into future projects will be affected. This in turn, would necessitate the provision of attractive fiscal incentives to encourage future investments in response to low prices.