The Tribune

* Argues Bahamians short-changed by former Gov't

* People's returns 'in the pits'; 'lowest on the planet'

* Pledges to 'renegotiate' as explorer starts drilling

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The attorney general yesterday said the Government could impose a new tax on Bahamas Petroleum Company (BPC) if it declines to renegotiate "abysmally low" royalty rates that are the world's poorest.

Carl Bethel QC told Tribune Business the Bahamian people were in line to receive the lowest return of any nation on their country's potential natural resources as he blasted the former Christie administration for ignoring studies suggesting it should revise a royalty structure that was "in the pits".

Disclosing the findings of a Commonwealth Secretariat report that showed, under the present structure, the highest royalty rate BPC will pay is some 20 percentage points below the lowest rate in other jurisdictions, Mr Bethel argued that the former government missed the chance to negotiate a better deal for the Bahamian people when the leases for the oil explorer's five licence areas came up for renewal in 2015.

Instead of renegotiating higher royalty rates for the benefit of the Public Treasury and proposed Sovereign Wealth Fund, Mr Bethel said his predecessors left the structure that has existed from 2007 to the present day untouched and only increased the seabed lease rates for those five areas from $57,500 to $250,000.

The attorney general then argued that the former Christie administration compounded that error by allowing the royalty rates to be based "on the net value of extracted petroleum", which is the value after BPC has deducted all its production and investment costs.

This, Mr Bethel said, would have left the Government and Bahamian people at the mercy of BPC's accountants and external auditors to determine this nation's share from the potential extraction of its natural resources as they would be responsible for certifying the company's production and investment costs.

He added that basing royalties on the "net petroleum value" was also contrary to global best practice as most oil producing countries base their share on "gross tax at the well head" in their agreements with private companies to ensure they get a better return.

Mr Bethel spoke out after BPC yesterday hailed the start of drilling for its Perseverance One well in waters 90 miles west of Andros. With the legal challenge to their plans from environmental activists seemingly stalled, at least temporarily, while a judge and hearing date is sought, the oil explorer confirmed its Stena IceMAX drill ship is proceeding apace.

With drilling of the well said to have begun at 6.30am on Sunday morning, targeting a "potential reserve" of between 0.77 and 1.44bn barrels of oil over a 45-60 day period, Simon Potter, BPC's chief executive, said: "The well has been spud.

"This is a momentous milestone for both BPC and The Bahamas, and represents the culmination of more than ten years work by a team who have remained steadfast in their belief in this project throughout. That it is finally taking place is a testament to the application, skill and professionalism of many people over those years.

"The well will be drilled to the highest environmental and safety standards over the next 45 to 60 days," he added. "Our shareholders have been extremely patient, but we are now within a couple of months of understanding the scale of potential resource uplift that might be accessed within the licences: A potential uplift that is the traditional domain of the 'oil majors'.

"More than a decade ago BPC secured several offshore hydrocarbon licences in the far southern waters of The Bahamas. Convinced of the compelling prospectivity of those licences, the company has spent close to $120m bettering our technical understanding, continuing to de-risk the play, and ultimately preparing meticulously for exploration drilling.

"Our 3D seismic survey revealed structures that have the potential to contain a world class, multi-billion barrel oil resource that, if present in the way we hope, could prove to be transformative - not just for our company, but for the nation and people of The Bahamas as a whole."

Any discussion on negotiating revised royalty rates is moot until BPC finds commercial quantities of oil that it can extract from the Bahamian seabed. Mr Bethel acknowledged this, while adding that the history of oil exploration in The Bahamas suggested this was "a big if".

And Mr Potter, in a recent interview with Tribune Business, pledged that BPC will "pay double the royalties that the law provides for" to the Government should it strike success. The royalty structure is embodied in law and the licence. The law establishes a royalty that we have to pay for the production of oil and gas, and the licence we signed provides more royalties on top of that," he added.

"It doubles the amount of royalties we'd pay under the law. We agreed with the government many years ago to pay more royalties than the law provides for. Depending on the volume of oil it could double the royalties."

BPC’s existing commercial terms with the Government involve a ‘sliding scale’ of royalty fees, with the rates tied to production (the daily volume of oil, measured in per barrel terms) that is extracted from Bahamian waters.

The royalty rates range from a low of 12.5 per cent for 75,000 barrels per day to a peak of 25 per cent for 350,000 barrels per day or more, with a production licence granted for 30 years.

However, Mr Bethel yesterday said the Christie administration was warned in 2014 - one year before it renewed BPC's seabed leases - by the Commonwealth Secretariat that "their rates were too low and not consistent with global standards".

"In their report they produced a graph showing where other countries were, and The Bahamas was at the bottom of the list," he blasted to Tribune Business. "The lowest return in terms of profit sharing and tax returns or royalties of any country on the face of the planet. We were in the pits. That is what we still have today."

Saying there were "serious questions" as to why the former government did not use the seabed lease renewals as leverage to secure a better royalty rate for the Bahamian people, Mr Bethel added that it knew from 2014 that "the royalty agreement as contained in the original 2007 lease with the oil company was the lowest in the world" but never acted to improve it.

He added that the highest rate in the present royalty structure, 25 percent of the "net petroleum value", was 20 percentage points below the lowest rate elsewhere that was identified by the Commonwealth Secretariat's study.

"The highest rate was 75 percent, and the average was 60 percent," the attorney general said. "That's a big question the PLP needs to answer. If you're dealing with a raw material, a resource that your jurisdiction has that is supposed to benefit your people, why accept a royalty rate that was so below the global average? Yes, we will renegotiate it."

Acknowledging that Mr Potter had indicated his willingness to do so, Mr Bethel added: "At the end of the day, if renegotiations don't work we have the option as a sovereign state to impose a tax on the business. We can impose a tax on the gross returns.

"We'll have a renegotiation or impose a business tax like we did with the gaming industry, and that will be based on the gross revenues from the well head, which should have been done from the beginning.

"One scenario is that we keep the royalty rates and they go to the Treasury, and we impose a business tax on the gross that goes directly into the sovereign wealth fund that will be created for the benefit of every Bahamian," he continued.

"We could establish an annuity that pays every Bahamian $50 a month, or use it for public projects that benefit communities. We are going to review the Sovereign Wealth Fund Act because we believe it is not quite where it should be. We'll conduct a review in short order and come with amendments or a new Act."

Mr Bethel said the Government was not about imposing "state mandates" on BPC, and added: "It's about having dialogue about a level of taxation that is reasonable and consistent with global standards."

He argued that the former administration's acceptance of a royalty rate based on net, as opposed to gross, value would have left the Government and Bahamian people as potential "victims of accounting" since it would take "months, years" to win in a challenge over BPC's investment and accounting figures.

Mr Bethel, though, suggested that the history of oil exploration in The Bahamas was against BPC, as numerous wells dug previously had all struck oil but not in commercial quantities to make any project economically viable.

BPC's Mr Potter, when the royalty rate structure was called into question in 2013, said the rates are “30 per cent higher” than those paid by Gulf of Mexico oil drillers and “more onerous” than what was specified in the then-Petroleum Act.

Justifying the existing agreement with the Government, Mr Potter emphasised that BPC and its now-$120m investment to-date had assumed all the risk, with its oil exploration activities not costing the Government one cent.

And, pointing out that the Government would earn any royalties from oil discoveries from “day one”, the BPC chief executive said there had been no exploratory well drilling in Bahamian waters for 25 years.

This, Mr Potter said, meant comparisons between the Bahamas’ royalties regime and that in Trinidad & Tobago, where oil and gas exploration activities had been going on for 100 years, were inappropriate because it was like “comparing apples to oranges”.