Guatemala: Icefi recommends to the Energy and Mines Commission of Congress not to amend the Hydrocarbons Law to extend the contract with the company Perenco

This Icefi release was published using machine translation.

The Central American Institute of Fiscal Studies (Icefi) sent to the deputies members of the Energy and Mines Commission (CEM) of the Congress of the Republic of Guatemala, an official letter ( annex ) with elements of analysis and recommendations to be taken into account in the opinion for the initiative of law registration number 6021. In this technical opinion, the Icefi recommends not to reform the Hydrocarbons Law, Decree Law number 109-83, with the purpose of granting a new extension to the oil exploitation operations contract 2- 85 with the Franco-British company Perenco.

This Contract 2-85, which currently enables the Perenco company to carry out oil operations in the Xan field, located in the municipality of San Andrés, Department of Petén, began on August 13, 1985, for a term of 25 years. However, in 2008 the Congress of the Republic approved the Law of the Fund for the Economic Development of the Nation (Fonpetrol), which legally empowered the Executive to approve a single extension for 15 years, with which its validity will expire on August 12. 2025. However, article 2 of the law initiative registration number 6021 proposes that the President of the Republic, in the Council of Ministers, may approve continuous extensions of 25 years each, or until the economic limit of the term is reached. reservoir, whichever comes first. This proposal directly contravenes what was already legislated by the Congress of the Republic in 2008, and would constitute an unjustified privilege in favor of the Perenco company, contrary to the interests of the State of Guatemala.

In the explanatory memorandum of the law initiative registration number 6021, the MEM argues that one of the main justifications for the proposed reform is of fiscal interest. However, it does not include any proposal to review the determination of royalties and the amount of income from the production of shareable hydrocarbons. The Icefi considers that the CEM must carry out a comprehensive analysis of the Hydrocarbons Law, including the calculation of these tax revenues.

The Icefi considers it questionable that the only mechanism proposed by the MEM is the extension of the current contract, which would benefit the Perenco company. In the opinion of this Institute, if it is not in the interest and convenience for the State of Guatemala to continue exploiting the hydrocarbons in the Xan field, the MEM should consider an international, open, competitive and transparent bidding process, which increases the chances that the contractor comply with the best possible conditions.

With concern, Icefi highlights the unjustified and possibly harmful nature of the proposal contained in article 4 of bill 6021, in which it is proposed that the State grant the contractor, in this case the Perenco company, legal authorization to suspend temporarily the payments for royalties and production of shared hydrocarbons, subject to certain justifying conditions.

The statement of reasons for bill 6021 does not detail the income of the contractor company (Perenco), nor its profit margins. The Icefi explained to the CEM that this omission makes it impossible to measure the revenue for the State of Guatemala from these oil operations, which constitutes an important and substantive defect, since it is proposed to authorize the renewal of the contract, only in the event that the conditions are favorable for the State of Guatemala. In order to correctly measure the benefit for the State, it is essential to compare the income received by the State of Guatemala for each unit exploited with each dollar of sales made or profits obtained by the contractor company. If the profit margins of the contracting company are not known, or at least its income, the estimate of royalties and income from the production of shareable hydrocarbons for the period from 2021 to 2045 in the scenario of a new renewal, they constitute a technically valid and insufficient basis to ensure the greatest benefit for the State of Guatemala.

The Icefi recommended that the CEM request the Superintendency of Tax Administration (SAT) to verify and supervise the deductions that the contractor company has applied to its income tax, for donations and corporate social responsibility projects. Making these tax aspects transparent is another technically necessary element to evaluate the convenience for the State of Guatemala of a new extension of the contract. In particular, the CEM must request the SAT to quantify and disclose the amount of these deductions, the effective rate that the contractor company has paid in income tax.

The Icefi considers an important omission that the explanatory statement has not included an analysis of its environmental and social impact. It recommends that the CEM analyze, or request independent and technically reliable evaluations, of these environmental, social, labor impacts, and especially on their potential to alter governance, social conflict, and the right to consultation of the populations of the affected areas. The Icefi recalls that the Xan Field is located in the Laguna del Tigre region, a protected area that is also a Ramsar site, that is, recognized as a key ecosystem for the protection of biodiversity, so the initiative of The law could violate international conventions on environmental matters signed by Guatemala.

Due to the seriousness of the anomalies detected, the Icefi recommends that the CEM issue an unfavorable opinion, and that the Congress of the Republic not approve bill 6021. In the opinion of the Institute, the Congress of the Republic, and in particular the CEM, should create a space for technical and open discussion on the need for a comprehensive reform of the Hydrocarbons Law, and the rest of the framework that regulates extractive industries, understanding the environmental, economic and social impacts of these activities and including sensitive issues such as social conflict and the right to development and consultation of the populations of the affected areas.