belize petroleum economics

Belize Petroleum Economics:

A Preliminary Inquiry into An Unusual Situation

____________

A Report to the Belize Coalition to Save Our Natural Heritage

By

Richard A. Fineberg www.finebergresearch.com

Principal Investigator,

Research Associates, Ester Alaska

July 25, 2011

http://www.finebergresearch.com/

Belize Petroleum Economics: A Preliminary Inquiry Into An Unusual Situation

Findings and Recommendations 1 This report, which represents an attempt to place the unique aspects of oil development in Belize in the broader context of global petroleum economics, grows out of a six-day investigative visit to Belize earlier this year. I am grateful to the Belize Coalition to Save Our Natural Heritage for this opportunity and hope that this report will be of use. A. Overview: Petroleum Development in the 21st Century Finding 1: The findings of the U.S. Presidential Commission on the Deepwater Horizon spill of May 2010 and the published observations by noted economist Joseph Stiglitz on oil industry cheating in its financial dealings with host governments are two of the many clear warning signals from authoritative sources that host governments dealing with petroleum development would be well advised to strengthen their institutions to avoid adverse environmental and economic consequences.

Recommendation 1: For assistance in understanding and minimizing the

adverse economic, environmental and social consequences of petroleum development, the GOB, in concert with concerned citizens, should (a) join the Extractive Industries Transparency Initiative (EITI) and (b) explore the possibility of working with Norway’s Oil for Development (OfD) program to provide training and capacity building assistance.

B. Low Production - High Price Issues Finding 2: Even at low oil production rates, BNE earned a significant profit during its first full year of production, as indicated by the reported income tax payment on Spanish Lookout production in 2006. The surprising economic success of the Spanish Lookout field reflects the remarkable increase in oil prices since 1998 that has radically altered traditional petroleum economics by increasing the potential viability of exploration projects that probably would not have gone forward under the oil prices that prevailed during the last quarter of the 20th century. Traditional institutional arrangements do not appear to have been designed to deal with the possibility that high oil prices would enable oil development to take place at very low production rates.

Recommendation 2: The GOB should focus on strengthening its management institutions to assure that (a) risks of industrial accidents and oil spills will be minimized, (b) spill response capabilities will be strengthened and (c) public interest in maximizing petroleum revenues will be furthered by timely and effective accounting procedures.

1 See Chapter V for annotation to these findings and recommendations.

http://eiti.org/eiti/principles

http://www.norad.no/en/Thematic+areas/Energy/Oil+for+Development/Oil+for+Development.127154.cms

Belize Petroleum Economics: A Preliminary Inquiry July 25, 2011 / Page ii (Findings and Recommendations)

Finding 3: With significant portions of Belize under lease to a variety of other hopeful developers, the new economic conditions that underlie BNE’s success (high oil prices) fuel increasing interest in petroleum exploration and development. Belize therefore needs to be prepared for two very different future petroleum development scenarios: (a) Exploration and low-production development that is economically viable but does not provide sufficient endowment for effective environmental oversight and spill response; and (b) the possibility of widespread development or a major discovery that would require rapid build-up of both oversight and spill response infrastructure to reduce risks and provide for response to major spills.

Recommendation 3: The GOB should establish a strong petroleum performance audit system to verify that GOB petroleum environmental oversight (spill prevention), emergency response (spill response) and revenue management units (a) are adequately funded, staffed and trained and are effectively executing their assignments under current conditions; and (b) have management plans in place to ramp up rapidly in the event of widespread, low-production or major production to assure effective oversight and response capabilities.

C. Statutory Issues Finding 4: Although legislation establishing a comprehensive Petroleum Revenue Management Fund (PRMF) was enacted in 2007, this fund does not appear to be operational. Meanwhile, petroleum revenue management appears to be in a state of institutional disarray.

Recommendation 4: For the limited but important purpose of providing transparent accounting of the disposition of petroleum revenue, steps should be taken to activate the PRMF without putting unnecessary spending limits caps in place.

Finding 5: According to a 2008 International Monetary Fund report on Belize, the principal purpose of the Petroleum Revenue Management Fund (PRMF) is to limit the appropriation of petroleum revenue to prevent that revenue from overheating the Belize economy with adverse consequences for existing sectors of that economy. However, at current low oil production levels it is not clear that petroleum revenues pose that threat.

Recommendation 5: An economic advisory panel should be convened to make recommendations regarding the level at which petroleum revenue spending in Belize would need to be capped.

Belize Petroleum Economics: A Preliminary Inquiry July 25, 2011 / Page iii (Findings and Recommendations)

Finding 6: BNE data suggest that between 2005 and 2009 the total dedicated funding contributed to the Environmental Common Fund (one-tenth of one percent of gross revenues, net of transportation) was approximately US $300,000 (US $ 0.3 million). This amount is not commensurate with the funding required to meet the obligations of environmental challenges of spill prevention and spill response, which are among the tasks assigned to the Environmental Management Fund (EMF), established by the Environmental Protection (Amendment) Act of 2009.

Recommendation 6: Administrative steps should be taken immediately to ensure that the principal petroleum development-related environmental tasks (a) do not get lost among the potpourri of tasks assigned to the EMF and (b) are actually funded to provide effective environmental protection. Amending Chapter 20 of the EPA to require contractor payment of environmental monitoring fees and bonding for environmental performance would be a useful step toward resolution of this situation.

D. Public Information Finding 7: Despite widespread interest in the burgeoning petroleum industry and public concern about petroleum development economic issues, during my visit to Belize I was unable to locate information on petroleum production and revenue that was current, comprehensive, demonstrably factual and accurate or useful for understanding the characteristics of Belize petroleum development, including its potential, as well as its economic risks and rewards.

Recommendation 7: To promote reasoned public dialogue on Belize petroleum development issues, concerned citizens should work with the GOB to acquire the economic data necessary to fill out the petroleum revenue worksheet developed for this report and presented in Table 5.

Finding 8: The Belize PSA agreement copies provided by the Coalition for review appeared to be copies of record. However, the BNE PSA and at least six other PSA copies were incomplete due to the removal of portions of certain sections of the contract. Due to the clumsy manner of these expurgations, it was not possible to tell exactly what was intended to be removed, why (or by whom) the deleted phrases, sentences, paragraphs or pages were removed, or how the remaining portions were to be interpreted.

Recommendation 8: To analyze these important documents for public policy purposes, reviewers should request complete PSA documents in order to ascertain the significance of the expurgations.

– Richard A. Fineberg, Principal Investigator Research Associates Ester, Alaska 99725 USA

– July 25, 2011

Belize Petroleum Economics: A Preliminary Inquiry July 25, 2011 / Page iv

Table of Contents

Page Findings and Recommendations (Summary) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv Contents iv List of Tables and Figures v List of Appendices v Chapter I. Starting Points. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. The Economics of Petroleum Development . . . . . . . . . . . . . . . . B. Production Sharing Agreements (PSAs) . . . . . . . . . . . . . . . . . . . C. A Note on Social Systems Chapter II. The Belize Petroleum Picture Puzzle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 A. Basic Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 B. Meeting with the Inspector of Petroleum (Current Production and Future Production Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Spanish Lookout Never Delay

C. Revenue Collection and Management . . . . . . . . . . . . . . . . . . . . . . . . 11 D. Belize PSAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Belize PSA Structure

Expurgations from the PSA Copies Reviewed for This Report Terms Offered by Belize PSAs E. Funding Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Environmental Management Fund Petroleum Revenue Management Fund The BNE Trust and Environmental Common Funds Bonding

Chapter III. Review of Public Data Outputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 A. GOB Summary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PSA Treatment of Costs B. The Industry Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 C. Press Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 D. Conclusion: Inadequate Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Chapter IV. Building a Petroleum Revenue Data Base. . . . . . . . . . . . . . . . . . . . . . 28 A. Prerequisites for a Useful Petroleum Data Base . . . . . . . . . . . . . . . . 28 Time Frame Considerations Oil Prices Production Volume Production Cost Data B. Building a Revenue Calculation Worksheet. . . . . . . . . . . . . . . . . . . . . 30 Chapter V. Findings and Recommendations (Annotated) . . . . . . . . . . . . . . . . . . . 34 A. Overview: Petroleum Development in the 21st Century . . . . . . . . . . . . 34 B. Low Production - High Price Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 C. Statutory Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 D. Public Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Belize Petroleum Economics: A Preliminary InquiryJuly 25, 2011 / Page v

Page Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

__________________________

– List of Tables and Figures – Table Page

1. Status of Belize Oil in Discovered Fields, May 2011 . . . . . . . . . . . . . . . . . . . . . 6

2. Belize Revenue from Spanish Lookout Oil Field . . . . .. . . . . . . . . . . . . . . . . . . . 19

3. Oil Production in Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

4. Model Production Revenue Calculation Worksheet (for Spanish Lookout Field, Belize, 2006 – 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-33 Figure

1. Belize Natural Energy Fact Sheet (How The Oil Is Shared) . . . . . . . . . . . . . . . 23

2. The Petroleum Pie – A View from the Press . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

__________________________

– List of Appendices – Appendix

A-1 Alaska North Slope Crude Oil Price v. Production and Delivery Costs (Historical Data, 1984 – 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

A -1.a Alaska Department of Revenue Chart, Feb. 2010 A-1.b Alaska Department of Revenue Chart, updated with information Added by Research Associates, Feb. 2011 A -1.c Alaska North Slope Oil Average Monthly Prices (Source: Alaska Department of Revenue)

A-2 BP Cost-Cutting Directive (May 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

A-3 Prof. Joseph E. Stiglitz, “The Problem of Cheating” (2007). . . . . . . . . . . . . A-3

A-4 Government of Belize (GOB) Brochures . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4 A- 4.a BELIZE PETROLEUM SECTOR (Brochure [undated], Jan. 2010) A- 4.b Facts About Oil Exploration in Belize (Brochure, no date)

A-5 Consultant’s 2010 report suggests tax system overhaul (Fairbanks Daily News-Miner, May 8, 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5

A-6 Copies of Pages from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6

A-7 Examination of Deletion from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003 At Page 38, Article 6.2.8 . . . . . . . . . . . . . . . . . . . . A-7

__________________________

–- Richard A. Fineberg (biographical note) __________________________

Belize Petroleum Economics: A Preliminary Inquiry Into An Unusual Situation

Chapter I. Starting Points This inquiry into Belize oil economics begins in three parts with: (A) a look at selected drivers of petroleum development; (B) an introduction to the Production Sharing Agreement (PSA) contractual system for managing that development; and (C) a short note on the general condition of social systems that deal with petroleum-related issues.

In this chapter, general propositions and background information are followed by an indented, boxed comment suggesting possible relevance or application to Belize.

A. Observations on the Economics of Petroleum Development 1. Petroleum development typically involves large initial cash outlays, made by investors in hopes of earning significantly larger cumulative payments over an extended period time. These investments are made in the face of uncertainties concerning (1) whether petroleum will be discovered in commercial quantities; and (2) the price that oil, if discovered, will earn when produced and delivered to market.1

Belize was explored by major oil companies between 1956 and 1997. Despite recognized geologic potential, commercially viable quantities of oil were not discovered.

2. Since 1998, the historical world oil price regime has experienced a radical increase in oil prices. Although oil prices still fluctuate, it appears that they now do so from a significantly higher level, relative to other key economic factors.2

Saudi Arabia’s proved oil reserves are approximately ten thousand times greater than Belize discovered reserves plus total Belize oil production to date from its two discovered fields.3 Without the advent of significantly higher oil prices (shown in Appendix Figures A-1.a and A-1.b) Belize’s Spanish Lookout field probably would not have been commercially viable several decades ago but is now able to be produce and deliver oil to market profitably.

––––––––- 1 For a veteran insider’s pertinent but often overlooked study of the economics of oil development and the interplay of oil industry and government institutions in the United States, see: John M. Blair, The Control of Oil (Pantheon Books, 1976). 2 See charts in Appendix A-1 for a graphic demonstration of the changes in oil prices in the last three decades and the resulting revenue from production that is surplus to costs. 3 Belize approximate production and reserves totals approximately 26 million barrels (bbls.), or 0.026 billion bbls (see Ch. !!.B, below). According to one world estimate, Saudi Arabia reserves of 264.5 billion bbls. comprise approximately one-fifth of total world reserves of 1,383.2 billion bbls., excluding oil sands (BP, Statistical Review of World Energy, June 2011, p. 6).

Belize Petroleum Economics: A Preliminary Inquiry July 25, 2011 / Page 2

3. Economy of scale is a factor in determining economic outcomes. (Example: If a pump jack that costs (say) $100 delivers 10 barrels of oil, each barrel’s share of the pump jack cost is $10 per barrel. But if the same pump jack delivers 100 barrels of oil, each barrel’s pump jack cost is $1 per barrel.)

Particularly in light of very low production volumes in Belize, to assess production profitability meaningfully requires clear understanding of current volumes, future prospects and cost accounting assumptions.

4. Because managers are responsible to investors to maximize profits from their investments, there is often pressure on field personnel to cut costs on petroleum projects.4

This phenomenon – a salient characteristic of a large and highly profitable venture in a country with established democratic institutions – is even more apt to flourish in regions where institutions are less robust and profitability is more problematical.

5. Because a management structure responsible to investors for maximizing profits is liable to be motivated to reduce expenditures, project managers may find it difficult to justify added expenditures that could reduce the possibility of mishaps due to operational mistakes, equipment failures and/or the coincidental occurrence of multiple problems, while environmental protection measures are liable to be underfunded. The result is an increased probability of accidents or spills that might harm workers, the general population, and/or the environment.5

The Deepwater Horizon fire, explosion and spill provide a confirming example of the perils of oil development cost-cutting, with particular reference to offshore exploration.

––––––––- 4 See, for example, cost-cutting directive from BP’s Al Bolea, Chair, TAPS (Trans-Alaska Pipeline System) Owners Committee, to David Wight, President (Alyeska Pipeline Service Company [TAPS]), May 6-7, 2002, in Appendix A-2. 5 Numerous case studies demonstrating this proposition may be found on my web site. (See, for example, “Background: The Story of a Troubled Tank – Alyeska Failed to Heed Warnings Prior to May Spill, Restarted TAPS Without Knowing Why Emergency Power Failed; Promises to Reform Management System on TAPS Echo Past Calls for Improvement,” Aug. 24, 2010.)


6. Investor interest in maximizing the developer’s share of the petroleum revenue results in aggressive cost reporting practices that one respected observer, based on first-hand information, has described as “cheating.” 6

When cheating can be observed and confirmed at a large oil field in a developed nation (see Appendix A-3), similar phenomena are liable to occur in other circumstances. Therefore, although I received no specific information confirming corrupt practices in Belize, procedures that would minimize this possibility should be established and employed to safeguard the public interest.

B. Production Sharing Agreements (PSAs) 1. Production sharing agreements (PSAs) are used in many parts of the world to manage petroleum fiscal systems; the second major class of fiscal systems, generally known as the royalty/tax system, is frequently found in North America and Europe. Similar mechanisms and practices may be observed in both system families. However, terminology and practices are not standardized and within each system one may also encounter wide variations.7

Belize uses a PSA system to manage its petroleum leases. 2. Production sharing agreements (PSAs) perform the dual function of (a) providing a framework of stability conducive to long-term investment while (b) establishing the terms for splitting the proceeds from petroleum revenue between host government and developing or contracting parties.8

Analysis of the Sakhalin-II PSA offers insights that may be applicable to Belize. 3. PSAs may set up different plans to distribute petroleum revenue. They are frequently front-end loaded, enabling the contracting party to recoup a high percentage of its costs from annual petroleum revenue in the early years of production. The flip side of this coin is that the government’s share is deferred to later years.9

Belize PSAs are heavily front-end loaded.10

––––––––- 6 See Appendix A-3 for Prof. Stiglitz’s discussion of this phenomenon in Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stiglitz (editors), Escaping the Resource Curse (Columbia University Press, 2007), pp. 24-25. 7 Daniel Johnston, “International Petroleum Fiscal Systems,” Empire Hotel and Country Club, Brunei, Jan. 16-18, 2002, pp. 1-3 (Workhshop/Workbook). 8 Dr. Ian Rutledge, The Sakhalin II PSA – A Production ‘Non-Sharing’ Agreement: Analysis of Revenue Distribution, Sheffield Energy & Resources Information Services, November 2004, pp. 3-4. 9 See, for example, Daniel Johnston and David Johnston, “Kashagan and Tengiz – Castor and Polllux,” Petroleum Accounting and Financial Management Journal, December 2001. 10 The principal (but not the only) front-loading mechanism of the standard Belize PSA is the allowance of full recovery of costs before production sharing begins. (See discussion in Chapters II.D and III.A., below.)


4. According to PSA analysts, total revenue sums paid to the government over the life of the producing unit may vary widely between initial years and later years, depending on cost recovery terms.11 It follows that long-term or life-of-field analysis of revenues is not meaningful until annual increments are isolated and considered in long-term context by discounting, or adjusting to reflect the fact that a dollar today is worth more than a dollar tomorrow.12

In the absence of long-term projections (e.g., life-of-field totals), current Belize petroleum revenue data reviewed for this report look only at short-term revenues, without discounting.

5. PSAs typically allow host government governments to acquire a direct percentage interest in a petroleum venture. This joint interest mechanism adds a layer of accounting complexity to the quantification and evaluation of PSA contract outcomes.

Belize PSAs generally contain this feature; with the discovery of oil at Spanish Lookout, the Government of Belize (GOB) has exercised this option.13

6. Here are three hypothetical examples of overcharges that are liable to be included in the reckoning of petroleum operating and capital costs, thereby reducing the resulting payments to government:

(a) Where a condition of vertical integration exists (i.e., the contracting firm earns money not only from exploration and production, but also from transportation, refining and/or the marketing of refined products), an excessive charge that is only a paper transfer within the vertically integrated company may be used to reduce payments to government;

(b) Because contractor costs also include a profit element payment to subcontractors, overstated charges are liable to result, increasing the base for calculating that contractor profit element, thereby reducing the revenue remaining for division between the government and the contracting party; and

(c) The estimated life span of a project may be shortened for purposes of increasing the amount of annual charges for depreciation and amortization allowances, resulting in an increase in annual contractor payments; for similar reasons, the longevity of specific cost items may be under-estimated.

These examples are indicative of opportunities for reducing payments to government through aggressive accounting practices that may warrant attention in Belize.

––––––––- 11 Daniel Johnston, “International Petroleum Fiscal Systems,” pp. 11-12. 12 Rutledge, pp. 3-4, 7. (To reflect the present value of an anticipated future payment, discounting reduces that payment by a percentage factor for each period by which it is removed from the present.) 13 This issue will be discussed in Chapters II.D and III.A., below.


C. A Note on Social Systems 1. Professor Terry Karl is a Stanford University political economist who has examined the different outcomes of petroleum development in various countries, In her concluding comments on her research experience, she took special note of two factors that impact the course of petroleum development:

(a) the lack of availability of statistical data in some essential areas; and (b) the existence of institutional disarray in petroleum states of institutional

disarray that was “often so great that it was difficult to find answers to relatively simple questions.”14

The facts this report presents suggest that Professor Karl’s focus on the lack of hard data and indications of institutional performance difficulties may offer useful insights for both concerned citizens and public policy makers as they attempt to deal with petroleum development issues in Belize.

––––––––- 14 Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (University of California Press, 1997), pp. 243-244.


Chapter II. The Belize Petroleum Picture Puzzle

A. Basic Questions The discovery of oil and the initiation of oil production at Spanish Lookout in central Belize in 2005 brings these fundamental policy issues to public attention:

(1) Is the Government of Belize (GOB) receiving its fair share of the revenue that contractor Belize Natural Energy Ltd. (BNE) is earning on its oil production?

(2) What are the long-term prospects for oil development in Belize? These policy questions, in turn, depend principally on answers to three other questions:

• How much oil is being produced the Belize petroleum concessions produce at this time?

• At what price is that oil being sold, and is that oil being sold profitably – i.e., do the revenues exceed the costs of finding and producing that oil and transporting it to market?

• How does the GOB petroleum fiscal management system deal with these questions?

Chapters II and III focus on these questions by looking at information available to the public on Belize petroleum development and the institutional framework that produces that information. The next section of Chapter II discusses a meeting with the Inspector of Petroleum and discusses the oil production totals presented during that meeting (Section B); the following sections examine GOB revenue collection systems (Section C), the PSA (Section D) and environment management institutions (Section E). Chapter III. reviews data outputs of the GOB, industry and press, with a primary focus on revenue totals. During the last 18 months, questions about petroleum revenue and petroleum revenue management have taken on even greater importance in Belize over the last 18 months, as indicated by press reports about: (1) the emergence of the Prime Minister’s nephew, as a top executive for a petroleum contractor;15 (2) a BNE investors’ suit against management for alleged failure to share production revenues;16 and (3) public disclosures in overseas newspapers regarding significant events in the Belize petroleum arena that some observers felt signaled failure on the part of the contractor and/or government to keep the public well informed about petroleum issues.17 In light of shortcomings in both production and revenue data sets, Chapter IV presents a model for gathering comprehensive data that would be useful for policy purposes. ––––––––- 15 “Protests In Belize Over Oil Drilling,” Belizean, Feb. 2, 2011. 16 Adele Ramos, “The Baroness, the guru and Belize oil,” AMANDALABelize, Jan. 15, 2010. 17 Jules Vasques (interviewer), “Mark Espat: Belfast Telegraph Article ‘Revolting’,” Belize Channel 7 News, Jan. 14, 2010.


B. Meeting with the Inspector of Petroleum (Current and Future Production Estimates) During the first full day of my visit to Belize in early May, Prof. Rick Steiner and I joined representatives from in-country environmental organizations for an informal briefing from Andre Cho, the Inspector of Petroleum and head of the Petroleum Sector for the Government of Belize (GOB).18 Inspector Cho has been in charge of administering the PSA and various aspects of field operations since oil production began five years ago. During this period, he appears to have been on point for the government when the press and public wanted to know what was happening in the field. In February 2006, for example, New York Times article described Mr. Cho as a hidden government asset who was under pressure to meet the demands of building the state oversight team.19 Four years later, in January 2010, Inspector Cho told a Belize television interviewer that although he was still filling vacant positions for his staff, he felt that his small inspection team provided the “basic minimum” for handling the lone oil field in production for most of this period, Spanish Lookout. That article pointedly concluded, however, that the nearby Never Delay field would soon begin producing. According to the same article, Inspector Cho was not able to hire a chief auditor until the summer of 2009. At the time of that interview (January 2010), the auditing unit was just starting to examine production and revenue numbers.20 While this meeting shed additional light on how Belize was coping with the challenges of managing oil development that were occasionally mentioned in the press, for this report the initial task was to obtain solid data regarding Belize oil production. To this end, these four items were at the top of the list: (1) to find out how much oil was being produced, (2) to understand how such small quantities of oil could be produced profitably, (3) to learn whether the government of Belize was receiving its appropriate share of revenue and (4) to understand the country’s future production prospects. From this perspective, this briefing was an almost complete bust. Outwardly, Inspector Cho was courteous. When we arrived at his office an hour early, the busy official altered his work plans to see us ahead of schedule. And during the meeting he took time to explain details of drilling and production engineering. But he was either unwilling or unable to provide solid production figures. Working from rough estimates of oil production without a definitive written summary or spreadsheet tallying the specific results, it was a struggle just to get basic production numbers that should have been the clear starting point for discussion of petroleum oversight and fiscal policy issues. Table 1 on the following page, which summarizes these rounded production and development numbers, will serve as a reference point for considering current production figures and future production prospects.

––––––––- 18 Appointed by the Minister of Natural Resources and the Environment, Andre Cho is also the Director of the GOB Geology and Petroleum Department. 19 Simon Romero, “Touched by Oil and Hope in Belize,” The New York Times, Feb. 21, 2006 (http://www.nytimes.com/2006/02/21/business/worldbusiness/21belize.html). 20 Jules Vasques (interviewer), “The Oil Revenue Breakdown,” Belize Channel 7 News, Jan. 29, 2010 (http://www.7newsbelize.com/sstory.php?nid=16106).


Table 1.

Status of Belize Oil in Discovered Fields, May 2011 (Information from GOB Petroleum Sector)*

Daily Production (Spanish Lookout): Production of oil in early 2011: 4,000 barrels of oil per day.

Oil produced since first production [in late 2005?]: Approximately 6 million barrels

Total reserves remaining: Approximately 13 million barrels

Life of field: 7 more years

New Production (Never Delay)

Production in early 2011 [not stated]

Oil produced since first production [in early 2011?] [not stated] Total reserves (remaining) 6 million barrels

Life of field: < 7 years ________ * Andre Cho, Inspector of Petroleum, May 6, 2011 (Briefing, Petroleum Sector Office, Belmopan, Belize). The following discussion of Spanish Lookout and Never Delay demonstrate how the basic numbers the Belize Petroleum Sector presents fail to bring the picture of the country’s current production and its future prospects into clear focus. These numbers are deficient in two key respects: (1) In terms of accuracy of current production figures, these estimates lack the precision necessary to frame or quantify current petroleum revenue issues. (2) Looking ahead, these numbers do not appear to bracket correctly either the range of outcomes that reflect the uncertainties inherent in forecasting or the wide gap between current and possible future production. Spanish Lookout Field During our briefing, Inspector Cho emphasized that production at Spanish Lookout was not declining, but examination of the record indicates that this may not be the case. While Inspector Cho told us the field was currently producing 4,000 barrels per day (bpd), in two separate press interviews 15 months earlier, inspector Cho placed that field’s production at 4,200 bpd in two separate press interviews.21 A brochure published by the Petroleum Sector, apparently created in January 2010, placed Spanish Lookout

––––––––- 21 “ANDRE CHO REPORTS ON GOVERNMENT EARNINGS FROM PETROLEUM EXPLORATION, Love FM radio, Feb. 1, 2010 (http://www.lovefm.com/printstory.”Anphp?story=11429&lurl=http://www.lovefm.com/ndisplay.php?nid=11429); and “The Oil Revenue Breakdown” (op. cit.).


production at 5,000 bpd (see Appendix A-4.a).22 The 5,000 bpd fiThe Belize PSA reatures gure suggests that if GOB brochure was not overstating Spanish Lookout production, then Spanish Lookout production is declining. On the other hand, the historical record also contains information indicating that past field estimates at Spanish Lookout have been understated. In June 2007, for example, contractor BNE estimated that the Spanish Lookout field held 7 million barrels of oil.23 Four years later, according to the figures presented by Inspector Cho, Spanish Lookout has produced almost that much oil, while the field’s estimated remaining reserves have nearly doubled. In view of the importance of Spanish Lookout as the major producing field in Belize, the 13 million barrel reserve estimate warrants a closer look. Mr. Cho told us that Belize’s main producing field was estimated to have started with 19 million barrels of reserves, six million barrels of which have now been produced. He was using the same 19 million barrel total reserve figure in January 2010, when a 20 million barrel estimate was proffered by BNE director and Chairman Susan Morrice. At that time, Mr. Cho reportedly told the television station 7NewsBelize:

“The recoverable reserves for Spanish Lookout is 14 million barrels. . . .I know Susan Morrice mentioned 20 million in the Irish media. . . . So far though we have produced four million, eight hundred and forty thousand, four hundred and ninety five point one three barrels from the Spanish Lookout field.”24

Putting Inspector Cho’s current estimate of oil produced (6.0 million barrels) with his January 2010 estimate (4.80 million barrels), it would appear that approximately 1.2 million barrels was produced in the intervening period. In rounded terms, that would account for his reduction of reserves at Spanish Lookout to from 14 million to 13 million barrels. But simple math would place Spanish Lookout’s average production for the intervening year at approximately 3,300 bpd. Are the remaining 700 (or 1,700) barrels per day still in the ground, or was more oil produced than was reported? The basis of Spanish Lookout’s postulated seven-year remaining field life also raises questions: If Inspector Cho’s stated current production rate of 4,000 bpd (about1.46 million barrels of oil per year) could be sustained for seven years, during that time Spanish Lookout would produce approximately 10.22 million barrels – significantly less than the13 million barrels of estimated reserves.25 Would the remaining portion of the 13 million barrels of estimated reserves at Spanish Lookout be left in the ground, or might the field run longer at lower throughput?

––––––––- 22 Geology and Petroleum Department (Ministry of Natural Resources and the Environment, Government of Belize), “BELIZE PETROLEUM SECTOR” (Brochure), created Jan. 12, 2010 (see Appendix A-4.a). (This brochure was reprinted with identical content one year later, in January 2011.) 23 Belize Natural Energy, “Crude Facts: The Spanish Lookout Oil Field,” Insert #4, June 2007 (http://www.belizenaturalenergy.bz/crudefacts/Crude%20Facts%204_final.pdf). 24 “The Oil Revenue Breakdown” (op. cit.). 25 Since oil fields typically produce less oil as they age, the assumption of continued production at 4,000 bpd at Spanish Lookout seems rather optimistic.


These are not academic considerations; these are matters that could affect both the oil revenue Belize hopes to receive, as well as the Spanish Lookout producing area. Would additional drilling and well maintenance work be employed to keep the field at current production rates? If so, would the extra work increase both field costs and the potential for environmental problems, thereby reducing industry profitability and the government revenue that, among other uses, is supposed to be earmarked for environmental mitigation and response, while increasing risks? Because the 12 wells that comprise the Spanish Lookout field are scattered around a rural village, these questions take on particular importance. Nevertheless, these questions and the impacts of possible oil price changes and different production strategies were not discussed. Never Delay On the morning of the meeting with Inspector Cho, members of our group encountered a small group of concerned citizens, one of whom mentioned that in the last few days one of the big petroleum trucks in the fleet that hauls oil from Spanish Lookout to the coast for export was emitting a foul, harsh odor when it passed him on the road. He said this was something new – a very different the odor produced by the light, sweet Spanish Lookout crude. Another observer suggest that this may have been a sulfur smell; he said it was his first indication that BNE had finally put Never Delay, a smaller discovery near Spanish Lookout, into production.26 Therefore, it came as no surprise later in the day when Inspector Cho mentioned that the oil from Never Delay has a much higher sulfur content than the sweet Spanish Lookout crude. Since sulfur is a poisonous and highly corrosive contaminant, one hopes that the field managers are dealing effectively with operational and environmental problems that might be associated with the new field. Apart from environmental considerations, the initiation of Never Delay adds to the difficulty of establishing solid numbers. (For example, at one point during our meeting, the six million barrels of Never Delay reserves – previously estimated at five million – was momentarily confused with the similar figure for oil already produced at Spanish Lookout.) Regarding current oil production totals, Never Delay’s daily output is said to be very small. But at the meeting it was never made clear exactly how much oil is being produced at the new field. Apparently the unspecified quantity of Never Delay production is simply included in the rounding of the already questionable estimate of production from Spanish Lookout. A month after the May 6 meeting, Belize Prime Minister Dean Barrow filled in the Never Delay blanks when he told a reporter that Never Delay was producing 438 barrels per day from four wells. He said another 30 bpd was expected from those wells, a fifth well was coming on line and a sixth well was just starting. The Prime Minister estimated Never Delay production at “just under 500 bpd,” to go with just under 4,000 bpd at Spanish Lookout.27

––––––––- 26 A short time later, between Spanish Lookout and Belmopan, we encountered a large oil hauling truck and observed that it was trailing a noticeably strong odor. 27 Jose Sanches, “Economy: More oil wells for BNE; job creation means infrastructure projects,” Channel 5 Belize, June 9, 2011 (http://edition.channel5belize.com/archives/55743).


The inconsistencies in the basic production numbers described above take on special significance in light of the fact that nearly 20 different contractors have leased large portions of Belize for potential oil development. If additional quantities of oil are discovered and developed, current management practices will set the stage for the future collection and management of much larger amounts of petroleum revenue. If, on the other hand, new fields are not discovered and a low-production scenario prevails, one might consider it even more necessary to insure that sound revenue collection and management policies and practices will maximize revenue from existing fields. When all outcomes call for careful implementation of petroleum policy and reaffirm the importance of obtaining and using the best possible production numbers, this might be a good time to apply the adage, “Cut once, measure twice” to the oversight of petroleum operations. C. Revenue Collection and Management The Petroleum Sector unit, discussed in the preceding section, is responsible for the collection and audit of other petroleum revenues, including royalty payments and environmental funds. Inspector Cho told us that members of the Petroleum Sector are present at the well site whenever a new well is brought into production, regardless of the time of day or night. However, we did not discuss the oversight procedures followed by the Petroleum Sector, or whether performance of their responsibilities was affected by factors reported in the press such as position vacancies, training requirements or the fact that only one monitoring unit was in place. According to GOB reports, income tax payments – collected on the annual net petroleum revenue remaining with the contractor after costs, royalty payments to the GOB and other production sharing and working interest owner payments are made – constitute the largest portion of petroleum revenue collected to date (see Table 2 in Chapter III, below).28 While the nation’s businesses are taxed at a base rate of 25% of net income, in 2006 the Belize National Assembly increased the tax rate for companies engaged in petroleum operations to 40%. The amendment, which was formally enacted Nov. 23, 2006, was effective as of Jan. 1, 2006.29 In 2008 the National Assembly amended the 40% tax rate, adopting a surcharge for Spanish Lookout that kicked in at a market price of US $90.00 per barrel and increased incrementally to US $190.00 per barrel, at which point the tax on subsequent price increases was capped at 50%.30 Petroleum income tax auditing is performed separately by the Income Tax Department. How closely were the personnel of the two audit units tracking reported production levels and daily changes in oil price? Were they working together? Was Inspector Cho’s recently-hired auditing team in the field to verify that reported barrels produced ––––––––- 28 Since income tax payments are the last item collected, the prior collections will be reviewed before the mechanics of this collection is discussed in Chapter III.A., below. 29 This tax rate applies to petroleum exploration, development and production operations, but does not apply to transportation and other operations. (See: Amendment No. 10 to the Income and Business Tax Act, 2006.) 30 A different surcharge, kicking in at US $100/bbl., applies to other contractors. See: Amendment No. 12 to the Income and Business Tax Act, 2008.


accurately reflected the actual number, and that field expenses were accurately reported? Or was the Inspector’s new team, busy trying to catch up on five previous years of operations, simply doing a spot-check on the mathematical accuracy of unverified numbers from the field? While I was in Belize, back in Alaska the importance of examining whether audit units were sufficiently staffed, equipped and mandated to accomplish their job was becoming clear: Alaska state legislators were just figuring out that five years after enacting a cost-based, progressive production tax (functionally similar to the Belize income tax) the state auditors were just trying to make sure the reported numbers had a paper trail that added up. Because they lacked the necessary computerized data system necessary to keep track of the costs of field operations, they were unable to verify critical cost and price elements that determined the progressive tax rate. (The Alaska auditing picture is summarized in a news report reprinted in Appendix A-5.)31 My interest in the effectiveness of the petroleum audit system in Belize was further whetted when I learned that the amount of money the Belize government has received – and, in some cases, even the facts regarding the existence of the revenue management funds and – were subject to question. (See Section 2.E. and Chapter 3, below.) However, I was unable to arrange a meeting with auditors while I was in Belize.32 D. Belize PSAs Production sharing agreements (PSAs) are legal documents that are frequently employed to set the terms between the host governments and the business entities seeking to produce oil within that government’s jurisdiction. As noted earlier, roughly half of the oil producing nations use PSAs, the other half do not; governments operating without PSAs rely instead on arrangements negotiated within their broader institutional framework. With or without a PSA, governments typically secure their revenue from oil production through existing tax and royalty payments. As a general rule, under both systems:

• Revenue payments are typically calibrated to the world price of oil by adjusting for the quality of the oil produced and subtracting transportation costs.33

• Royalty oil is the host’s share of the resource; royalty payments therefore come directly to the government “off the top,” as if the government produced and sold that portion of the oil, typically without subtracting production costs.34

––––––––- 31 Christopher Eshleman, “Consultant's 2010 report suggests tax system overhaul,”Fairbanks (Alaska) Daily News-Miner, May 8, 2011. (Note: In the case of Belize, with its much smaller production, audit staffing and training issues may be more important than the equipment problems reported in Alaska.) 32 Following the meeting at the Petroleum Sector, I asked my hosts if a meeting with auditors could be arranged before I left Belize. Unfortunately, that meeting could not be scheduled on short notice. 33 For a rough schematic of the relationship between oil prices and costs under either system, see the right-hand side of Appendix Figure A-1.b. 34 According to Daniel Johnston, although royalties are not all that common in PSAs, when they exist, “[t]he royalty comes right off the top just as it would in a royalty/tax system” (“International Petroleum Fiscal Systems,” p. 9). Rutledge writes that PSA royalties generally fall within the 10-20% range (“The Sakhalin II PSA,” p. 3).


• Production tax and income tax payments are net of royalty – the royalty portion of produced oil is deducted prior to the tax calculations; all income taxes and most (but not all) production tax calculations subtract production costs.35

The various pay-out mechanisms dividing up the revenue from a given barrel of oil are often inter-related and the details of each element are important determinants of the short-term bottom line. Moreover, these data should also serve as building blocks for understanding the long-term petroleum revenue policy. Belize PSA Structure Using PSA agreements, since 2000 Belize has leased much of its territory – both onshore and offshore – through at least 19 different contracts.36 As noted above, only one PSA holder – BNE – is producing oil.37 The GOB has posted a model PSA agreement, which is very similar to the BNE contract. Although specific contractual terms may vary, as noted above, most Belize leases generally follow the template of a 2007 model PSA agreement.38 Review of the variety of PSA petroleum revenue distribution plans and the application of these different plans to particular geologic conditions is beyond the scope of this report. However, it can be observed that the Belize PSA contracts are noticeably shorter than many other PSA agreements encountered in other regions. For example, the 1994 Azerbaijan PSA agreement for development of the Azeri, Chirag and Gunashli fields in the Caspian Sea takes more than three times more words to cover the agreement subjects than the BNE PSA agreement.39 It is possible that the Belize PSA’s brevity has adverse public policy consequences. Consider, for example, how the two contracts define labor costs in their accounting appendices. In the Azerbaijan PSA, the definition of “Labour and Related Costs” consists of approximately 200 words in four paragraphs;40 By comparison, the BNE PSA definition of labor costs is found in single paragraph containing approximately 50

––––––––- 35 As noted in the preceding section, income tax is collected on the balance of production revenue remaining after PSA costs and revenue sharing amounts, as specified by the PSA, have been subtracted from gross petroleum revenue receipts. 36 Electronic copies of PSAs with 19 contacting entities were provided for this review by Coalition to Preserve Our Natural Heritage circa May 6, 2011. 37 Belize Natural Energy Ltd. Production Sharing Agreement, Jan. 2, 2003 (BNE PSA). As discussed in the preceding sections of this report, BNE is now producing under the PSA in the two fields in central Belize. 38 The model contract is posted at the GOB Geology & Petroleum Department’s Petroleum Unit downloads page (http://www.mnre.gov.bz/departments/geology-and-petroleum/sectionsunits/petroleum/downloads/). 39 Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea among the State Oil Company of the Azerbaijan Republic and Amoco Caspian Sea Petroleum Limited, et al., November 1994 (Azerbaijan-ACG PSA [English translation]). 40 Azerbaijan-ACG PSA, Appendix III., Accounting Procedure, 2.1(a) “Labour and Related Costs.”


words.41 Both PSAs contemplate that labour costs include the following benefits, as specified in the BNE PSA:

“holidays, vacations, sickness, living and housing allowances, travel time, bonuses and other established plans for employee benefits customarily granted to the Contractor’s employees in similar ventures.42

Absent from the BNE PSA, however, is this cautionary directive, specified in the Azerbaijan PSA, that

Gross salaries and wages, pensions, benefits and other related costs (together with attributable office costs) of those employees of the Contractor and its Affiliates not solely engaged in the conduct of Petroleum Operations shall be apportioned . . . in a manner commensurate with their direct involvement.43

The absence of similar qualifying language in the Belize PSA does not demonstrate that Belize contractors are abusing the broad terms of that PSA. Rather, this example is offered to call attention to the possibility that the Belize PSA, by virtue of its brevity, may open the door for the contractor, in the process of splitting revenue with the government, to reduce its government payments by aggressive interpretation of broad PSA contract terms. Ironically, another overly broad provision of the BNE PSA may make it difficult for members of the public to explore this possibility. Under the Belize PSA, the term “confidential information” means any information known to one party and disclosed to the other that the provider identifies as “confidential.” Three exceptions are stated: One party may not declare information confidential if that information: (1) is previously known to the other party, (2) is publicly known (except through disclosure in violation of this provision) or (3) comes into legitimate possession of the other party.44 The three circumstances that would limit withholding are not defined by the PSA. The Belize PSA’s broad grant of confidentiality notably lacks statements that would encourage informed public discussion by recognizing the importance of the public need to know basic facts and would enable that dialogue by limiting the kind of information that may be declared confidential. Expurgations from the Belize PSA Copies Reviewed for This Report Another structural issue warrants attention: The electronic copy of the BNE PSA I received during my visit to Belize contained seven omissions. Six separate pages were truncated – three by clean horizontal cuts, three by jagged horizontal breaks; the final omission was either a white-out or page omission (it was not clear which).45 Copies of

––––––––- 41 BNE PSA), Annex-I (Income Tax Commissioner’s Bulletin), Accounting Methods and Principles (Article III), 3.1 “Labour Costs,” p. 56. 42 Ibid. 43 Azerbaijan-ACG PSA, Appendix III., Accounting Procedure, 2.1(a) “Labour and Related Costs,” par. 2. 44 BNE PSA, Article 33.1, par. 2. 45 The BNE PSA omissions, shown in Appendix A-6, are at pp. 3, 11, 14, 18, 38, 53 and 58.


the seven Belize PSA pages with deletions are shown in Appendix A-6. In at least six other PSAs examined for this report, entries related to production terms were blocked from review.46 The last missing item in the copy of the BNE PSA was an example of a production share calculation. That example, part of the undated Income Tax Commissioner’s Bulletin, was supposed to show “the application of the scale of Production Sharing for a field producing 360,000 bbls per day on an average in the course of a quarter.” Since BNE production under the PSA is running somewhere around 4,000 bpd (not quite 1.1% of the total daily production contemplated in the PSA example), review of that formula would have been of interest to see how low production influences economic results. However, the PSA ended at that point, without showing the example. (A portion of the top of another page was visible below the blank portion of the final page, indicating that the production share calculating example was deliberately removed.) Most of the expurgations began and ended in the middle of a phrase, raising questions as to how the remaining portions of those fragmented phrases were supposed to be read. The reasons for the expurgations were not clear. Could subsequently enacted statutory language have rendered the excised portion inoperable? If so, were the removed portions replaced by other statutory or contractual language? Might these maskings and deletions have been removed from review copies simply because somebody felt that making these provisions public might have embarrassed somebody, or might somehow have impinged on some party’s interests or confidentiality rights?47 In the absence of explanation for the items missing from the PSA copies reviewed for this report, these strange expurgations may be regarded as warning flags indicating that further research is necessary to understand how Belize is administering the PSA terms governing petroleum operations. Terms Offered by Belize PSAs Under the BNE PSA, the industry “take,” or share of net revenue, is highly front-end loaded. The contract features what is generally regarded as a low royalty rate (7.5% of gross revenue), an industry-weighted production share (98.5%) for the first 25,000 bpd of production and full cost recovery before sharing of production gains begins.48 On the other hand, as noted in Section C., above, Belize also increased its share of the net revenue take by raising the income tax base rate to 40% (net of costs), and by adding a surcharge to the base rate that rises – and falls – with oil prices.

––––––––- 46 In addition to the BNE contract omissions, PSAs in which deletions were observed included the contracts with RSM Production Corp. (April 2000), Bel Geo Ltd.(Oct. 2007), Centam Canadian Energy Corp. (Jan. 2008), BCH International Inc. (March 2009), ZMT International, Inc. (March 2009) and Northern Spirit Resources (March 2010). All copies appeared to be copies of record, with signature pages at the back signed by industry and government officials. 47 Common sense would suggest that when portions of a printed, signed agreement are deleted (or modified), deletions should be neatly crossed out and revisions are initialed so that readers will know exactly what has been removed or changed, and that the parties have agreed to the specifics of the changes. 48 See: BNE PSA, Articles 8, 9 and 19.


Although the GOB model PSA is very similar to the BNE PSA in structure, as noted above, post-discovery PSAs between the GOB and other contractors reduce the steep industry front-loading somewhat in two respects:

• Ten of the 13 post-discovery PSAs increased royalty from 7.5% – one to as 15%; the remaining PSAs held at 7.5% royalty.

• Regarding production sharing, almost all of the subsequent PSA contracts increased the GOB production share but continued to postpone production sharing until all contractor exploration and production costs associated with the leased area were repaid.

It can be argued that both the early front-loading of industry revenue and the latter increases in GOB “take” make sense in light of current economic conditions and the logic of PSA operations. However, in the absence of hard data these theoretical observations do not reveal whether the initial and the current PSA frameworks produce an appropriate share of public revenue from the country’s lone producer, or how well these terms will serve the public interest in the future. E. Funding Environmental Protection One of the purposes of my visit to Belize was to help members of the environmental coalition in Belize deal with this question: Do the fiscal mechanisms for environmental protection assure adequate funds for accident and spill prevention and response? This is an important question. Consider: A half century of oil production in various parts of this country would require a much larger environmental program than the nascent operation at the Spanish Lookout field. With this background in mind, the next task is to examine the mechanisms for funding spill prevention and response and other petroleum-related environmental protection measures. Environmental Management Fund In 2009 the National Assembly enacted legislation amending the Environmental Protection Act for the principal purpose of enhancing existing environmental protection measures “to provide for greater environmental control and management of the petroleum industry.”49 In addition to adding specific inspection and enforcement powers to deal with petroleum production and other petroleum-related activities, the 2009 measure established an Environmental Management Fund (EMF), which consolidated petroleum-related funds for application to specific environmental tasks, including spill prevention and response and established a supervising Board to manage those funds.50 The diverse funding sources underwriting these measures includes the dedicated production revenues established by statute and required by the PSA and amounts from a variety of other sources that include fees, licenses and penalties, as well as 20% of import ad valorem tax and funds collected under the Protected Area Trust legislation.51 ––––––––- 49 Environmental Protection (Amendment) Act of 2009, April 20, 2009 (amending Environmental Protection Act. 50 Environmental Protection (Amendment) Act of 2009, Part XI., Par. 61-62. 51 Environmental Protection (Amendment) Act of 2009, Part XI., Par. 68.


The funds flow directly to the EMF, which operates independently from the environmental agency and is managed by a five-member administrative board (four government officials and one non-government organization representative) whose designated functions include the preparation and audit of an annual budget, the submission of an annual report.52 Despite statutory requirements, two years after the statute was enacted a report on the funds in the EMF did not appear to be generally available. Inspector Cho mentioned the creation of the EMF but did not provide any reports of information as to funding. To ascertain whether the EMF has received sufficient funding to accomplish its diverse missions, Professor Steiner subsequently asked the Department of Environment for copies of the budget audit but did not receive a reply.53 In sum, whether the recently-established EMF has sufficient funding to accomplish its assigned objectives is subject to question. Three funds discussed below are frequently mentioned as potential funding sources for environmental protection oversight and enforcement. On closer inspection, however, none of these entities provide significant funding at this time. One of these entities – the Petroleum Revenue Management Fund (PRMF) does not appear to be functioning yet, while the BNE Trust Fund and Environmental Common Fund contributions required by the PSA, generate very little revenue due to low production levels. Only the latter (and by far the smaller) definitely generates income for the EMF. Petroleum Revenue Management Fund Although the PRMF was established by the National Assembly in August 2007, this fund does not appear to be operational today.54 The PRMF is a revenue stabilization fund whose principal purpose is to limit expenditure of petroleum funds in order to prevent a runaway, oil-fired boom from over-heating and damaging the country’s economy. This phenomenon is often a threat to the economies of developing countries when petroleum is discovered and produced in quantities that generate sufficient revenue to dominate the economy. 55 At the present low level of oil production in Belize, however, it is not clear that government spending of petroleum revenue needs to be limited.

––––––––- 52 Environmental Protection (Amendment) Act of 2009, Part XI., Par. 63-66. 53 Richard G. Steiner, “Belize’s Oil: Doing It Right,” June 1, 2011, pp. 23-24. 54 See: Magda Kandil (principal author), “Management of Oil Revenues in Belize,” in Belize: Selected Issues, March 2008, ch. 2 (International Monetary Fund [IMF Country Report No. 08/92]). 55 The feared negative consequences of an oil boom are known as the Resource Curse; the economic symptoms are known as the Dutch Disease. (See: Macartan Humphnreys, Jeffrey D. Sachs and Joseph E. Stiglitz (editors), Escaping the Resource Curse (Columbia University Press, 2007) and Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (University of California Press, 1997).


The BNE Trust and Environmental Common Funds Under Article 23.3 of the BNE PSA, the contractor contributes one percent of the gross production revenue contributes to two funds: the BNE Trust dedicates nine-tenths of one percent to “environmental conservation and general education,” while the fund previously known as the Environmental Common Fund (now part of the EMF), receives one-tenth of one percent. The BNE Trust is considered to be a general purpose social fund, while the Common Fund payment is “held in trust by the Government and managed for the sole purpose of indemnification against any or all environmental damages caused during the petroleum operations.”56 According to a BNE fact sheet, between 2005 and 2009 the company paid US $2.7 million into the BNE Trust. From this figure, it can be calculated that the former Common Fund should have received US $0.3 million during the same period.57 Bonding

It has been suggested that GOB should require that contractors post a bond guaranteeing environmental performance and provide payment of environmental fees.58 In addition to providing funds in the event of a spill, the bonding requirement would enhance spill prevention because the underwriter of the bonding guarantee would engage a qualified risk manager to evaluate contractor operations.

––––––––- 56 PSA, Article 23.3. 57 Belize Natural Energy, “Crude Facts – How The Oil Is Shared,” Feb. 2010 (Insert #5, Side 2 [www.belizenaturalenergy.bz]. This figure appears in Chapter III, Figure 1, below. (Although BNE lumped the Common Fund together with royalty payments, the Common Fund amount can be estimated as 1/9th of the $2.7 million reported paid to the Trust Fund, per the BNE PSA at Article 23.3.) 58 Steiner recommends modifying Sec. 20 of the EPA to require that contractors, under environmental impact assessment requirements, post bonding and pay monitoring fees (Belize’s Oil: Doing it Right [June 1, 2011], p. 18).


Chapter III. Review of Public Data Outputs Public information on Belize petroleum revenue comes from three principal sources – the government of Belize (GOB); contractor and oil producer BNE; and press accounts and commentary on the two occasional releases of raw data. A. GOB Summary Information The most detailed government revenue source I found while in Belize – a table in an undated GOB brochure issued by the Ministry of Natural Resources and the Environment – presented information on an annual basis for 2006 through 2010 for production sharing revenue and business income taxes. This information is presented in Table 2, below (as it appeared in a GOB brochure [see Appendix A-4.b]). While the annual breakdown is of interest, in the absence of oil price, production and cost figures this information cannot be used for comparing Belize operations to petroleum operations elsewhere, or for developing inter-annual trending data.

Table 2. Belize Revenue from Spanish Lookout Oil Field

Year Income Tax Royalty GOB WI GOB Prod. Share Total

($US) ($US) ($US) ($US) ($US)

2006 $6,137,946.98 $2,877,266.91 $9,015,213.89

2007 $8,472,141.17 $4,943,117.78 $13,415,258.95

2008 $12,118,034.17 $8,182,898.67 $3,077,116.00 $334,421.00 $23,712,469.84

2009 $10,200,744.92 $6,087,522.00 $4,118,135.57 $441,915.61 $20,848,318.10

2010 $21,037,494.36 $8,102,902.35 $29,140,396.71 __________________ __________________ __________________ __________________ __________________

Total $57,966,361.60 $30,193,707.71 $7,195,251.57 $776,336.61 $96,131,657.49––––-

Source: Ministry of Natural Resources and the Environment, Facts About Oil Exploration in Belize (brochure, no date) (http://www.mnre.gov.bz/departments/geology-and-petroleum/sectionsunits/petroleum/downloads/).

Cursory inspection of the numbers in this table raises a range of questions that call for a closer look:

• Looking at the left-hand column: Since oil investment typically takes an extended period to turn a profit and Spanish Lookout production has been exceptionally low, some might find the 2006 income tax payment of US $6.1 million paid by Spanish Lookout contractor BNE in its first year of production surprising. As noted in earlier discussions, when geology is not auspicious, the host is likely to sweeten the PSA terms to encourage development. While some observers might argue that the Belize PSA terms are necessarily favorable to industry


because extensive exploration in the last half of the last century failed to locate commercial discoveries, others might question this premise. After all, Spanish Lookout is about 125 miles east of Guatemala’s largest oil field, and the prospects there were so enticing that a farmer accidentally found oil while digging a shallow water well.59 Moreover, BNE hit oil on its first exploration well, which prompted BNE’s chairman and lead investor to note happily that, as a rule of thumb, one should plan on drilling15 dry holes before finding oil.60 Does the fact that BNE was able to make a significant profit in its first full year of production despite low production volumes at Spanish Lookout confirm the concern that the PSA terms are too generous to the contractor?

• Moving across the columns: There was no way to assure from the data presented that the inter-annual variations between royalty and income tax revenues correctly reflected the government “take,” or the terms of the PSA and relevant statutes. Did the 2009 drop in royalty and income tax payments accurately reflect the volatility of the market price of oil? Were the income tax payments fully capturing the gains from high prices? What factors explain why 2010 royalty payments only rebounded to the 2008 level, while the 2010 income tax payments nearly doubled the 2008 collections?

• The data in Table 2 raise another question that, on its face, appears simpler than the two preceding questions: What explains the apparent dichotomy between the income tax payments in the first column and the blank cells in the third and fourth data columns for 2006, 2007 and 2010? The third column ( “GOB WI”) represents the income the GOB received the 10% working interest share of PSA that the GOB purchased pursuant to Article 19 of the PSA. Under this agreement, immediately after a discovery, the government can make arrangements to pay the contractor 10 percent of the contractor’s exploration costs in exchange for a 10% working interest in the PSA unit, which gives the GOB “all rights and obligations of the Contractor pro rata with its equity interest.” 61 Since BNE paid income taxes in all years between 2006 and 2010, why didn’t the GOB receive its 10% share of working interest profits for 2006, 2007 and 2010? A similar question applies to the fourth column (“GOB Prod Share”), Belize’s 1.5% production share provided by PSA Article 9.

The empty revenue cell question invites attention because it appears to have a simpler mechanical handle than the other questions summarized above regarding this table. Instead of requiring judgment as to whether the terms of the petroleum fiscal regime terms have generated sufficient revenue in a particular cell, this question merely inquires, why is this cell empty? Despite the absence of precise numbers, this inquiry will serve to introduce readers to the importance of understanding the nuances of the complicated relationships between the government party and the petroleum developers, as spelled out in the PSA treatment of contractor costs. ––––––––- 59 David Brown, “Belize Oil: Stuff Dreams Are Made Of (Poetry in a Geologic Puzzle Box),” AAPGExplorer, October 2006 60 Emory King, “Once Upon A Time (An Interview with Susan Morrice, Director of Belize Natural Energy),” Dec. 4, 2005 (memorandum to Belize Times, posted by International Energy Ltd.; http://ine-energy.com/documents/publications/Once_Upon_A_Time_Emory_King_120405.pdf). 61 BNE Ltd. PSA, Article 19.2.


PSA Treatment of Costs Under the terms of the Belize PSA, production costs must be fully recouped through sale of what is called, in PSA terminology, “cost oil” before the sharing of the remaining revenue, called “profit oil,” begins. In the case of the BNE PSA, for this purpose costs include unrecovered prior-year exploration costs.62 According to petroleum contract specialist Daniel Johnston, delays in the onset of working interest owner share payments are commonly seen in PSA pay-outs elsewhere and may be explained by either capital depreciation schedules or PSA cost recovery guidelines.63 As a general proposition, separate financial accounting schedules may be operating at the same time, producing disparate results. Think of this dual system of revenue disposition as a wrist watch that records time and also has a stopwatch function; the clock may be running for one payment, while the stopwatch has stopped for another. Johnston also observed that Belize PSA cost recovery terms are extremely favorable to contractors in two significant respects: (1) Where PSAs often specify a percentage cap on the annual expenses that the contractor may retain as cost oil before calculating the amount of oil to be shared as profit oil,” the Belize contract’s cost allowance of up to 100% of annual gross revenue places the contract at the extremely contractor-friendly end of the scale; and (2) the Belize PSA requires that all operations costs must be fully repaid before the contractor begins pay-out on the government’s working interest and production interest shares.64 Moreover, the extremely low production sharing percentage (1.5%) allows the contractor to retain almost all of the production revenue. Review of the BNE PSA contract terms for government purchase of a working interest share in a producing unit reveals a wild card in this cost reporting deck: Most Belize PSA’s and the Belize model contract explicitly bar contractors from including any exploration costs incurred prior to the commercial discovery to the working interest cost but allow new exploration costs within the particular discovery field as a part of the allowable post-discovery operations costs.65 BNE is one of two contractors operating in Belize expressly allowed to require repayment of prior exploration costs far from its discovery at Spanish Lookout, as well as other exploration costs within the contract unit but outside the discovery field. The previous costs incurred elsewhere were for offshore exploration in the 1990’s, far from the Spanish Lookout field, for the Gladden-1 well (approximately 30 miles from the coast in offshore waters near Glover’s Reef) and other exploration expenses in the adjoining offshore Block 13 concession.66 ––––––––- 62 See: BNE PSA, Article 9.1. 63 Daniel Johnston, personal communication, July 2011. (Johnston was offering general observations in response to the question, “Are you aware of standard PSA terms or circumstances that might enable the contractor to make income tax payments in its first year of production (indicating significant profit), while the government reports receiving no WIO revenue [sharing that profit] for the first two years of production?” 64 Daniel Johnston, personal communication. 65 See, for example, Belize model contract, op. cit., Article 19.1-19.3. 66 See: BNE PSA, Article 19.2 and Income Tax Commissioner’s Bulletin, Annex-I, Sec. 2.2.1, p. 56; and Belize Model PSA (op. cit.), Article 19.2 The other similarly gifted contractor is U.S. Capital Energy, which originally held the right to recoup the same offshore charges in the event of discovery elsewhere. Both


Without more detailed financial data on BNE operations, including payments to and transactions with the GOB, it is not clear which PSA terms (or other laws and accounting procedures) might explain the fact that, according to the summary of annual payments in Table 2, the GOB did not report working interest owner payments in 2006, 2007 and 2010. It is interesting to note that BNE’s reporting of its working interest payments to the GOB between 2005 and 2009 differs from the GOB numbers.67 The contractor’s reckoning of these reported expenditures is shown and discussed in the following section. B. The Industry Picture BNE’s “Crude Facts – How the Oil is Shared” (Figure 1 on the following page) is a February 2010 schematic flow chart that presents rounded, aggregate total revenue, cost and pay-out numbers for the years 2005 through 2009. While this report is admirable in its attempt to present a comprehensive overview of the disposition of Belize petroleum revenue, it does not provide production and price figures, annual breakdowns or operating and capital expenditure breakdowns. While many of the overall figures are close approximations to GOB numbers, others (identified below) do not match. Moreover, the statement forthrightly acknowledges that the data are unaudited. In the upper left-hand corner of the chart, capital and operating cost recovery – US $147.6 million – is listed with transportation and handling costs of US $44.5 million; the total amount is subtracted from sales revenue of US $326.1 million. Because the aggregate, four-year totals were not broken into annual components and barrels produced were not given, it was not possible to translate these figures into meaningful production or transportation cost figures. One aspect of the government take that warrants careful scrutiny is sthe US $13.8 million for working interest participation shown in this figure as paid to the government out of earned petroleum revenue. According to a footnote in the lower right-hand corner of the BNE chart, the working interest payments include three components:

• US $3.08 million paid; • US $4.2 million due to be paid; and • US $6.56 million in “capital investment.”

The first two items closely match the BNE working interest payments reported by the GOB as working interest payment received in 2008 and 2009. However, the final item requires clear explanation, particularly with regard to the missing working interest payments in 2006, 2007 and 2010. To help clarify the blurred

allowances for prior remote exploration costs were made through modification of the standard Income Tax Commissioner’s Bulletin, which was annexed to those PSAs but was not included in the Belize Model PSA.) 67 Belize Natural Energy, “Crude Facts – How The Oil Is Shared,” op. cit. (The BNE fact sheet is reproduced on p. 23, below.)


Figure 1. Belize Natural Energy Fact Sheet


picture of petroleum investment in Belize, here is a list of questions raised by BNE’s cryptic working interest entry in Figure 1:

• Does this capital investment have anything to do with the empty working interest payment cells for 2006, 2007 and/or 2010 in Table 2 of the last chapter?

• In which years were these petroleum revenues earned? • When were these fund invested and in what were they invested? • If invested in the producing fields, per BNE’s special gift award from the GOB, is

a corresponding deduction shown in the US $147.6 million cost recovery total in the blue box at the top left of this chart?

• Could this separate capital investment entry be related to any of the general cost recovery accounting anomalies mentioned by Daniel Johnston?

• Could similar transactions cancel out working interest payments in coming years? 68

The following points also deserve attention: BNE reported paying US $1.5 million more in income tax for the 2005-2009 period than the income tax amounts for those years shown in the GOB table. The header indicating that this chart total covers production revenue for the years 2005 through 2009 raises this question:. If revenue was earned in 2005, why wasn’t it recorded in the government’s annual breakdown in Table 2? 69 Finally, BNE also noted on the chart that the 2009 figures were not audited.

––––––––- 68 A 2010 news article reported that BNE was planning to spend (BZ?) $25 million on exploration in 2010 because “2010 is the final year of BNE’s exploration contact.” (“Oil exploration: Digging deep for success,” Business & Finance , March 2010 [“Susan Morrice discovered oil in Belize against all the odds. She has a deep belief in its transformational powers, says Fearghal O'Connor”]; http://www.businessandfinance.ie/bf/2010/2/feb2010intsandfeats/oilexplorationdiggingdeepforsu.) 69 If the 2005 payments were recorded in later years, this would adversely affect the validity of inter-annual comparisons.


C. Press Reports The Belize press deserves credit for its efforts to present the public with information that would help put petroleum operations and statements by officials in perspective. Figure 2, below, from a November 2010 news report, below, includes total production and revenue figures, as well as a breakdown between domestic consumption and exports. Once again, however, annual cost and production figures are lacking. Figure 2. The Petroleum Pie – A View from the Press

1 You Tube and photographs of oil wells, trucks and response equipment deleted.


The following estimate of total annual petroleum (from the Central Bank of Belize, as reported by the U.S. Geological Survey), provides a useful picture of annual production.

Table 3. Oil Production in Belize 1

/ - - - - - - - - - - - - - - - - - - - - - Calendar Year - - - - - - - - - - - - - - - - - - - - - /

2005 2006 2007 2008 2009 Petroleum (barrels) 2 14,000 797,000 950,000 1,200,000 3 1,609,000 ____________ 1. Includes data available through July 20, 2010. 2. Assumes that all crude petroleum produced was exported. 3. Revised. Source: Susan Wacaster, “The Mineral Industries of Central America: Belize, Costa Rica, El Salvador, Honduras, Nicaragua, and Panama,” in USGS, 2009 Minerals Yearbook [Advance Release], Oct. 2010, p. 6.1 (data from Central Bank of Belize, Annual Report, 2010, p. 133), http://minerals.usgs.gov/minerals/pubs/country/2009/myb3-2009-bh-cs-es-ho-nu-pm.pdf.

This breakdown raises again the issue of revenue from 2005 production. Were royalty and other payments to the GOB paid in 2005 on the 14,000 barrels of production reported in Table 3? Whether or not domestic consumption is included in the Central Bank / USGS annual totals is not clear. Based on the different production figures presented, there are at least two reasons to surmise that domestic production is excluded from these totals.70 In any event, the mid-2011 production figure of just under 4,500 bpd given by Prime Minister Barrow,71 when compared to the 2009 figure in Table 3 (above) suggests that Spanish Lookout production is declining. That total (which includes just under 500 bpd from Never Delay), is approximately equal to the 2009 average shown in Table 3; the 2009 figure was achieved without Never Delay production.72 Add domestic consumption barrels to the totals in Table 3, and the decline apparent in the comparison between the numbers in Table 3 and those given by Prime Minister Barrow would be even greater.

––––––––- 70 Here are two basic reasons to assume that exports are excluded from the totals in Table 3:

• The highest daily production average shown in Table 3 is approximately 4,410 bpd in 2009 (1,609,000 / 365 = 4,408 bpd). This would indicate that without additional production for local consumption Spanish Lookout never would have approached the celebrated 5,000 bpd average.

• For total production to increase from the 4.57 million barrel total figure shown in Table 3 to the 5.88 million barrels stated by BNE through September 2010 in Figure 2, then production over the first nine months of 2010 would have averaged approximately 4,800 bpd (5,880,000 – 4,570,000 = 1,310,000 barrels; [1,310,000 / 274] = 4,781 bpd). Again, there is a significant discrepancy between this figure and the 4,408 bpd figure shown in Table 3.

The addition of domestic production to the Bank of Belize / USGS figures would be a major stop toward resolving both discrepancies. 71 “Economy: More oil wells for BNE; job creation means infrastructure projects,” op. cit. 72 See data in footnotes 70 and 71.


D. Conclusion: Inadequate Data The petroleum information outputs reviewed in this report were not suitable for public policy analysis: If data for public consumption were presented with enough specificity to permit meaningful analysis, the information was not comprehensive. (For example, the GOB totals in Table 2 lacked the price and production cost data necessary to prepare aggregate totals that could be used for year-to-year comparisons). if the totals were comprehensive, they were not presented with annual detail to enable meaningful analysis. (For example, the BNE 2005-2009 totals in Figure 1 provided an estimate of total costs but lacked production data and were not presented in an annual format.). For these reasons, the information obtained for this report was not sufficient to complete a picture that would be useful for policy planning and analysis. Nor were the data capable of being used to assure that the government is being properly compensated for Belize petroleum production. The following chapter attempts to address this situation by setting up a model that will identify the information needed to complete a comprehensive picture of Belize petroleum production and revenue.


Chapter 4. Building A Petroleum Revenue Data Base A. Prerequisites for a Useful Petroleum Revenue Data Base The shortcomings in the public reports on oil production and revenue summarized in the preceding chapter suggests that the concerned citizens of Belize may lack access to the production and revenue data necessary to evaluate and chart a wise course through the uncertainties inherent in petroleum development. While it does not appear feasible to build reliable petroleum revenue totals from the information gathered during my brief visit to Belize, it is reasonable to assume that better information exists – in some form, in some place – perhaps even within the Belize petroleum development management organization. To propel more meaningful information into the public sphere, this chapter presents a comprehensive worksheet framework for understanding the economics of petroleum development under the Belize PSA. This worksheet is offered in hopes that it may be of use in two ways:

• Identifying missing information by clarifying what is known and what is not known about this arcane subject; and

• Providing a uniform framework for cross-checking and reconciling data. Most of the data problems discussed to this point demonstrate that particular attention must be paid to the units of analysis that will be used for gathering and recording information about petroleum development. To lay the groundwork for data collection necessary for a more complete analysis of Belize operations, this section discusses four key units of analysis that will be of use in building the framework for a petroleum revenue data base. Time Frame Considerations To assess the significance of petroleum data, it is often necessary to consider time frames. This is the case at many levels. For example, when calculating return on investment, it is important to distinguish between short-term and long-term horizons. If a $10 repayment in two weeks were expected on a one dollar investment today, investors might flock to make that investment, expecting nothing back next week. But without the probability of (say) a ten-fold profit two weeks hence, potential investors might be difficult to find; viewed from a one-week perspective, that investment would not look very good. In considering questions about petroleum policy issues, the answer often depends on whether you are willing to bet Belize falls into the former category (i.e., ten-fold profit coming quickly), or whether you fear the second week will be no different from the first. The future, of course, is uncertain. To come to an informed judgment as to which outcome is most probable, petroleum data must be handled carefully. For example, since volatile oil price and changing production figures function together to determine gross production revenue, to make sure gross revenue data are accurate it is important to make sure that the volume and price figures are taken from the same time frame. When petroleum data are considered on an annualized basis, day-to-day fluctuations in price and volume are less liable to obscure the general path that petroleum development is taking. Although government officials often prefer to view petroleum revenue in fiscal year increments, when dealing with petroleum data, it is often more useful to work with calendar-year data so that the determinative petroleum calculations can be more readily


compared to data compiled elsewhere, such as corporation annual reports, and to prior-year data.73 Oil Prices Oil pricing practices are spelled out in PSA Article 10, indicating the importance of price in determining the value of Belize oil production; the necessity of putting oil prices in an appropriate time frame was demonstrated clearly during 2008, when the average annual oil price was nearly US $100.00 per barrel. During that year, the price had skyrocketed to nearly US $150 per barrel in June, then dropped like a rock to near US $40 just six months later. Since price is multiplied by production to determine revenue, both variables must be taken from the same time frame or the results will be inaccurate. The importance of distinguishing between short-term price volatility long-term price trends was demonstrated during the fall of 2008, when oil prices were dropping. During that period, the National Assembly wisely looked past current prices to revise the petroleum income tax upward in recognition of the long-term trend of rising oil prices.74 Production Volume In the petroleum world, production of 4,000 barrels per day is a very small number. 75 To put current Belize oil development in global perspective, consider: The GOB Petroleum Sector estimates that when Spanish Lookout and Never Delay eventually shut down – somewhere between five years and a decade from now – the two fields will have produced approximately 26 million barrels of oil. By comparison, Saudi Arabia’s crude oil reserves are estimated at 264 billion barrels. In other words, Saudi Arabia’s remaining reserves are10,000 times greater than the total amount of production Belize expects from its two discovered fields.76 Among the 99 countries that have discovered oil, Belize ranks approximately 93rd. 77 Production Cost Data In addition to the anomalies of capital cost reporting discussed in Chapter III, it is important to note that profit oil must be shared with GOB and the amount that remains with the contractor is subject to a 40% income tax with a progressive surcharge, creating ––––––––- 73 The state of Alaska manages its budget on the basis of a fiscal year that starts July 1 and ends June 30. Legislators and administrators deal with petroleum data in that frame of reference. The resulting confusion between fiscal-year and calendar-year data and difficulty comparing historical data to the calendar year data compiled by corporations and other data sources makes it more difficult for legislators and administrative policy makers to distinguish between long-term signals and short-term data anomalies. 74 Amendment No. 12 to the Income and Business Tax Act, 2008 (discussed in Ch. II.C., above). 75 As noted in Chapter II.D., above , the BNE PSA included an example of production sharing at 360,000 bpd. At current production rates of approximately 4,000 bpd, it would take 90 days to produce that much oil. For policy purposes, the example (missing from the copy of the PSA reviewed for this report) therefore appears to be irrelevant. 76 BP, Statistical Review of Energy, op. cit. 77 See: “Oil – proved reserves (bbl) 2011 Country Ranks,” CIA World Factbook 2011 (http://www.photius.com/rankings/economy/oil_proved_reserves_2011_1.html).


an incentive for the contractor to over-report costs. In light of these considerations, production costs should be monitored closely. Because production costs loosely track (escalate and decline with) the price of oil, analysis of these expenses on an annual basis is recommended.78 B. Building a Revenue Calculation Worksheet In light of the problems developing petroleum data discussed in Chapters 2 and 3, the model petroleum revenue worksheet shown in Table 4 will offer a format to place piecemeal Belize petroleum information discussed in preceding chapters in a comprehensive framework. Following the guidelines discussed in the preceding section, this worksheet uses simple math to produce a quantitative base that may be applied to two purposes: (1) to enable concerned citizens to evaluate whether Belize is receiving its appropriate share of petroleum revenue; and (2) to help understand the economic context of future prospects. So that Belize cost and revenue data can be aligned with average annual oil prices and production data reported elsewhere, this worksheet is formatted to use annual calendar-year totals and/or per-barrel figures – whatever happens to be most useful.79 The worksheet game plan is simple: Reading across the page, Sheet 1 covers 2006 through 2010 (the first five full years of petroleum production at Spanish Lookout). Sheet 2, identical in format, is reserved for 2005, sources and notes.80 Working from the top down, the 24-line worksheet is divided into four basic components:

Oil price and volume (producing annual gross revenue, shown in the top yellow bar);

Costs (operating, capital, exploration costs, followed by transportation costs (totaled above the second yellow bar; subtracting this total from gross revenue yields the total annual net take);

Contractor payments to Belizeans and the GOB are listed serially, with income tax calculated last (between the second yellow bar and the final yellow bars at the bottom);

The three essential building blocks above determine contractor and Belize revenue, shown in the two bottom yellow bars in nominal U.S. dollars, and then as a percentage of the total net revenue take. ––––––––- 78 Production cost trends and the relationship between oil price and production costs are discussed in Chapters I and II and shown, in rough terms, in Appendix Figure A-1.b. 79 To estimate per-barrel costs, simply divide that total annual figure by barrels produced (entered at line 2a). If per-barrel figures are provided instead, those figures can be entered and multiplied by the annual production figure. 80 By putting 2006 through 2010 on Sheet 1, when everything is filled out data mavens will have five years of full-year data, suitable for inter-annual comparisons, trending and spotting anomalies. (2005 totals won’t work very well for these purposes because 2005 only contains partial-year data.) Since data users will only use 2005 figures to build comprehensive totals (and to make sure somebody didn’t lump 2005 numbers in with 2006), space for 2005 entries is reserved in the first column of Sheet 2. the rest of Sheet 2 is saved for totals, documentation and notes about sources, surprises and unanswered questions.


Here is a closer look at what the 24 data entry lines cover, and how they work. Reading from the top down:

• Price and production (lines 2 and 3) produce annual gross revenue (line 4).

• Total annual field costs at lines 5 through 7 are summed at line 8, then added to transportation costs (line 9) to produce total costs at line 10.81

• At line 11, the total costs are subtracted from gross revenue to produce the total net revenue “take” – the difference between the sales revenue and the field and transportation costs incurred to produce those barrels.

• Lines 12 through 20 record and add contractor payments, which are summed at line 21 to show total payments to GOB and local landholders.82

• At line 22, line 21 is subtracted from line 11 to show contractor net revenue.

• Lines 23 and 24, respectively, are Belizean and contractor percentages of pre-tax net revenue.

Assuming that reliable annual price and production totals can be obtained, this framework could provide rough estimates of other line items in the worksheet – items that could help fill in the blanks to determine key elements in the Belize petroleum puzzle. In addition to providing information that is relevant to the formulation and evaluation of environmental policies, this framework may open the door to other useful avenues of inquiry. For example, this model, once completed with verifiable data, should serve as an aide to understanding (1) anomalies in the production data base that may warrant further investigation and (2) the possibilities and the magnitude of the pay-out from the discovery and future production of significant quantities of petroleum.83 Completion of this model would also be a useful first step toward understanding how BNE managed, on the small quantity of oil it is producing, to earn a profit – and to do so in the first full year of operation.

––––––––- 81 Capital cost treatment may delay contractor pay-out to the GOB and there appears to be some question about treatment of the exploration cost subset (BNE PSA treats exploration costs differently from other PSAs). Further attention to both issues is needed. To help shed light on these issues, this worksheet separates costs into three components. (Note that not some exploration costs may not figure into annual calculations. (See discussion Chapter III.) 82 Note that business income tax is not calculated at line 20 until the contractor pay-outs (lines 11 through 18) have been totaled at line 19, then subtracted from line 11, the annual pre-tax net take (price or production revenue minus allowable costs). 83 While I am not confident that standardized probabilistic field development rate of return models are likely to produce useful results for public policy purposes when applied to small-volume discovery scenarios, this exercise will assure more accurate inputs and, therefore, better results from any analytic tool that may be employed.

Table 4 (page 32). Model Production Revenue Calculation Worksheet For Spanish Lookout Field, Belize, 2006 - 2010

Sheet 1 of 2

1 LINE ITEM (How Calculated *) 2006 2007 2008 2009 2010

2a Annual barrels produced (Line 2b x 365)2b Production in barrels per day (bpd) * * * * *

/ - - - - - [Lines 3 through 22b Reported on Calendar Year Basis in Nominal U.S. $ ] - - - - - /

3 Annual Average Price / bbl. * * * * *

4 Annual Gross Revenue (Line 2a * Line 3)

/ - - Costs - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

5a Annual Operating Costs * * * * *5b Op. Costs / bbl. (Line 5a / Line 2a)6a Annual Capital Costs * * * * *6b Cap. Costs / bbl. (Line 6a / Line 2a)7a Annual Exploration Costs ** * * * * *7b Expl. Costs / bbl. (Line 7a** / Line 2a)

8a Total Annual Field Costs (Lines 5a + 6a + 7a **)8b Field Costs / bbl. (Line 8a / Line 2a)

9a Annual Transportation Costs (to sale point) * * * * *9b Transp. Costs / bbl. (Line 9a / Line 2a)

10a Total Annual Costs (Line 8a + Line 9a)10b Total Costs / bbl. (Line 10a / Line 2a)

/ - - Net "Take" (Sales Revenue less Costs) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

11a Total Annual Net "Take" (Line 4 - Line 10a)11b Total Net "Take" / bbl. (Line 11a / Line 2a)

/ - - Contractor Payments to GOB + Local Payments - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

12a Annual Royalty * * * * *12b Royalty / bbl. (Line 12a / Line 2a)

13a Annual Trust Fund Deposit * * * * *13b Trust Fund / bbl. (Line 13a / Line 2a)

14a Annual Environmental Common Fund Deposit * * * * *14b Common Fund / bbl. (Line 14a / Line 2a)

15a Annual Surface Rental (local) * * * * *15b Surface Rental / bbl. (Line 15a / Line 2a)

16a Annual GOB Lease Rentals (GOB) * * * * *16b Lease Rentals (Line 16a / Line 2a)

17a Annual Production Share * * * * *17b Production Share / bbl. (Line 17a / Line 2a)

18a Annual W. Int. Share (0.1 * sum [Lines 12a thru 17a]) * * * * *18b W. Interest Share/ bbl. (Line 18a / Line 2a)

19a GOB + Local Annual Subt. (sum [Lines12a thru 18a])19b GOB + Local Subtotal / bbl. (Line 19a / Line 2a)

20a Business Income Tax ([L.11a - L.19a] * 0.40) *** * * * * *20b Business Inc. Tax / bbl. (Line 20a / Line 2a)

21a Annual GOB + Local Total (Line 19a + Line 20a)21b GOB + Local Total / bbl. (Line 21a / Line 2a)

22a Contractor Profit (Line 11a - Line 21a)22b Contractor Profit / bbl. (Line 22a / Line 2a)

23 Belize % Share of Net Take (Line 21a / Line 11a) % % % % %

24 Contractor % Share of Net Take (Line 22a / Line 11a) % % % % %

* Astorisks denote cells to be filled by data entry. (Other cells to be filled by formula shown in italics.) ** Exploration costs excluded in certain circumstances. (See discussion in text.) *** Surcharge applies to Sp. Lookout at price over US $90/bbl., other fields at price over $100/bbl. (Inc. & Business Tax [Amendment] Act, 2008 [No. 12].

Draft worksheet prepared for Belize Coalition to Save Our Natural Heritage byRichard A. Fineberg, Research Associates, Ester, Alaska 99725, USA

(6/30/11)

Table 4 (page 33) Model Production Revenue Calculation Worksheet For Spanish Lookout Field, Belize, 2006 - 2010

Sheet 2 of 2

1 LINE ITEM (How Calculated) 2005 Statute / PSA Notes

2a Annual barrels produced (Line 2b x 365)2b Production in barrels per day (bpd)

/ - - - - - [Lines 3 through 22b Reported on Calendar Year Basis in Nominal U.S. $ ] - - - - - /

3 Average Annual Price / bbl.

4 Annual Gross Revenue (Line 2a * Line 3)

/ - - Costs - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

5a Annual Operating Costs5b Op. Costs / bbl. (Line 5a / Line 2a)6a Annual Capital Costs6b Cap. Costs / bbl. (Line 6a / Line 2a)7a Annual Exploration Costs **7b Expl. Costs / bbl. (Line 7a** / Line 2a)

8a Total Annual Field Costs (Lines 5a + 6a + 7a **)8b Field Costs / bbl. (Line 8a / Line 2a)

9a Annual Transportation Costs (to sale point) 9b Transp. Costs / bbl. (Line 9a / Line 2a)

10a Total Annual Costs (Line 8a + 9a)10b Total Costs / bbl. (Line 10a / Line 2a)

/ - - Net "Take" (Sales Revenue less Costs) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

11a Total Annual Net Take (Line 4 - Line 10a)11b Total Net Take / bbl. (Line 11a / Line 2a)

/ - - Contractor Payments to GOB + Local Payments - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - /

12a Annual Royalty 12b Royalty / bbl. (Line 12a / Line 2a)

13a Annual Trust Fund Deposit13b Trust Fund / bbl. (Line 13a / Line 2a)

14a Annual Environmental Common Fund Deposit14b Common Fund / bbl. (Line 14a/ Line 2a)

15a Annual Surface Rental (local)15b Surface Rental / bbl. (Line 15a / Line 2a)

16a Annual GOB Lease Rentals (GOB)16b Lease Rentals (Line 16a / Line 2a)

17a Annual Production Share 17b Production Share / bbl. (Line 17a / Line 2a)

18a Annual Working Interest Share 18b W. Interest Share/ bbl. (Line 18a / Line 2a)

19a GOB + Local Annual Subt. (sum [Lines12a thru 18a])19b GOB + Local Subtotal / bbl. (Line 19a / Line 2a)

20a Business Income Tax ([L.11a - L.19a] * 0.40) ***20b Business Inc. Tax / bbl. (Line 20a / Line 2a)

21a Annual GOB + Local Total (Line 19a + Line 20a)21b GOB + Local Total / bbl. (Line 21a / Line 2a)

22a Contractor Profit (Line 11a - Line 21a)22b Contractor Profit / bbl. (Line 22a / Line 2a)

23 Belize % Share of Net Take (Line 21a / Line 11a)

24 Contractor % Share of Net Take (Line 22a / Line 11a)

* Astorisks denote cells to be filled by data entry. (Other cells to be filled by formula shown in italics.) ** Exploration costs excluded in certain circumstances. (See discussion in text.) *** Surcharge applies to Sp. Lookout at price over US $90/bbl., other fields at price over $100/bbl. (Inc. & Business Tax [Amendment] Act, 2008 [No. 12].

Draft worksheet prepared for Belize Coalition to Save Our Natural Heritage byRichard A. Fineberg, Research Associates, Ester, Alaska 99725, USA

(6/30/11)


Chapter 5. Findings and Recommendations

A. Overview: Petroleum Development in the 21st Century Finding 1: The findings of the U.S. Presidential Commission on the Deepwater Horizon spill of May 2010 84 and the published observations by noted economist Joseph Stiglitz on oil industry cheating 85 in its financial dealings with host governments are two of the many clear warning signals from authoritative sources that host governments dealing with petroleum development would be well advised to strengthen their institutions to avoid adverse environmental and economic consequences.

Recommendation 1: For assistance in understanding and minimizing the

adverse economic, environmental and social consequences of petroleum development, the GOB, in concert with concerned citizens, should (a) join the Extractive Industries Transparency Initiative (EITI) and (b) explore the possibility of working with Norway’s Oil for Development (OfD) program to provide training and capacity building assistance.

B. Low Production - High Price Issues Finding 2: Even at low oil production rates, BNE earned a significant profit during its first full year of production, as indicated by the reported income tax payment on Spanish Lookout production in 2006.86 The surprising economic success of the Spanish Lookout field reflects the remarkable increase in oil prices since 1998 that has radically altered traditional petroleum economics by increasing the potential viability of exploration projects that probably would not have gone forward under the oil prices that prevailed during the last quarter of the 20th century.87 Traditional institutional arrangements do not appear to have been designed to deal with the possibility that high oil prices would enable oil development to take place at very low production rates.

Recommendation 2: The GOB should focus on strengthening its management institutions to assure that (a) risks of industrial accidents and oil spills will be minimized, (b) spill response capabilities will be strengthened and (c) public interest in maximizing petroleum revenues will be furthered by timely and effective accounting procedures.

––––––––- 84 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (Final Report), Jan. 11, 2011 (http://www.oilspillcommission.gov/final-report). 85 See Appendix A-3, for extract from Joseph Stiglitz in “Dealing with the Industry,” in Escaping the Resource Curse (M. Humphreys, J.W. Sachs and J.E. Stiglitz [eds.], Columbia University Press, 2007, chapter 2). 86 See pp. 19-20. 87 See Appendix A-1.b.


Finding 3: With significant portions of Belize under lease to a variety of other hopeful developers, the new economic conditions that underlie BNE’s success (high oil prices) fuel increasing interest in petroleum exploration and development. Belize therefore needs to be prepared for two very different future petroleum development scenarios: (a) Exploration and low-production development that is economically viable but does not provide sufficient endowment for effective environmental oversight and spill response; and (b) the possibility of widespread development or a major discovery that would require rapid build-up of both oversight and spill response infrastructure to reduce risks and provide for response to major spills.

Recommendation 3: The GOB should establish a strong petroleum performance audit system to verify that GOB petroleum environmental oversight (spill prevention), emergency response (spill response) and revenue management units (a) are adequately funded, staffed and trained and are effectively executing their assignments under current conditions; and (b) have management plans in place to ramp up rapidly in the event of widespread, low-production or major production to assure effective oversight and response capabilities.

C. Statutory Issues Finding 4: Although legislation establishing a comprehensive Petroleum Revenue Management Fund (PRMF) was enacted in 2007, this fund does not appear to be operational. Meanwhile, petroleum revenue management appears to be in a state of institutional disarray.88

Recommendation 4: For the limited but important purpose of providing transparent accounting of the disposition of petroleum revenue, steps should be taken to activate the PRMF without putting unnecessary spending limits caps in place.

Finding 5: According to a 2008 International Monetary Fund report on Belize, the principal purpose of the Petroleum Revenue Management Fund (PRMF) is to limit the appropriation of petroleum revenue to prevent that revenue from overheating the Belize economy with adverse consequences for existing sectors of that economy. However, at current low oil production levels it is not clear whether or not petroleum revenues pose that threat. 89

Recommendation 5: An economic advisory panel should be convened to make recommendations regarding the level at which petroleum revenue spending in Belize would need to be capped.

––––––––- 88 See: Magda Kandil (principal author), “Management of Oil Revenues in Belize,” in Belize: Selected Issues, March 2008, ch. 2 (International Monetary Fund [IMF Country Report No. 08/92]), discussed at pp. 17-18, above. 89 Ibid.


Finding 6: BNE data suggest that between 2005 and 2009 the total dedicated funding contributed to the Environmental Common Fund (one-tenth of one percent of gross revenues, net of transportation) was approximately US $300,000 (US $ 0.3 million). This amount is not commensurate with the funding required to meet the obligations of environmental challenges of spill prevention and spill response, which are among the tasks assigned to the Environmental Management Fund (EMF), established by the Environmental Protection (Amendment) Act of 2009.90

Recommendation 6: Administrative steps should be taken immediately to ensure that the principal petroleum development-related environmental tasks (a) do not get lost among the potpourri of tasks assigned to the EMF and (b) are actually funded to provide effective environmental protection. Amending Chapter 20 of the EPA to require contractor payment of environmental monitoring fees and bonding for environmental performance would be a useful step toward resolution of this situation.

D. Public Information Finding 7: Despite widespread interest in the burgeoning petroleum industry and public concern about petroleum development economic issues, during my visit to Belize I was unable to locate information on petroleum production and revenue that was current, comprehensive, demonstrably factual and accurate or useful for understanding the characteristics of Belize petroleum development, including its potential, as well as its economic risks and rewards. 91

Recommendation 7: To promote reasoned public dialogue on Belize petroleum development issues, concerned citizens should work with the GOB to acquire the economic data necessary to fill out the petroleum revenue worksheet developed for this report (format presented in Table 4).

Finding 8: The Belize PSA agreement copies provided by the Coalition for review appeared to be copies of record. However, the BNE PSA and at least six other PSA copies were incomplete due to the removal of portions of certain sections of the contract. Due to the awkward manner of these expurgations, it was not possible to tell exactly what was intended to be removed, why (or by whom) the deleted phrases, sentences, paragraphs or pages were removed, or how the remaining portions were to be interpreted.92

Recommendation 8: To analyze these important documents for public policy purposes, reviewers should request complete PSA documents in order to ascertain the significance of the expurgations.

––––––––- 90 Ibid. 91 See discussion of data in Chapter II.A and Chapter III, above.) 92 See discussion in Ch. II.D and deletions from the BNE PSA at Appendices 6 and 7.


Appendices

A-1 Alaska North Slpe Crude Oil Price v. Production and Delivery Costs (Historical Data, 1984 – 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

A -1.a Alaska Department of Revenue Chart, Feb. 2010 A-1.b Alaska Department of Revenue Chart, updated with information Added by Research Associates, Feb. 2011 A -1.c Alaska North Slope Oil Average Monthly Prices (Source: Alaska Department of Revenue) A-2 BP Cost-Cutting Directive (May 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2 A-3 Prof. Joseph E. Stiglitz, “The Problem of Cheating” (2007). . . . . . . . . . . . . . A-3 A-4 Government of Belize Brochures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4 A- 4.a BELIZE PETROLEUM SECTOR (Brochure [undated], c. Jan. 2010) A- 4.b Facts About Oil Exploration in Belize (Brochure, no date) A-5 Consultant’s 2010 report suggests tax system overhaul (Fairbanks Daily News-Miner, May 8, 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5 A-6 Copies of Pages from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6 A-7 Examination of Deletion from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003 At Page 38, Article 6.2.8 . . . . . . . . . . . . . . . . . . . A-7

Appendix A-1

Alaska North Slope Crude Oil Price v. Production And Delivery Costs

(Historical Data, 1984 – 2010)

A-1.a. Alaska Department of Revenue Chart, Feb. 2010. A-1.b. Alaska Department of Revenue Chart, updated with information

added by Research Associates, February 2011. A-1.c. Alasks North Slope Oil Average Monthly Prices (Source: Alaska Department of Revenue)

Figure A-1.a. Alaska North Slope (ANS) Crude Oil Price v. Production and [Sheet 1 of 2] Delivery Costs (Historical Data, 1984 – 2009)

(Nominal US $ per barrel)

– Alaska Department of Revenue, Presentation to Senate Finance Committee, Feb. 16, 2010 (Slide 6).

[See comments on following sheet.]

– Research Associates, Ester, Alaska

Figure A-1.a. Alaska North Slope (ANS) Crude Oil Price v. Production and [Sheet 2 of 2] Delivery Costs (Historical Data, 1984 – 2009)

(Nominal US $ per barrel)

The Alaska Department of Revenue chart on the preceding page shows the dramatic increase in the price of oil that began in 1998. The next two charts help place this price increase in perspective with additional information. Figure A-1.b adds oil production and transportation cost information, as well as 2010 data, while Table A-1.c presents the monthly oil prices that produce the annual averages graphed here, as well as an inflation adjustment for the annual averages in the right-hand column.

When read together, these figures show the importance of paying attention to details when building a summary of crude oil data.

While oil prices remain volatile, many informed observers believe that the world has entered an era that will sustain significantly higher oil prices. Near the end of each of the last three decades, oil prices tumbled. But in 2008, instead of diving toward the single-digit range and hanging out there for several months, oil prices bottomed out at a significantly higher level (just under $40.00 / bbl. in nominal dollars), then quickly resumed an upward path. Even when adjusted for inflation, during the decade between 2000 and 2009 the rising price of oil still averaged more than twice that of the preceding decade (see Figure A-1.c).

To help understand the significance of this trend, in Figure A-1.b adds the price, field cost and transportation cost estimates against the 2010 price update In the lower right-hand corner, dotted red lines show approximations of field cost estimates. (The yellow box that appears at the center of the revised chart provides sourcing and additional detail about the transportation and cost elements that are subtracted from the market price of crude oil to determine the net price, which serves as the production tax base.)

Figure A-1.b. serves as a reminder of the importance, for policy purposes, of obtaining and using the most current information available. When the State of Alaska first presented Figure 3 early in 2010, that chart gave the impression that the price of oil was still declining, continuing the breaking in the upward trend that had prevailed since 1998. In fact, throughout 2009 oil prices had increased rather steadily, with the December 2009 average nearly doubling the January average (see Figure A-1.c).

As shown in the following figure, operating and capital field production costs have reportedly increased by more than 50 percent over the last five years, from approximately $12.82 in fiscal year 2007 to $19.81 in fiscal year 2010).1 These costs double to triple the transportation costs shown here. Field cost increases in Alaska are consistent with a national trend that represents a striking reversal from two decades of production cost declines.2 It should be noted that there is often significant variation in regional costs3 and the Alaska figures have not been audited.

1 The Department of Revenue’s estimated FY 2010 operating and capital costs were presented in the Alaska Department of Revenue Fall 2010 Revenue Sources Book, and in a January 2011 report to the Legislature (Commissioner Bryan Butcher [Alaska Dept. of Revenue], “Oil and Gas Production Tax Status Report to the Legislature,” Jan. 18, 2011, p. 1 and slide 4). 2 In April 1998, the press reported that according to U.S. Energy Information Administration data the total cost of producing oil dropped from $14.61 in 1981 to $4.12 per barrel (Dirk Beveridge [Associated Press], “Crude comes cut-rate; methods slash oil-finding costs,” Anchorage Daily News, April 2, 1998, p. F-1). 3 For additional background on rising production costs, see: U.S. Energy Information Administration, Performance Profiles of Major Energy Producers, 2008, December 2009, pp. 10-11 and 21 (Report No. DOE/EIA-0206[08]).

– Research Associates, Ester, Alaska

Figure A-1.b. Alaska North Slope Crude Oil: Updated Chart with 2010 Price and Cost Data (Nominal US $ per barrel)

Sources: Alaska Department of Revenue, Oil and Gas Production Tax Status Report to the Legislature, Jan. 18, 2011 (Chart 4 [field costs]), Fall 2010 Revenue Sources Book (Appendix Table B-2a [tanker and tariff estimates]) and web site [oil prices].

– Compiled by Research Associates, Ester, Alaska (February 2011)

2010

Trans-Alaska Pipeline ~ US $3.81 / bbl. (2010)

Tanker + Misc. Pipeline ~ US $2.21 / bbl. (‘10)

Est. Field Costs increasing from ~ US $12.82 / bbl. (2007) to ~ US $19.81 / bbl. (2010)

SUBTRACT COSTS (~ US $25.83 / bbl.) FROM PRICE:

ALASKA NORTH SLOPE CRUDE OIL (2010 Calendar Year Average Price: US $79.28 / bbl.)

$79.28 Market Price (2010) $79.28 (25.83) $53.35 “Profit Oil”? $19.81 Field + 2.21 Tanker 3.81 + P/L $25.83 “Cost Oil”?

Figure A-1.c. Alaska North Slope Crude Oil Price History (1988 - 2011)

Alaska North Slope (ANS) West Coast Oil Price

Year Calendar Year Avg. GDP Deflator Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (Nominal) (Real) (Chained Price Index)

1988 14.23 14.03 13.79 15.29 14.86 14.14 13.70 13.63 12.58 11.34 11.36 13.23 $13.52 $22.47 0.66941989 15.11 15.99 17.25 19.37 17.64 17.00 16.78 16.04 16.62 17.27 17.49 19.07 $17.14 $27.42 0.69541990 20.00 19.30 17.91 14.82 14.38 13.20 15.55 25.99 32.16 31.53 28.79 24.02 $21.47 $33.14 0.72101991 20.57 15.74 17.02 17.56 16.67 16.36 17.25 17.18 17.37 18.47 17.57 14.83 $17.22 $25.60 0.74831992 14.92 15.30 15.50 16.96 18.03 20.20 19.40 17.97 18.46 18.71 17.46 16.33 $17.44 $25.27 0.76781993 15.62 16.78 17.35 18.17 17.47 16.02 14.84 15.42 14.98 15.39 13.07 10.29 $15.45 $21.91 0.78481994 11.66 12.59 12.91 14.96 16.47 16.43 16.52 16.66 16.11 16.02 16.71 15.38 $15.20 $21.11 0.80141995 16.16 17.14 17.31 18.36 18.43 17.43 16.23 16.72 16.65 15.96 15.88 16.94 $16.93 $23.02 0.81841996 17.23 17.78 20.40 22.04 19.65 18.98 19.79 19.90 21.69 22.60 21.50 23.66 $20.44 $27.26 0.83421997 23.57 21.03 20.07 18.54 19.41 17.3 17.48 17.98 18.09 19.59 18.33 16.39 $18.98 $24.86 1990-1999 0.84951998 14.79 13.39 12.25 12.41 12.31 11.62 12.92 12.49 14.13 13.38 11.47 9.39 $12.55 $16.23 Real Avg.: 0.86031999 10.69 10.43 13.07 15.64 15.86 15.82 18.16 20.08 22.96 21.83 23.65 24.54 $17.73 $22.63 $24.10 0.87172000 25.74 27.65 28.01 23.83 27.15 29.62 27.63 29.40 32.25 31.56 32.74 23.72 $28.28 $35.39 0.88892001 24.37 26.02 24.70 25.55 26.70 25.82 24.60 24.12 23.21 19.45 17.23 16.69 $23.21 $28.38 0.90992002 17.52 19.14 22.76 24.99 25.87 24.16 25.82 27.39 28.76 27.53 24.69 28.03 $24.72 $29.74 0.92492003 31.91 35.20 32.59 25.59 26.19 29.35 29.17 30.22 27.09 28.55 29.11 30.67 $29.64 $34.93 0.94422004 33.10 33.66 35.50 35.43 39.07 36.73 39.44 43.12 42.71 48.56 42.15 36.66 $38.84 $44.63 0.96842005 41.12 43.59 50.63 49.75 46.77 53.67 56.67 62.40 63.47 60.37 56.11 57.17 $53.48 $59.50 1.00002006 62.85 59.26 60.61 67.74 69.32 69.50 73.10 71.74 62.33 54.27 54.26 58.13 $63.59 $68.42 1.03422007 51.52 57.00 59.01 63.92 64.76 69.11 75.93 73.83 79.72 84.77 92.98 88.64 $71.77 $74.95 2000-2009 1.06542008 91.16 94.12 105.06 112.37 125.41 133.78 132.87 115.98 101.86 73.65 53.94 37.70 $98.16 $100.22 Real Avg.: 1.08982009 39.01 42.78 47.75 46.56 58.23 69.80 64.53 71.52 69.20 74.28 76.52 75.12 $61.28 $61.74 $53.79 1.10432010 79.34 76.74 79.45 82.23 74.23 75.66 76.53 75.78 75.27 82.41 83.93 89.75 $79.28 $79.28 1.11272011 92.56 96.79 115.34 120.86 113.57 111.72 * 111.27 [est.] 1.1276

Sources:

Oil Prices: Accessed February and June 2011 at Alaska Department of Revenue (http://www.tax.alaska.gov/programs/oil/oilprices/ans.aspx)* June 2011 is average of reported prices between June 1 and June 22.(Spot prices are unaudited and do not reflect Production Tax Settlement Values.)Gross Domestic Product Index: White House, Budget for Fiscal Year 2012, Historical Tables , “Gross Domestic Product and Deflators,” pp. 211-212.(2011 GDP deflator estimated.)

Price (Nominal $ per barrel)

Research Associates, Ester, Alaska (June 2011)

Appendix A-2

Al Bolea, Chair, TAPS (Trans-Alaska Pipeline System) Owners Committee, “Re: Revised Program Scope 2002”

(letter to David Wight, President, TAPS [Alyeska Pipeline Service Company],

May 6-7, 2002).

(BP Cost-Cutting Directive)

Letter from BP’s Al Bolea, Chair, TAPS Owners Committee, to David Wight,

President Alyeska Pipeline Service Company (TAPS), May 6-7, 2002. Sam Bishop, “Alyeska urged to trim costs: Pipeline owners call for more ‘efficiency’

on maintenance,” Fairbanks Daily News-Miner, June 12, 2002, p. A1.

Appendix A-3

Prof. Joseph E. Stiglitz: “The Problem of Cheating”

(2007)

Extract from “Dealing with the Industry,” in Escaping the Resource Curse (Macartan

Humphreys, Jeffrey W. Sachs and Joseph E. Stiglitz [eds.], Columbia University Press, 2007, chapter 2)

[With annotating comments by Richard A. Fineberg.]

Appendix A-3

Prof. Joseph E. Stiglitz, “The Problem of Cheating” In Escaping the Resource Curse,1 economist Joseph Stiglitz writes:

“Whatever the contract[,...] corporations are tempted to cheat – to pay less than they are supposed to – because the amount of money that can sometimes be made by doing so is so large. The occasions to cheat arise not just in developing countries. In the 1980s I worked on a case involving cheating by the major oil companies in Alaska. . . . By overestimating their costs by just a few pennies per gallon (and multiplying those pennies by hundreds of millions of gallons) the oil companies would increase their profits enormously. They could not resist the temptation.”

“They also found other ways to cheat, such as selling their oil to their own

subsidiaries, recording a lower than fair market value ...or using other subsidiaries to ship their oil out and then reporting fictionally high shipping cost. Each piece of the cheating was hard to detect, and government prosecutors had to analyze thousands of transactions – at a cost of tens of millions of dollars. In the end, there was no doubt that cheating had occurred – and on a massive scale. There followed a series of settlements involving a whose who of global companies – including what are now BP, ExxonMobil and ConocoPhillips – for an amount in excess of 6 billion dollars.2”

1 Joeseph E. Stiglitz, “What Is the Role of the State?” Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stiglitz (eds.), Escaping the Resource Curse (Columbia Univ. Press, 2007), pp. 24-25. 2 [Stiglitz documents the paragraphs quoted above with the following footnote.] “See Fineberg (2003). In what came to be known as the “Amerada Hess case” for the first company on the list of 15 defendants, BP alone settled for $185 million in royalties (in 1991) and $1.4 billion in back taxes (in 1994), though the federal government provided substantial tax relief to BP that cut its settlement cost in half. . . . I served as an expert witness in the suit. . . . Alaska was only the first of a long line of suits by states and the federal government alleging that the oil companies had cheated in hundreds of millions of dollars of payments. The government has already prevailed on a number of these cases. During the Clinton Administration, new regulations were issued to try to limit the scope for such cheating.”

Stiglitz’s citation to “Fineberg 2003” refers to Richard A. Fineberg, "Securing the Take: Petroleum Litigation in Alaska," in: Svetlana Tsalik, Caspian Oil Windfalls: Who Will Benefit? (New York: Open Society Institute, 2003), ch. 3 (pp. 53-69).

Based on considerable time I spent in state service working on oil and gas litigation issues in the late 1980’s (including the Amerada Hess royalty case, to which Stiglitz referred), I can vouch for the general accuracy of the Stiglitz overview, which he offered as a lesson to resource-rich nations. Unfortunately for public policy, the industry’s machinations are largely veiled behind a curtain of taxpayer confidentiality. I spent time behind the curtain as a policy advisor to the governor in the late 1980’s and subsequently reported on the problems I found in a 1990 report to the Legislature. (The 1985 TAPS Settlement: A Case Study in the Effects of Confidentiality on Information Available to Decision Makers in Oil and Gas Revenue Disputes [Prepared for the Alaska State Legislature, February 1990].)

Stiglitz’s assertion that Alaska had to litigate to recoup “in excess of $6 billion” is conservative. Based on the records I compiled and reviewed for the chapter Stiglitz cited, I reported that the Alaska Dept. of Law reported $6.8 billion in oil and gas settlement payments for underpayments on taxes and royalties through 2001. Since then, the Constitutional Budget Reserve Fund has taken in another $1.5 billion in oil and gas settlements – $1.3 billion of that amount in the last 4 years. (Alaska Department of Revenue, Fall 2010 Revenue Sources, p. 90.) That adds up to $8.3 billion.

http://www.finebergresearch.com/pdf/Securi.pdf

http://www.finebergresearch.com/pdf/Securi.pdf

http://www.finebergresearch.com/pdf/tsmdru.pdf

http://www.finebergresearch.com/pdf/tsmdru.pdf

Appendix A-4

Government of Belize (GOB) Brochures

(Petroleum Information)

A-4.a. BELIZE PETROLEUM SECTOR (Brochure [undated], c. Jan. 2010) A-4.b. Facts About Oil Exploration in Belize (Brochure, no date)

Appendix A-4.a

“BELIZE PETROLEUM SECTOR” (Brochure)

Geology and Petroleum Department (Ministry of Natural Resources and the Environment, Government of Belize), Jan. 2010 (reprinted Jan. 2011).

GOB Brochure, created in January 2010, places Spanish Lookout field production at 5,000 bpd.

File created in January 2010, accessed circa June 30, 2011 at http://www.belize.org/tiz/resourcesmodule/download_resource/id/51/src/@random4b58afc67f219/

34-36 Unity Boulevard Belmopan City

Belize, C.A. Phone: (501) 822-2178/2651

Fax: (501) 822-3538 E-mail: [email protected]

Geology & Petroleum Department

Geology & Petroleum Department

Ministry of Natural Resources

& the Environment Government of Belize

BELIZE PETROLEUM SECTOR

SPANISH LOOKOUT COMMERCIAL DISCOVERY

The Spanish Lookout commercial discovery was made by Belize Natural Energy Ltd. in July 2005 in the Mike Usher-1 exploration well in the Span-ish Lookout Mennonite Community in the Cayo District central western Belize.

The Spanish Lookout Oil Field is currently pro-ducing approximately 5,000 barrels of oil per day. The oil is a 400 API gravity oil with 0.8% sulphur . There are currently 10 producing wells and 5 in-jection wells are planned. The field is approxi-mately 2,000 acres in size and the proven recover-able reserves is approximately 15 million barrels.

The map below shows the location of the Spanish Lookout Oil Field.

LEGAL REGIME

• The Petroleum Sector is governed by the Petroleum Act, Chapter 225 of the Substantive Laws of Belize, Revised Edition 2000-2003 and the Petroleum Regulations.

• The Minister responsible for petroleum is the Honorable Gaspar Vega, Minister of Natural Resources and the Environment.

• The Geology & Petroleum Department (GPD) is the Government agency responsible for the ad-ministration of the Petroleum Sector.

• The Inspector of Petroleum of the GPD is directly responsible for the administration of the Petroleum Sector under the Petroleum Act and Regulations.

• Petroleum contracts are issued to qualified petro-leum companies to explore for and produce petro-leum. The type of contract utilized in Belize is an exploration and production contract.

• The exploration period is for a total of 8 years and is divided into four renewable 2 year periods: an initial exploration period, a first renewal period, a second renewal period and a third renewal period. Each period expires at the end of the two years and the contractor must apply to the Minister for re-newal. Renewal is automatically granted if the Con-tractor fulfilled its work and expenditure commit-ments. The period may not be renewed if the Con-tractor failed to fulfill its commitments. A perform-ance bond equivalent to the expenditure commit-ments for the period is required for each period.

• Relinquishments of 25% of the original contract area are due at the end of each period.

• The production period is for a total of 25 years with provision to renew for an additional 25 years.

FISCAL REGIME

• Each contract requires the Contractor to pay a roy-alty, production share and income tax to the Gov-ernment. A petroleum surcharge fixed to oil prices was recently introduced in 2008 and is payable ac-cording to oil prices. Each contract also requires the Contractor to assign to the Government a minimum of 10% working interest in a field if the Government opts to take it. The royalty, produc-tion share and working interest is negotiable with a minimum royalty of 7.5% for oil and 5% for natu-ral gas. The income tax is fixed at 40% on net in-come.

• 100% of all expenditures are recoverable before payment of production share.

EXPLORATION HISTORY

Exploration efforts in Belize have been driven by the existence of onshore and offshore oil seeps and most recently the Calla Creek oil seep in 2000 which sparked renewed interest in Belize’s petro-leum potential culminating in the awarding of the Belize Natural Energy Ltd. block and the com-mercial discovery of the Spanish Lookout Oil Field in 2005.

The Yalbac-1 well was the first exploratory well drilled in Belize by Gulf Oil in 1956. The last two wells drilled before the Spanish Lookout discovery were the offshore Gladden-1 well and the onshore Noh Mul-1 well both drilled in 1997. Exploration has been carried out in Belize by companies such as Gulf Oil, Placid, Anschutz, Shell, Chevron, Esso, Phillips and Occidental Petroleum.

The map below shows the exploration wells drilled during the period 1956-1997.

FEES AND SURFACE RENTALS

1. Fees for inspection of the Register: - for general research and examination of the Register

US$

$5

- for the supply of a copy of any entry on the Register

$10

2. Surface rentals: - annual surface rentals for a contract area during the exploration period, per acre:

Years 1 and 2 $0.10

Years 3 and 4 $0.15

Years 5 and 6 $0.20

Years 7 and 8 $0.40

- annual surface rentals for the surface area of a field, per acre:

$5

3. Administrative fees: - application fee

$100

-annual administration fee $10,000

(Sheet 1 of 2)

Appendix A-4.b

Facts about Oil Exploration in Belize (Brochure)

Ministry of Natural Resources and the Environment (no date)

[Received in Belize, May 9, 2011]

Brochure presented the table below (reprinted in Chapter. 3, Table 2). with 2006-2010 petroleum revenue totals.

(Sheet 2 of 2)

Appendix A-4.b

Facts about Oil Exploration in Belize (Brochure)

Appendix A-5

Fairbanks (Alaska) Daily News-Miner

Consultant's 2010 report suggests tax system overhaul

(May 8, 2011)

Fairbanks (Alaska) Daily News-Miner

Consultant's 2010 report suggests tax system overhaul

By Christopher Eshleman May 8, 2011

JUNEAU — A 2010 study of state government’s tax management offered a scathing report card, citing out-of-date, largely manual processes being used to review a $3 billion annual tax portfolio.

The $300,000 project, approved last year by the Legislature, found a piecemeal and “eclectic” blend of more than 100 different systems, some “home-grown,” used to administer various tax programs. A reliance on unsecured computer systems to store “sensitive taxpayer information” represents a “high security risk,” it said.

The consultant leading the review saw a “clear need” for an overhaul. The Senate Finance Committee has proposed spending almost $35 million for the new equipment and software needed to follow through by automating and upgrading tax systems.

The 160-page report, issued in October by the Colorado-based consulting firm Fast Enterprises LLC, found employees at state tax offices spend more time compiling and organizing data “than actually auditing, examining, analyzing, forecasting or managing tax programs.”

“Economic research capabilities of the current system rely on manual processes,” it stated.

The report preceded, by five months, a Division of Legislative Audit report that cited similar problems.

The state’s Department of Revenue said it and Gov. Sean Parnell were not ready to move the $35 million proposal because “the state needs to look at its (information technology) infrastructure as a whole” and was leaving it to tax specialists to review options and settle on “the best solution” before approving funding, Ginger Blaisdell, a tax manager, said Friday by email. She said she offered similar comments during legislative meetings earlier this year.

The Senate Finance Committee’s request for funds came last month.

The report arrived three months before Parnell announced his plan to cut oil taxes. Many lawmakers later complained that they lacked the type of analysis needed to adequately judge the pros and cons of Parnell’s proposal. The Department of Revenue is years behind as it audits oil tax returns and has yet to finish any audits that would apply to years under the 2007 Alaska’s Clear and Equitable Share act, which rewrote and increased oil taxes.

The report arrived weeks before a Cabinet shuffle by Parnell. New Revenue Commissioner Bryan Butcher said by email he thinks state officials generally wanted time to ensure a request for new equipment and software fit within broader plans to upgrade tax management.

The proposal comes as the state simultaneously pursues major upgrades to technology equipment and software elsewhere. For example, the proposed capital budget includes $47 million for the Department of Administration to replace its antiquated statewide accounting and payroll systems with new technology. The Legislature four years ago approved $20 million to start that project.

State administrators said Friday that multi-pronged information technology project justifies deliberate review of options to ensure their respective systems will work well together.

The Colorado firm interviewed state lawmakers, industry representatives and public employees during the study. It also held a pair of workshops with the Tax Division and Revenue Department.

Contact staff writer Christopher Eshleman at 459-7582. ______________

Accessed May 8, 2011 at http://www.newsminer.com/view/full_story/13173908/article-Consultant-s-2010-report-suggests-tax-system-overhaul?

http://www.newsminer.com/view/full_story/13173908/article-Consultant-s-2010-report-suggests-tax-system-overhaul

http://www.newsminer.com/view/full_story/13173908/article-Consultant-s-2010-report-suggests-tax-system-overhaul

Appendix A-6.

Copy of Pages Extracted from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003

Showing apparent deletions or masking of content on contract pages 3, 11, 14, 18, 38, 53 and 58 *

Original PDF Page No.* Deleted material within: pp. 1-2: Table of Contents (provided for reference; no deletions) p. 3: “Whereas…” p. 11 Article 4.6 p. 14 Article 6.1.1.1 p. 18 Article 6.2.8 p. 38 Article 27.1 p. 51 Annex 1 – Income Tax Commissioner’s Bulletin (no deletions; Table of Contents of Annex; provided for reference) p. 53 1.7.1 Capital Expenditures p. 58 3.9 Example of Production Share Calculation _______ * Page numbers shown here refer to PDF file page numbers in copy of PSA provided to Richard A. Fineberg by Coalition to Preserve Our Natural Heritage (received in Belize City, Belize, May 6, 2011).

Appendix A-7.

Examination of Deletion from Belize Natural Energy Production Sharing Agreement of Jan. 2, 2003

At Page 38, Article 6.2.8

Appendix A-7 (Sheet 1 of 2)

At Article 2.6 in the Belize Natural Energy PSA, with the word “reserves” entered in the search box (at top left of computer screen, just below the “Create PDF” tab), the computer “Find” function located that word on the second line of page 9 (denoted by arrow, below).

At Article 6.2.8 (p. 18), with the word “reserves” still entered, when instructed to “Find Next in Current PDF [file],” the search function found and highlighted (but did not print) the space where the word “reserves” would have appeared in a masked portion of the contract

i

Appendix A-7 (Sheet 2 of 2)

To demonstrate that the computer was apparently able to read the words masked on the display of the Belize Natural Energy PSA, here is a copy of an unmasked version of Sec. 6.2.8 of another Belize PSA (Princess Petroleum Ltd., Oct. 12, 2007, p. 21), in which this portion of Sec. 6.2.8 has not been masked. Note also the initials in the lower-right corner of the page, indicating that an official has certified the authenticity of this page.

In the case of the BNE agreement, five separate portions of the body of the PSA, comprising approximately 15 percent of the 39 pages of the entire body – along with two portions of an annex to the PSA – were either deleted or masked from the photocopy I received. In some (but not all) of the other PSA agreements reviewed for this report, similar excised and masked deletions of other passages were observed. Were passages removed from these contracts because subsequent statutory language rendered them inoperable? If so, were the removed portions replaced by other statutory or contractual language? And exactly where did the removed passages begin and exactly where did the text of the contract resume? Or might these maskings and deletions have been removed from review copies simply because somebody felt that making these provisions public somehow impinged on confidentiality rights? Researching the reasons for the strange removal of these passages is beyond the scope of this report. Common sense would dictate, however, that when portions of a printed, signed agreement are deleted (or modified), deletions are usually neatly crossed out and revisions are initialed so that readers will know exactly what has been removed or changed, and that the parties have agreed to the specifics of the changes. The nature of the PSA removals suggests that the missing passages may have been removed because either government or contractor officials thought that public knowledge of the existence of the removed terms might have been embarrassing to somebody. In any event, these awkward deletions make it more difficult for reviewers to evaluate the terms of the contract.

_______________________ Richard A. Fineberg is an independent, Alaska-based analyst who has reported on economic and environmental issues associated with Alaska petroleum development for more than three decades. In addition to preparing numerous reports for non-government organizations and occasional research assignments in the Caspian Basin and Sakhalin (available on-line at http://www.finebergresearch.com), he has served as a senior advisor to the governor of Alaska on oil and gas policy, and as an occasional consultant to various state and federal agencies, including the U.S. Internal Revenue Service, the Alaska Department of Revenue and the Regulatory Commission of Alaska. Please address questions or comments on this report to: Richard A. Fineberg P.O. Box 416 Ester, Alaska 99725, USA Tel.: (907) 479-7778 E-mail: [email protected]

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