Government could lose up to $112 million (K82 billion) in revenue if the country commences oil production under the current production sharing agreements (PSAs) with foreign companies, a new Oxfam report has stated.
The analysis of the fiscal terms in the oil contracts done by Oxfam, through a consortium of international economic and oil industry consultants, is based on assumptions on provisions in the contracts which allow companies to pay less taxes as the oil blocks make more profit.
As a consequence, the report says the country could lose between $112 million and $562 million (about K375 billion) for reductions in 2 percent and 10 percent corporate taxes reductions for a 30-year period in which the country could export oil as after two years of production, current oil contracts allow companies to negotiate for reduction of the tax rates.
Additionally, on profit sharing, the contracts have two conflicting fiscal principles in its paragraphs, namely sliding shares and R-factor which would end up depriving government up to $363 million (about K265 billion) for project as sliding scales is based on sharing revenue while R-factor is based on cumulative revenue to cumulative costs.
The report subsequently urges government to strengthen its capacity to undertake an economic analysis of the fiscal terms contained in the existing and future production sharing contracts.
The report was presented to Parliamentary Committee on Natural Resources on Wednesday in Lilongwe.
Speaking after the interface Oxfam Interim country director Lingalireni Mihowa said the report is based on various consultations with various stakeholders.
She cited stakeholders including Ministry of Finance, Department of Mines, Chamber of Mines and civil societies as those key to the process.
“We believe that this information will help us to have a better understanding of the oil and gas contracts and help you as legislators, to effectively support the process of negotiating future contracts,” said Mihowa.
The committee’s chairperson Victor Musowa said there was a need for lawmakers to be properly informed on the subject matter, observing that analysing the fiscal terms of the agreement is sticky in the absence of the House’s access to the actual committee.
He also cautioned the consultants on the matter to ensure that any models drafted for the country should reflect realistic economic realities to avoid putting off potential clients.
The analysis comes as government continues to renegotiate with the oil companies the terms of the contracts after previous condemnation from various stakeholders on how the contracts were awarded and formulated.
A previous Oxfam report, titled ‘Malawi’s Troubled Oil Sector, Licences, Contracts and their Implications’ detailed how former president Joyce Banda’s administration rushed to sign deals with prospective oil exploration companies just before the 2014 elections.
Banda’s successor, Peter Mutharika’s administration, has continued to push for renegotiations, which have delayed completion of the exploration licence.
Malawi signed PSA’s with RAK Gas (Blocks 4 and 5) and Pacific Oil (Block 6).
Both reports single out the need to put in place a clear policy and to revise the badly out-dated Petroleum and Exploration and Production Act of 1983.