(U) BELIZE: PM PUSHES WINDFALL PROFITS TAX FOR OIL

C O N F I D E N T I A L BELMOPAN 000323

SIPDIS

FOR WHA/CEN - R. BEAL, EEB - B. DUGGAN
LOME FOR DIFFILY

E.O. 12958: DECL: 07/09/2018
TAGS: EPET EFIN ENRG PREL EINV BH
SUBJECT: (U) BELIZE: PM PUSHES WINDFALL PROFITS TAX FOR OIL
COMPANY

REF: BELMOPAN 0320

Classified By: Leonard A. Hill for reason 1.4(b) and (d)


1. (C) SUMMARY: A windfall profits tax on oil production
is coming to Belize. The only questions are how much of a
bite it will take and how much of a disincentive it will be
to U.S. investors. While the Prime Minister and government
say they are consulting and taking industry concerns into
account, the U.S. firm behind the sole oil producer in the
country is talking of "de facto nationalization" of its
investment. The results of a July 9 stakeholder meeting will
indicate how far the government plans to push its tax
proposal. END SUMMARY.


2. (C) Prime Minister Dean Barrow's government plans to
impose a windfall profits tax on the country's sole oil
producer, Belize Natural Energy (BNE). The government's
rationale for the move is straightforward: high oil and
commodity prices have hammered the budget. Barrow told the
DCM July 7 that it is "only fair" that the government gets "a
little bit more" revenue to compensate for the "battering"
that Belize's finances have taken in recent months. In
addition to a financial beating, the GOB is taking a
political beating after winning office in February on a
platform that included promises to reduce energy and food
prices.


3. (C) A Colorado firm, CHx, is a major investor in BNE and
has expressed concern to us over "de facto nationalization"
of their investment, should the tax pass as initially
drafted. An industry group composed of producer BNE and
nearly a dozen other firms with production sharing agreements
(but no actual production) agreed on a counter-proposal,
which was presented to the government in late June. The GOB
is holding a stakeholder meeting for all firms July 9 to
offer a counter-counter-proposal. The Prime Minister said he
hopes the meeting will lead to "understanding if not
agreement" but indicated that he was prepared to meet
privately with BNE/CHx and again with the whole group if need
be to "reach some kind of consensus."


4. (C) Separately, former PM Manuel Esquivel, currently a
senior adviser to Barrow and the government, told us that he
expected the July 9 meeting would be conclusive and there
would be no further talks with industry. He reiterated a
point PM Barrow made, that the GOB was not trying to act
unilaterally but had in fact consulted with all industry
players and would take their concerns into account. That
being said, Esquivel noted, no one would ever be completely
happy having additional taxation imposed on them, but the
government's finances demanded that action be taken. Asked
about the timing of legislation -- CHx had been telling us
and others in Washington that the tax would be approved as
early as July 8 -- Esquivel said the government had hoped to
have a draft by August 1 but that that date would likely slip
further. He said that the PM's commitment to a transparent
process of consultations had slowed things down, as had the
nature of the industry, where a "one size fits all" policy
was hard to adopt since there was at present only one
producing firm to which the tax would apply.


5. (C) Given their diverse interests and significantly
differing levels of current investment, industry players did
a remarkable job of forming a united front to respond to the
proposal. The industry as a group did not engage much when
the previous government imposed a retroactive change to
income taxes on BNE (ref),since no other firms were
producing and had no income to tax. There does seem to be a
growing level of awareness in the industry that, although any
tax changes will only hit BNE for now, they could make the
climate so unfavorable to producers that firms may be
inclined to walk away from their production sharing
agreements.


6. (C) Industry concerns with the government's original
proposal are many, and focus on several points:

-- a threshold level of US$65 a barrel;

-- the tax reaches back to the first dollar of production,
rather than starting with production over the threshold;

-- the tax ignores exploration and production cost recovery;

-- the tax applies regardless of whether or not production

is hedged at a lower level, so BNE could potentially be taxed
as if it were receiving US$140/bbl for oil that it had in
fact been hedged previously at US$80. (COMMENT: For CHx
this is a major issue, since its bankers require hedging of
50% of production as a condition for receiving loans. END
COMMENT.)


7. (C) Throughout the various discussions of changing tax
regimes for the oil industry in Belize, the Embassy has
consistently urged both the previous and current governments
to consider the long-term implications for investment. Both
the energy sector and the tourism industry are heavily
dependent on U.S. investors, and anything that undermines
their confidence could have a significant impact on the two
sectors of the economy that generate the most foreign
exchange. We have made our points privately at all levels of
the government, and the Ambassador referred publicly to the
need to maintain a transparent and predictable investment
climate in his July 4 remarks. The DCM raised the shifting
taxation problem with the Prime Minister July 7 and with
Esquivel July 8, and we have gone to bat for BNE -- as well
as other U.S. investors -- numerous times on other issues in
the past. We are generally satisfied that the firm has been
a good corporate citizen. However, its management has at
times appeared to operate on the assumption that it is easier
to ask forgiveness than permission, which has created a
perception with some that the firm is arrogant and flouts the
rules. The PM has told us on a couple of occasions that
BNE's past behavior has caused some of its current troubles.



8. (C) COMMENT: At the end of the day, the GOB is going to
hike taxes on the oil sector. BNE and CHx have said
privately they could live with some changes, but what they
want in return for concessions now is a guarantee that this
is the last new tax burden they will face. We continue to
advocate for a transparent and predictable investment
environment which benefits Belize and U.S. investors. END
COMMENT.

HILL