Identifier
Created
Classification
Origin
08BELMOPAN336
2008-07-23 21:50:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Belmopan
Cable title:  

WINDFALL PROFITS TAX ON BELIZE'S OIL INDUSTRY

Tags:  ECON EFIN ENGR EPET PREL EINV 
pdf how-to read a cable
VZCZCXRO4561
RR RUEHGR
DE RUEHBE #0336/01 2052150
ZNR UUUUU ZZH
R 232150Z JUL 08
FM AMEMBASSY BELMOPAN
TO RUEHC/SECSTATE WASHDC 1383
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCNCOM/EC CARICOM COLLECTIVE
UNCLAS SECTION 01 OF 02 BELMOPAN 000336 

SIPDIS

SENSITIVE

DEPT FOR WHA/CEN (ROIS BEAL)

E.O. 12958: N/A
TAGS: ECON EFIN ENGR EPET PREL EINV
SUBJECT: WINDFALL PROFITS TAX ON BELIZE'S OIL INDUSTRY

REF: BELMOPAN 323

UNCLAS SECTION 01 OF 02 BELMOPAN 000336

SIPDIS

SENSITIVE

DEPT FOR WHA/CEN (ROIS BEAL)

E.O. 12958: N/A
TAGS: ECON EFIN ENGR EPET PREL EINV
SUBJECT: WINDFALL PROFITS TAX ON BELIZE'S OIL INDUSTRY

REF: BELMOPAN 323


1. (SBU) Summary: After months of difficult negotiations, on July
16, the GOB introduced a new windfall profits tax (aka petroleum
surcharge) on the country's current and future domestic oil
producers. Belize Natural Energy Ltd. (BNE) received a special
arrangement on current production, accounting for the company's
production hedges and offering a lower threshold for the surcharge,
alleviating a key concern. BNE appeared pleased with the final
agreement and other potential oil producers appeared ambivalent.
End Summary.


2. (SBU) The profit potential from the nascent petroleum industry
has fueled debates between the GOB and private companies for months.
The widely-held public perception is that, with record-high oil
prices, Belize Natural Energy Ltd. (BNE),the only company currently
producing oil in Belize, is recording huge profits while the
government is receiving a small percentage from income tax and
royalties. (Note: income taxes were increased from 20 to 40% in
2006.) After difficult negotiations, on July 16, the GOB introduced
a new windfall profits tax (aka petroleum surcharge) on the
country's current and future domestic oil producers.


3. (SBU) The GOB announced a petroleum surcharge across the
industry but carved out a special arrangement for BNE. According to
Prime Minister Dean Barrow, any revenue BNE receives above the
threshold price of US$90 per barrel will be treated as windfall and
is to be split 50-50 between BNE and the GOB. The surcharge is
applied after deductions specified in the production sharing
agreement are subtracted and will be effective September 1. Due to
the higher threshold price, the agreement takes into account BNE's
US$80 price hedges on roughly 765 barrels of oil per day - a point
critical in BNE's negotiations. The agreement with BNE is for
current production only and represents oil resulting from the
Spanish Lookout oil well. Any new finds will fall under the general
industry agreement. The GOB expects the current proposal to provide
approximately US$9 million in new revenue for the remaining period
of the fiscal year (September 08 - March 09).



4. (SBU) The general industry agreement is based on a sliding
scale, which kicks in at 100 USD per barrel and moves from a 15% to
a 50% surcharge at the high end of the pricing table of US$190 per
barrel.


5. (SBU) Media commentary noted that BNE officials seemed too
supportive of the agreement and claimed there was insufficient
confrontation between the government and BNE. However, the Prime
Minister commented publicly that multiple negotiations have been
conducted with a level of mutual respect though there was of course
some tension. The PM noted in a radio interview on July 21 that
Belize's Ambassador to the U.S. was summoned to Congressional
Committee meetings in Washington to complain that the GOB was taking
unfair advantage of BNE. In one such meeting he stated a
Congressman said, "we just renewed CBI and this is how we are
repaid?" The PM indicated that this made him feel nationalistic.
(Note: The PM implied that he would have been offended if he
himself had been standing before the Committee. End Note) The PM
stated he had also spoken to the U.S. Ambassador to Belize several
times on the issue and that the Ambassador was more diplomatic in
his approach on the taxation matter, the U.S. position on a good
investment climate was clear.


6. (SBU) The opposition party has criticized the tax agreements,
claiming that the delays have lasted too long. They also proposed
that the windfall tax should be triggered after the oil companies
achieve a pre-determined rate of return rather than by the price per
barrel of oil and commented that the threshold of ninety dollars
announced by the government is too high. They claimed the announced
agreements are a ploy to boost the budget figures provided on July

14.


7. (SBU) COMMENT: If the surcharge is applied for one half-year,
we estimate additional revenue to the GOB based on a US$130 oil
price, 50-50 split above the US$90 threshold, using 3,635 unhedged
barrels produced daily, to be closer to US$13 million - much higher
than the PM's estimates. The PM may have provided a conservative
estimate to closer match the national budget's petroleum surcharge
estimate presented on July 14. Additional revenue is critical to
the GOB right now since they announced their national budget and
immediately thereafter received a notice to pay an arbitration
judgment for nearly US$5 million resulting from the former
government's improper dealings. This is significant for a
government already relying heavily on grants from foreign
governments. Though the media pressed for more confrontation in the
end the news appeared to be well-received.


8. (SBU) BNE was unavailable for comment though the CEO gave the
appearance that he was quite content with the agreement during the

BELMOPAN 00000336 002 OF 002


press conference with the PM. He referred to the arrangement as a
"win-win agreement." BNE's almost joyful presentation at the press
conference, along with their sudden disappearance from the Embassy
lobby, leads us to believe the final agreement meets or surpasses
their expectations. Competing oil companies present at the press
conference, however, appeared somewhat ambivalent about the whole
matter.


9. (SBU) Though we have met repeatedly with BNE and other oil
companies in Belize, their financials remain obscure. It is
difficult to determine whether BNE is in fact profitable or not.
The Association of Concerned Belizeans placed a full page
advertisement in the newspapers stating that BNE deducted
exploration and infrastructure costs from their revenues incorrectly
therefore keeping an additional US$10 million from the GOB. The
accounting argument will likely continue for years, but without
public disclosure of full financials, the determination of BNE's
profitability will be hard to determine for certain. END COMMENT.

HILL