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 
 
¶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