Dear Editor
It is good news to learn that Guyana will receive royalties on each barrel of oil produced from the Stabroek block. But oil, a mile beneath the waves and a further two miles deeper under the seabed, and one hundred and twenty miles off shore, is not money in the pocket.
With the oil glut and low oil prices at present, it might be several years before the Government of Guyana sees a penny of royalty from this find, even if it is as large as we hope, and the oil is mostly recoverable, and the wells are fast flowing and show low rates of decline. The first royalty producing barrel might very well be more than ten years away.
The politics of governance is made easier by windfall revenues! And winning the next election would so much easier if there was a stream of cash to make many of the electorate’s dreams possible. So how can Guyana monetize this resource now, long before the first barrel flows?
I live in Midland, Texas which sits atop the Permian Basin, the most prolific oil field in the United States. The Permian currently produces two million barrels of oil per day. Midland exists because of the oil beneath its sands. I have lived here for thirty-six years and have seen three booms and three busts. Right now, it’s a bust. You can recognize it when the iconic bumper sticker re-emerges: “Dear God, please send another oil boom and I promise not to p*ss it off this time”. A promise that few ever keep when the good times roll in!
Let me share a personal story. I have three small parcels of land where I own the sub-surface mineral rights. An oil company has leased the rights to drill under the land and has given me a royalty of twenty per cent of revenue on oil produced. If and when! There’s oil there, lots of it; proven; many producing wells adjoin my property; five different producing geologic zones sit under my land; and the seismic studies are spectacular, a windfall by any definition. But there is no well to bring it up. And at today’s price of forty-five dollars a barrel, there will never be one because it’s just not economically viable. So not a penny of royalty is coming my way.
But all is not lost. The exploration company did pay me a fee to traipse over the surface of my land to do their seismic evaluation of the oil underground. And the oil company that leased the mineral rights did pay me a signing bonus to encourage me to grant them the lease. The lease is for three years so that if they do not drill a well in three years, the mineral rights return to me and I will then be able to enter into a new lease with them or another company. But if the price of oil improves, we will most likely negotiate an extension of the lease well before the term expires, for an extension fee.
The point of all this is to show that there are other ways to monetize buried treasure before it can be brought up. The net result in terms of cash paid out by the oil company will be about the same, adjusting for the time value of money. The difference for me is that I get some money up front, and some along the way, though a little less when the well comes in. A little money in hand is better than a lot more under the sea.
I did ask for milestone payments too but did not get them. Milestone payments are those that are scheduled to be paid to the mineral owner when certain pre-determined parameters are met, such as when the company receives the required permits to drill; or at the actual start of drilling; or at the completion of the well, etc.
Editor, it would be good to know what Guyana got for leasing the Stabroek block. Was it only production based royalty? Was there an exploration fee? Signing bonus? Milestone payments? Extension fees? If there were no “early payment” clauses, perhaps with the good news from ExxonMobil’s find, the Government of Guyana might consider re-negotiating the deal to get better terms upfront, knowing that they will have to give up something for later.
Yours faithfully,
Tulsi Dyal Singh
