The government is prudent to negotiate licensing income with ExxonMobil in advance of actual oil production

Dear Editor,

It is prudent of the Government of Guyana to engage ExxonMobil (XOM) to negotiate licensing and rental income for Guyana’s oil-bearing acreages in advance of actual production. This is the norm in the oil business. This is what nations, states and individuals who own petroleum reserves do, especially when they have little expertise and little capital to monetize them on their own. As I write this, Iran has seventy blocks of oil reserves, worth $30 billion. And it expects to receive a tidy sum, up front, from foreign oil producers who wish to acquire the rights to monetize the oil and gas lying underground.

Here in Texas, the state’s sovereign wealth fund has received many billions of dollars over the years for the rental and sale of mineral rights for oil and gas under state lands. This fund is a major funding source for higher education in Texas. Auctions are done and payments are received for these mineral rights, long before the first wells are drilled. Royalties on actual production and sales come later.

Does Guyana not charge a licensing fee for gold extraction and timber logging on state lands? There are some, bent primarily on opposing the government, who will pejoratively suggest that charging a rental fee or licensing fee or exploration fee or signing fee is like a loan or a cash advance or some form of debt that encumbers the nation. That is false.

If what has been reported is correct, XOM would already have a good estimate of the value of the Stabroek block. Their petroleum engineering, financial and actuarial staff would have determined a range a values based on many permutations of the selling price of oil and the cost of production using their internal futures price deck.

It is true that the current price of oil is low, low enough to put many high cost producers out of business. But certainly not XOM. They have a huge portfolio of producing properties around the world, with wells already drilled and paid for, where the lifting costs are below today’s low trading price, such that they can make a decent profit while others, less endowed, struggle to stay alive.

XOM is a fully integrated oil company with multiple profit centres. It can prosper even in a low crude oil price environment because that’s when their refineries emerge as a greater profit centre. Low or high, XOM wins. No question, it prospers best when crude oil prices are high. XOM’s net profit is about twenty billion dollars per year. This year, despite low oil prices, it has already generated more than that. Additionally, it has billions of dollars of liquidity in cash reserves.

This is the best of times for XOM to stock up on oil reserves and to buy them cheap! If the Stabroek block is rich in reserves, this would be a good time for XOM to lock it in, plus as much more of the adjacent blocks as it can acquire. Of course, they may have to hold on to them until the price of oil makes economic sense to undertake new drilling.

XOM already has a huge inventory of reserves in its corral, but oil, once lifted, is gone. Savvy operators like them are always looking to replace declines and to increase reserves, not necessarily for use today or tomorrow, not perhaps for several years. This is the background on which Guyana must craft its strategy to secure value now instead of who knows when.

The first rule of politics is to stay in office. The best way to stay in office is to demonstrate accomplishments. There is much that needs to be done for the Guyanese populace and much to accomplish. This government has a windfall opportunity. Unfortunately, this thought will drive fear into the opposition which will use any concoction of false statements and flawed analyses to deprive the government of this unique opportunity.

It is particularly significant that the President of ExxonMobil will be meeting with President Granger to talk about XOM’s place in Guyana’s future and vice versa. I do not know Rex Tillerson, ExxonMobil’s president, but I know that he was born, raised and educated in Texas and lives near to XOM’s head office near Dallas, Texas; the very picture of a Texas oil executive who climbed the ladder of corporate stardom through stints as a Vice President of different overseas operations and rotations as head of domestic divisions.

Without knowing what XOM already owns or has under lease or has options on, in Guyana, it is impossible to guess what positions Guyana can stake out. But presumably, Guyana’s representatives are fully acquainted with their sources of strengths and weaknesses as they go into negotiations.

Why might Tillerson pay now to play later? First, it is the industry norm. He is well versed in the industry. In 2011, he himself paid Russia billions of dollars for a field bearing $300 billion worth of recoverable oil. He bought XTO Energy in 2009 for $31 billion worth of XOM stock. Second, he is sitting on a pile of cash. Third, it is a good time to buy good prospects cheaply. Fourth, locking-in the Stabroek block, if it turns out to be as lucrative as we hope, will add to his legacy. Who knows, one day it might be called the Tillerson Field! Fifth, don’t forget that the Exxon blowout with Venezuela occurred under his watch. The first commandment of Texas business reads: if he crosses you, it is okay to teach him a lesson as long as you promise not to gloat! Yes, global geopolitics can get real personal. Sixth, it would add significantly to his annual bonus calculation.

Guyana’s representatives would do well to assume that Tillerson is the smartest man in the room, even if privately, they think that their IQ is higher than his. After all, this man makes $40 million a year in salary and bonuses! (All references to dollars in this letter are in US dollars.) They should not be fooled by his good ole boy, down home, self-effacing charm. This man faced down the Rockefeller family, one of the largest block of owners of ExxonMobil’s shares when they tried to dilute his control of the company. Also, they should drop all the “Your Excellency”, “the Honorable”, and other honorifics while in meetings. Many Texans find them amusing at first and pretentious afterwards. No one likes profiling, but with Guyana’s current ranking in the world’s corruption scorecard, it would be wise to assume that when Tillerson looks across the table, he might be tempted to think that he is looking at another bunch of petro-crooks from Venezuela, Guinea, Russia or Nigeria, and it will require the highest levels of tact, integrity, knowledge and mutual respect to convince him otherwise.

Good luck to Guyana.

 

Yours faithfully,

Tulsi Dyal Singh

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