Column 19 last week summarised how petroleum produced is shared between the Contractor and Guyana represented by the Minister. Now, if the parties were to take their respective shares and act independently, selling their share of the crude, or refining and selling it as they wished, there would be no need for the Agreement to include any provision or rules concerning valuation. In Guyanese parlance, that would be their business. In other words, Guyana can do as it wishes with its share while the Contractor will be able to do likewise. But life is not so simple, nor are petroleum operations.
Guyana’s share of the production, at least in relation to the Liza Block, is a minimum of 14.5% of the number of barrels of oil produced (2% for royalties and 12.5% as minimum profit share). In column 19, I had expressed the view that for practical purposes, Guyana will not physically take up its share and will more than likely request ExxonMobil to refine and dispose of its uptake. I admit that I am discounting, at some risk, the possibility that Guyana may choose to sell its share at the wellhead to one of the other joint venture partners in the Liza Block.
Recall that the shares in the Joint Venture are held 45% Esso Exploration, 30% Hess and 25% CNOOCNexen. It may be far simpler, tidier and will pose less accounting and audit issues, and possibly disputes, if Guyana decides to sell its share to any of the partners at the wellhead. The more curious will immediately ask from whose share does the 14.5% to Guyana come. The answer is that it comes out of the gross and the JV partners will take their respective shares of the net.
Janet and Trotman
But let us return to the 1999 Janet Jagan Agreement which broadly accords with the Model Agreement used as the basic document for negotiation with the oil companies.
That Agreement was with one party only and any inter-party transaction entered into by Guyana could only be with Esso Exploration and Production Guyana Ltd, which is a branch of an ExxonMobil subsidiary. With two additional parties to the Agreement, the possibilities obviously increase although the principle should still hold. Surely, this foursome makes it all the more necessary that President Granger should ensure that Minister Trotman release a copy of the Agreement for Guyanese to see what he has agreed to and to assure the nation that the negotiations involved the Quintet + 1 and that Cabinet approved the Contract.
The Granger’s Administration so far is simply unbelievable, more than a sick joke. Is it that the Granger Administration has no regard for the people of this country, or is there something that the Administration is bent on hiding? But back to the valuation of production which it should be explained is for the purpose of the Agreement and not the valuation basis that accountants and auditors use for financial statement purposes. The valuation rules set out in Article 13 of the Agreement are summarised hereunder.
The value of a barrel of crude for each field is computed immediately after the end of the month by reference to the Free On Board (FOB) price in United States Dollars at the delivery point. The interpretation Article Clause defines a “field” as the “area within the contract area consisting of a petroleum reservoir or multiple petroleum reservoirs all grouped on, or related to, the same individual geological structural features or stratigraphic conditions from which petroleum may be produced commercially.”
The Article explains the necessity for separate determination of different fields as being due to production from different fields likely to be of different quality and therefore to attract different prices. The question is what if the Contractor deals with the production entirely within its own group, i.e. its own refinery and its own distribution outlets as opposed to a mix of third parties and within its own group? Here is how it works.
Where fifty percent or more of the total volume of sales from any field were third party sales, the price of all crude oil from such field is deemed to be the simple arithmetic average price realised, calculated by dividing the total receipts by the number of barrels.
On the other hand, if third party sales accounted for less than fifty percent, the price of the crude from that field and of that quality will be the arithmetic average of a) the simple arithmetic average of third party sales as determined above and b) the simple arithmetic average price per barrel at which one or more crude oils of similar quality to the crude oil are sold. Such price is determined by calculating the mean of the high and low FOB price or prices for each day of those crude oils as quoted in Platts Crude Oil Market Wire daily publication.
It does not end here however as there are several caveats. For example, in the determination of the final price a whole range of technical factors are taken account of: differences between the crude oil and the crude oils quoted in Platt’s, for quality, API gravity, sulphur, pour point, product yield as well as differences in quantity, delivery time, payment and other known contract terms; and the market area into which the crude oil is sold should it be different from the area used for Platt’s.
The Agreement further provides that the selected crude oils are to be agreed by the Contractor and the Minister before each calendar year and in making the selection preference will be given to crude oils of similar quality to crude oil from the relevant field. The Article provides that in determining quality, factors such as gravity, sulphur and metal content, pour point and product yield, all technical but quantifiable measures, are to be taken into account.
These rather complex calculations and considerations will require some mechanism on Guyana’s part to ensure that it receives the right sum for its share of production. In the event of a dispute or difference between the Government and the Contractor which they are unable to resolve, they must then appoint a sole expert under Article 26. Yes, oil can get messy.