Ministry silent on Exxon feasibility study for Stabroek Block – TIGI

The Ministry of Natural resources has for one month remained silent in the face of a request from the Transparency Institute Guyana Incorporated (TIGI) for clarification on whether ExxonMobil has submitted an economic feasibility study for its proposed Stabroek Block development.

In a press statement issued yesterday, TIGI President Troy Thomas notes that on March 29, 2017, the organisation wrote to Minister Raphael Trotman requesting the information in the face of the government’s stated intent to seek Extractive Industry Transparency Initiative (EITI) candidacy and the ministry’s evaluation of the company’s application for a production licence.

“Considering that the EITI is a global standard to promote open and accountable management of oil, gas and mineral resources, and knowing of Guyana’s stated interest in implementing this standard, TIGI wrote the Minister of Natural Resources,” Thomas explains before noting that a follow up to its request on April 27 yielded acknowledgment of receipt of the letter but no clear response about whether or not a response would be forthcoming.

Attempts to contact Minister Trotman and the ministry spokesperson for comment were unsuccessful.

The text of the letter, which was released by TIGI, notes that several factors make it likely that government is keen that the extraction and production of oil in the Stabroek Block would yield a return that is consistent with the expectations of Guyanese.

“Considering the structural stability of oil prices at low levels and their upward stickiness; the increases in US shale gas production; the “bearish” outlook for oil by industry experts; and the extreme uncertainty about a temporal extension of the Organization of the Petroleum Exporting Countries (OPEC) production cuts and the effectiveness of such an extension if it were to happen; TIGI imagines that the Government of Guyana (GOG) would want to know with a high degree of confidence that production licences are only issued for projects that are economically feasible,” the letter states.

It further argues that economic feasibility and the expected return would clearly depend on the size of margins, which in turn would depend, among other things, on the prevailing oil prices, while noting that a March 21 report from Goldman Sachs suggest that between 2017 and 2018, even with an extension of the production cut by OPEC, a record increase in non-OPEC production would prevent any significant increase in oil prices.

Minister Trotman was referred to Section 33 (1) of the Petroleum (Production and Exploration) Act of 1986, which notes that once given notice of the discovery of petroleum that is of potential commercial interest, the Minister may, by notice, direct the licensee to carry out, within a period specified in the notice of not less than two years, such prescribed investigations and studies as the Minister thinks appropriate for the purpose of assessing the feasibility of the construction, establishment and operation of an industry for the production of petroleum in the discovery block or blocks concerned.

TIGI explains that while this Section of the Act clearly gives the minister an opportunity to direct companies to carry out “investigations and studies” to assess the feasibility of the proposed project, the accompanying regulations make it clear that such investigations and studies include “economic feasibility studies relating to the recovery, processing and transport of petroleum from the discovery block or blocks in the prospecting area (Section 5 (1) (a)) of the Regulations made under the Petroleum (Production and Exploration) Act of 1986).”

The institute also states that it is aware that when profitability margins are tight, as they must be in the current economic environment, profit maximising companies will be inclined to take greater risks, especially if they are not contractually required to themselves underwrite those risks.

“Moral hazard issues tend to arise from (i) the private information companies have about exactly what risks and mitigation strategies are involved in a project such as the one taking place in the Stabroek Block, and (ii) the potential divergence of interests between the company and the host country, with the former generally putting profits ahead of concerns for safety and the environment, even while paying lip service to the latter concerns,” it explains.

TIGI specifically notes that in the case of the development of the Stabroek Block oil fields by ExxonMobil and its partners, production is being aggressively fast-tracked despite the persistently weak market fundamentals.

“Both the government and ExxonMobil (and its partners) have announced that production would begin in 2020, even though ExxonMobil will only be able to make a ‘financial decision’ sometime in mid-2017, according to its Country Manager, Jeff Simmons.

It is therefore all the more important for citizens, civil society and agencies such as TIGI to ensure that the coincidence of interests between the GoG and ExxonMobil does not belie the former’s commitment to our national interests in regard to both the financial returns and safety and environmental security,” the letter argues.

In light of these points, TIGI has requested that the minister share with it the types and particulars of the studies and investigations he has requested as part of the process for evaluating Exxon’s production licence application.

Additionally, it has asked to be informed if the documentation listed under Section 10 (e) of the “Form for Application for a Petroleum Production Licence” as prescribed by the Regulations accompanying the Petroleum (Production and Exploration) Act of 1986, and in particular subsection (f) of Section 10 (e), will be required in the evaluation of ExxonMobil’s application.

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