The man from Exxon has described the oil agreement with Guyana as “fair” since this country is a new kid in the sharp-elbowed petroleum world. Even though I have a more expansive definition of fair, I am compelled to agree with Mr Henson.
Guyana arrived at the negotiating table with the weighted bags of multiple handicaps; all have costly premiums affixed. It is a poor country with limited infrastructure. That is a subtraction. It has very few pertinent skills or expertise in things related to oil, whether underwater, upstream, or downstream. This is the equivalent of starting from scratch, if not lower; there are no mitigating factors, given the country’s starting point with its back to the wall and from the disadvantage of being inside a hole. Some more percentage points are lost. The country currently has one viable gold sector, and that is public knowledge; other once major industries are either dead or dying on their knees. This is a serious disadvantage that leaves no fallback option; there are no counterpunching reserve chips. Deduct more points from projections and dreams; separate textbook fantasies from tough immovable reality. To proceed further, there is the debt load and the ugly sociology of domestic politics. All of these represent accounting, as well as actuarial liabilities.
While all these mechanics are in play, there is that angry elephant in the conference room, which is visible and cannot be tiptoed around; at least not on the Guyanese side of the table. It is that thorny border matter. That is an expensive presence and proposition that cannot be denied, and which has to be regarded by any prudent investor as a contingent liability, a real enormous one. The operative words at the table are: recognize, deduct, reduce.
It goes without saying that these economic and risk premiums are not beginning from a full hundred per cent pie. The calculations and subtractions start from what is left after Exxon has factored in its own cost bases and profit projections under a host of expense and pricing regimes. As an aside, the company should get significant benefits from the new Trump tax law. Regardless, Guyana sits across the table without qualifications, experience, and even a good story to tell. In a serious job interview, this is tantamount to appealing to potential and living on a promise, with the hope that listeners will risk taking a chance and plunge.
I quickly acknowledge that this illustration is incomplete, as there is all that liquid bubbling below the seabed. That is more than a promise; it is real. Except that it has to make the sophisticated expensive journey from under the mud to inside the bank. Exxon knows all of this. It also knows that the Chinese and Elf Aquitaine and Shell might all be interested. Guyana knows, though, none of the others bring either the clout of Uncle Sam, or the comfort of proximity, or the memory of being stiffed. And, of course, there are those remnants of the now tattered Monroe Doctrine to brandish in muted 21st century fashion.
When the above are added up, the result is what is now termed “fair.” As matters go, it is painfully thin, but is what the circumstances will allow and bear. Like other citizens, I wish there is more on the numbers side for this country. Then I remember the many minuses that are in the mix, and which have been conveniently ignored, or given short shrift in some corners. I remember, too, from a different personal context how microscopic such calculations and negotiations can be. Many times, they are not about big ticket percentages, but of dog-and-cat combat for basis points. To the unfamiliar, a basis point is one hundredth of one per cent. Those in the driver’s seat never give up a single one, if it can be helped.
In this instance, Guyana is in the passenger seat. It is not a first class one. To those who wish insight into Big Oil and its history and workings, I recommend Daniel Yergin’s monumental The Prize. The birth throes of the Middle East and elsewhere from over a hundred years ago are now Guyana’s to be lived.