Non-Associated Gas in the Esso/Hess/CNOOC-Nexen Contract

Every Man, Woman and Child in Guyana Must Become Oil-Minded Part 45

Introduction

After the major financial issue last week, we return today to the mundane issue of the provisions on non-associated gas in the 2016 Agreement which the three oil companies signed in June 2016. Those provisions are contained in Article 12.2 and have four paragraphs. Recall from Column 43 that non-Associated Gas is defined as “natural gas or gas other than associated gas”, i.e., gas derived from a reservoir producing predominantly crude oil.

It is probably necessary to reflect on Article 8 which embodies section 30 of the Act. That section requires notice to be given forthwith to the Minister of any discovery in the Contract and to inform him of the tests the Contractor proposes to run on the discovery and for the Contractor to submit test results to the Minister.

In its notification of the Discovery, the Contractor is required to inform the Minister whether s/he believes that such discovery is potentially commercial under the current Agreement terms, or if Contractor requires revised fiscal terms or contract terms under the Agreement to proceed with a Development Plan. It is unclear what revised fiscal terms the Contractor will require since all imports are duty and tax free and a range of income is either exempt from taxes, or better for the Contractor, is paid by the Government of Guyana. 

Friendly, good faith negotiation

The Agreement allows the Contractor to propose revisions to the Agreement to the Minister which will constitute the basis for entering into good faith negotiations leading to better terms which will provide the Contractor with a commercially competitive return on investment for development of the Non-Associated Gas discovery. The Agreement does not define what a commercially competitive return on investment is but it would be inconsistent and counter-intuitive if the numbers do not overwhelmingly favour the Contractor. 

Once agreed, such terms will become part of and be included as an annex to this Agreement, and not only benefit from the Stability Clause but will benefit from additional extensions under the Contract. For example, if a Non-Associated Gas field is known to have potential commercial value but cannot be developed because of market conditions, the period for retaining the field in the contract area can be extended for five years and if the time required for the market to develop and for the consuming facilities to be constructed for the gas field exceeds such extended period, the Contractor can request from the Minister a grant of further extended (unspecified) period.

There is more latitude for the Contractor with timelines determined under section 31 (1) regarding notification whether a discovery is of potential commercial interest, and 31 (2) regarding the application for a Petroleum Production Licence. How we came to pass an Act with such absurd provisions defies all logic but surely Minister Trotman did not have to apply such a discretionary power over such an extended Contract Area in a post-discovery oil contract.

And that is not all. Negotiations on revised terms for Gas can run for twenty-four months or such further time as mutually agreed! For emphasis, the Articles require that the negotiations must be friendly.

Cost recovery galore

With respect to costs, all such costs incurred in carrying out an Appraisal Programme are to be charged as Exploration Costs and are recoverable as contract costs. Similarly, all costs without exception, which are incurred by the Contractor outside the Production Area but which are associated with an approved Development Plan for an export gas project, including costs associated with utilisation of third-party infrastructure or construction of onshore processing facilities, are also Recoverable Contract Costs to be borne as Cost Oil before Guyana can receive its half share of Profit Oil.

Conclusion

It is almost painful to continue writing about what someone in a private email described to me as “almost uniformly among the world’s worst from the points of view of the resource-owning countries, and whose extended stability clause seems to prevent a reconsideration for 40+ years.” The tragedy is that Minister Trotman will face no consequence – personal, professional or political – for this unbelievably lopsided anti-Guyana Agreement.  

So on a final note for this week, the Contract gives the companies the right to use both Associated Gas and Non-Associated Gas in their Oil Field and Gas Field operations, including the right to re-inject for pressure maintenance and enhanced recovery without charge, fee or royalty!

Until next week.