Every Man, Woman and Child Must Become Oil-Minded (Part 50)

Three years on – is our country ready?

Introduction

Inspired by the May 20, 2015 announcement by ExxonMobil that it had made the largest discovery of petroleum resources for that year off the coast of Guyana, this column with the title Road to First Oil began, coincidentally, on May 26, 2017 and was expected to run for approximately twenty-five weeks. In fact, today’s column is the 50th in the series and there seems to be no reason why the Daily Editor would not wish to continue it indefinitely, albeit with a change in the contributor at some future date.

If for no other reason, the media and civil society need to guard against the seemingly single-minded pursuit of an oil economy to the exclusion of what President Granger has dubbed the six curses of Guyana – sugar, rice, bauxite, gold, diamonds, and timber – the essence of the Dutch Disease.  In fact, there is little evidence of any conscious effort by the Government in the past three years to prevent the Dutch Disease from afflicting the country.

The purpose of today’s column is to assess the progress and preparation Guyana has made to being a petro-state following the first announcement made more than three years ago. The declared reserves at that stage of approximately eight hundred thousand barrels of oil has now jumped to at least four times that number. This is huge and puts Guyana among the world’s top oil producing countries measured by reserves per capita of population. But when it comes to petroleum, to use the language of Portia in Shakespeare’s Merchant of Venice, Guyana seems to be twice blessed – as volume increased so has the price for crude oil which has increased by approximately 40% in the last three years.

Back of the envelope calculations

The convergence of the stars means that (even) if prices stay as they are, Guyana can expect to receive more than the minimum of 14.25% of the gross revenue to be generated from the production and sale of oil. In fact, some back-of-the-envelope calculations on the assumption of an average price of US$70 and average production cost of US$35 per barrel would accrue to Guyana approximately US$19 per barrel made up of royalty of US$1.40 per barrel and profit oil of US$17.50. 

Proper planning and some quality work by our economists three years after the first announcement and two years before First Oil should have allowed us to have better than back-of-the-envelope calculations. By now, the Government of Guyana should have engaged the oil companies on their cost of production and their estimates of what profit oil is expected to be. The oil companies cannot have it both ways – in one breath talking about a partnership with the Government while simultaneously concealing information vital for planning purposes by the Government.

It is only after this kind and quality of work that the country can talk about a Sovereign Wealth Fund rather than to treat it as some kind of legal instrument as the Cabinet is reported as doing. Or make any rational decision on whether the volumes which have now been incontrovertibly established supports on-shore processing of the production. We must not forget that while the law makes it pellucid that all petroleum resources belong to the State, our Government seems to think they belong to Exxon and its partners.

The earmarked bonus

But let us return to what we set out to do – see where we have come in the past three years since the first announcement. The first major development was the forced disclosure on the Guyana-Esso/Hess/CNOOC Agreement after nearly eighteen months of obfuscation, denials and lies by Minister of Natural Resources Raphael Trotman and his colleagues of a completely new Petroleum Agreement in place of Janet Jagan’s 1999 Agreement. Trotman himself had justified non-disclosure on the basis of his elementary misinterpretation of a confidentiality clause in the 2016 Agreement which largely mirrored the relevant provision in the 1986 Petroleum Exploration and Production Act. 

The publication of the Agreement minus the Annexures came only after the revelation that the Government had received a signing bonus of US$18 million which it had stashed away outside of the Consolidated Fund. A legal action that this is in violation of the Constitution is now engaging the attention of the High Court. The annexures were subsequently released after further pressure was brought by the media but to date the Bridging Deed referred to in the 2016 Agreement has still not been released. Not released too are the terms of the farm-out Agreements signed by Esso with Hess and CNOOC/Nexen in 2014 for which Esso would have no doubt collected some not insignificant sums.

Implications of those pre-contract costs

The publication of Annex C was particularly interesting, disclosing as it did that the oil companies had spent US$460 million in pre-contract costs up to December 31, 2015 all of which was fully recoverable as cost oil along with expenditure between January 1, 2016 and June 2016 when the new contract was signed. What made the pre-December 2015 pre-contract cost particularly interesting and justified a call for an investigation into the sum asserted was that the total amount not only did not add up to US$460 million, but also that it excluded any sum recovered by Esso from the various side agreements it signed with the two other oil companies in 2014 and a similar agreement with Shell a few years earlier.

Guyana laws have a term – fraud – where a person claims more than s/he is entitled to but our Government seems unwilling to exercise its right – and indeed its duty – to verify the amount allegedly spent by Esso and its partners.

As this column has shown, the Petroleum Agreement contains some other egregious provisions of which the four most offensive are (1) the stability clause; (2) the power of a Minister to bind successive governments in perpetuity without even the façade of parliamentary cover; (3) self-insurance by the oil companies against all risks; and (4) incredibly applying pre-discovery conditions to a post-discovery situation. All the apologists who decry others as pessimists and prophets of doom should have the courage to justify such reckless action by Raphael Trotman which has received the full-throated support of Foreign Minister Carl Greenidge and President Granger. 

Recklessness on a historically unprecedented scale

It is clear to anyone familiar with contracts made by any Government in this country since 1966 that this is the most lop-sided, reckless and costly contract since Independence, bar none. Indeed, in terms of revenue forgone, it may not be an exaggeration to say that this Agreement will cost Guyana more than all other contracts signed by all other governments in the history of this country. The Granger Government has undone all the nationalisation contracts engineered by the late Forbes Burnham when he bought valuable assets for G$1!

Meanwhile Trotman, for all his unbelievable lack of performance remains as Minister, either because of his loyalty or because of some rule that Ministers in a coalition Government cannot be fired! And he remains as the chief spokesman on petroleum months after responsibility for petroleum was transferred to the Ministry of the Presidency!

Let us not forget that Minister Trotman has not passed a single piece of petroleum legislation in three critical years, nor has he taken the elementary step of appointing a Chief Inspector as required by the Petroleum Exploration and Production Act. If Minister Trotman had taken the time to read the relevant legislation, he would know that Guyana has no environmental protection legislation specific to the petroleum sector, arguably as important for its existential implications and the fiscal terms are for the national budget and the economy. 

Another major omission or failure by the Government is its failure to conceptualise and articulate a policy on the domestic oil price post First Oil. We have been told for decades that our agro-industrial sector is being retarded because of electricity costs of which fuel price is a major component. Surely the Government cannot wait until 2020 to formulate a position.

Another disturbing development is not only the silence of civil society but how easy it has been for Exxon to buy their loyalty with a rental or services contract here or a donation there. While for some of the businesses it was a matter of straight dollars and cents – and I am particularly saddened to see how Oil Now has become no more than an Exxon’s mouthpiece – there can hardly be any justification for entities like Iwokrama and Conservation International to take money from the oil companies. No wonder that they have been so silent on the flawed Environmental Impact Assessment study which contained some highly suspect information and conclusions.

Conclusion

The over seventies like me recall the days prior to Independence when the initials of our colony were caustically referred to as Bookers Guyana and for the less old ones when MacKenzie was described as a company town. At the rate at which we are developing the oil sector, Guyana will soon become a company country, with Exxon beyond the reach of our laws, our Constitution and our Parliament. 

It is perhaps not an irretrievable situation but clearly there needs to be manpower changes and more leadership from the President. He needs to take charge before it is too late.   

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