The 2016 Petroleum Agreement has been a source of grief, anger, disbelief and shock to the average Guyanese whether living inside or outside Guyana. The insulting 2% royalty, the contrived US$18 million for legal fees masked as a signing bonus, and the Government paying the oil companies’ corporation tax liability have evoked extremely strong emotions. It cannot be surprising therefore that some commentators find the Agreement so lopsided that they wonder publicly whether the Government will get anything out of the Contract, as least for some time to come.
In my opinion that extreme level of pessimism is not only not justified but is actually counterproductive.
On the other side of the coin are those like Dr. Henry Jeffrey and Professor Clive Thomas who advocate for direct, unconditional cash payments. In contrast with the pessimists, Thomas boldly mentioned the figure of US$5,000 per household per year which would cost over US$1 billion per year. Later on, Mr. Tacuma Ogunseye moderated Thomas’ generous call by placing a ceiling of 2% to 5% of the gross revenue of Government to meet Thomas’ call.
The saying that if something is too good to be true, it probably is not true applies with great force to Thomas’ bold call. Thomas is of course a highly regarded economist who at one time matched the best in the region. One expected that he would have followed up his call with a carefully worded submission on behalf of his party, the Working People’s Alliance. Unfortunately, as academics sometimes do, he appears to have moved on, leaving the WPA and his colleague Tacuma Ogunseye to advance the matter. That is most unfortunate. But maybe all is not lost.
The Government has put out what it mistakenly calls a Green Paper – it is really a White Paper – stating its intention to establish a single Natural Resource Fund for achieving the multiple objectives of intergenerational savings, stabilisation, and investing in development priorities. Not only is this Paper silent on anything like cash transfers – conditional or unconditional – but it seems to have been written entirely by the multilateral financial institutions with no direct Guyanese input. If the WPA and Thomas should now abandon its responsibility to advance the Direct Cash Transfer – at whatever level and with whatever conditions – then it will find it difficult to rebut any accusation that it was neither responsible nor serious.
Testing the numbers
Meanwhile I have tested both Thomas’ and Ogunseye’s numbers using a range of assumptions concerning the price for a barrel of oil and of the cost of production and have had to conclude that any suggestion of a US$5,000 per household is simply absurd, accounting for more than 100% of projected government’s oil revenue in 2020 and 2021, coming down gradually as volume of production and the government share increase.
In other words, Thomas’ higher number has to be disregarded and here is why, using estimates of recoverable cost per barrel ranging in multiples of $5 from US$30 to US$50, and of revenue per barrel in multiples of US$10 ranging from US$50 to US$80 although the price can in fact go upwards of US$100 per barrel depending on major international events impacting on oil supply it will be unlikely to stay that way for any extended period.
I hasten to add that my assumptions are rough estimates and ignore what management accountants like to refer to as the behaviour of cost. Both theory and practice have established that the level of production has a direct bearing on costs as higher production causes the per unit cost of fixed expenses to decrease while in relation to variable expenses the unit cost of production is constant.
Apparently, the Government sees no insult or embarrassment that Exxon has refused to share projected costs and production and revenues with the citizens and the Government of Guyana with which the company boasts on its Facebook page to be in partnership. Here are some of my numbers stated in US Dollars except where indicated otherwise.
The lowest amount which the Government will receive per barrel is US$5.70 which can happen on any occasion when the oil price is US$40 and Cost Oil is equal to or greater than US$30 or per barrel. Remember that the minimum percentage which the Government will receive is 14.25% of the total revenue. Or to put it another way, once oil price is US$40 and cost oil is not less than US$30 per barrel, the Government take will be US$5.70 per barrel.
At a price of $50 per barrel and cost oil at $30 per barrel, Government’s take will be $10.80 per barrel, falling to $8.35 per barrel if cost oil is $35 per barrel and to $7.13 per barrel if cost oil per barrel is $40 and above.
At a price of $60 per barrel, Government take will range from $8.55 per barrel if cost oil is $50 per barrel to $15.90 if cost oil is $30 per barrel. Similarly, at a price of $70 per barrel, Government take will range from $11.20 per barrel if cost oil is $50 per barrel to $21.00 if cost oil is $30 per barrel. Finally based on the revenue and cost assumptions I have made for purposes of this column, if revenue per barrel is $80, Government’s take will range from $16.30 per barrel to $26.10 per barrel.
Taking the range of variables and using Ogunseye’s 2% to 5% of Government’s gross revenue from the Exxon/Hess/CNOOC Petroleum Agreement, the amount available per household can be as low as $23.78 per year where the oil price is $40 per barrel, cost of production is $30 per barrel and production 120,000 barrels per day. When that figure goes up to 750,000 barrels as is likely in the latter part of the next decade, 2% of gross revenue will go up to $148.61 per household per year. At the upper end of the scale of assumptions, 5% of Government take of 750,000 barrels per day with the price at $80 and cost at $30 will give each household $1,701 per year.
I say with much hesitation that Dr. Thomas suggestion of US$5,000 per year per household as a direct cash benefit to each household was a good idea ruined by the unusual failure of Thomas to test his numbers which left him woefully exposed. On the other hand, I have heard the criticism that Dr. Thomas’ call was really to divert attention from the very bad Petroleum Agreement signed by the Government of which his party is a member. Whichever is the case, Dr. Thomas has uncharacteristically taken a good idea and then discredited it himself.
Conditional direct cash transfers are necessary in the face of the harsh poverty faced by so many of our citizens. While it ought to be one element of the proposed Sovereign Wealth Fund, advancing it and convincing President David Granger requires intellectual leadership which Thomas has long offered.