Economist Tarron Khemraj says that from all of the analyses he has seen of the oil deal for the Stabroek Bock, Guyana will end up getting just around 37% of the gross revenues while ExxonMobil and its partners will cream off the rest.
In his Business Page column in yesterday’s Sunday Stabroek, Khemraj also suggests that there may not be much room for Guyana to back out of the 2016 Production Sharing Agreement (PSA) with Esso Exploration and Production Guyana Limited (EEGPL).
The APNU+AFC government’s secret renegotiation in 2016 of the 1999 PSA has evoked condemnation from prominent individuals and parts of civil society. The much-maligned agreement was concluded without expert negotiators being employ-ed and after the discovery by EEGPL of reserves of over one billion barrels of oils in the Liza block with the prospect of more finds. The reserves have now ballooned to over three billion barrels of oil with more likely to be added. However, Guyana’s take will remain fixed to the 2016 terms no matter how much oil is found.
In his column yesterday, Khemraj adverted to the recent arguments presented at a private sector forum by Minister of Business Dominic Gaskin about how much money Guyana could expect.
“The Government of Guyana will receive in the first year of oil production 2% of the gross value and 50% of profit oil. Based on the production of 100,000 barrels per day and at today’s oil price of about US$60 per barrel, this amounts to in excess of US$300M in government revenues in the first year. That’s not chicken feed,” he added.
He compared the revenues that the oil and gas sector would bring in to Guyana’s gold sector saying that the country’s current top export earner will pale compared to the returns from oil and gas.
Khemraj in his column said that Gaskin sought to shift the debate away from the percentages, rates and bonus to the expected aggregate inflow of revenues the government is likely to realize once production gets to 500,000 barrels per day. He added that Gaskin made a good point that Guyana does not have the capacity to exploit this natural resource and therefore, a partner with finance capital is needed. Khemraj noted that Gaskin also said that going back on the contract will send a message of uncertainty to foreign investors.
Khemraj also pointed out that Kimberly Brasington from the local affiliate of ExxonMobil echoed a similar perspective about reneging on the contract.
“While Mr Gaskin was more aggressive in his posture, Ms Brasington delivered a subtle threat. She made it clear that changing the contract now will turn investors away from Guyana. The threat is credible since this is the way world capitalists operate. They not only read the news and follow keenly the business and financial press, but also meet at country clubs and golf courses. If they want to disrupt your market access they will do just that”, Khemraj asserted.
He added “Minister Gaskin does not want us to consider the gross revenues because the percentages and the signing bonus are in favour of ExxonMobil. All the market analysts and the economic analyses I have seen indicate that Guyana’s fiscal intake is under 40%. In other words, after accounting for royalty and 50/50 profit share, Guyana gets about 37% of revenues over the lifetime of the project. The bonus is just too low. It is clear the Granger government did not do the research. Furthermore, no one is asking for an exorbitant bonus. When I calculated a reasonable bonus, I accounted for the fact that ExxonMobil has a specific cost of capital or discount rate. A bonus of around US$200 million would not have disrupted its cost of capital”.
Khemraj further said that some kind of proportionality could have been negotiated on the government’s side in the 2016 agreement for when the market price exceeds certain upper thresholds. He noted that if the price increases to US$70, US$80 or US$100 per barrel, Guyana still receives 50% of profit after accounting for unit or average total cost.
The economist added that he has been unable to get a sense of how long it will take for ExxonMobil to recoup its fixed costs of exploration, development and pre-contract expenses. He said that he believed that Annex C of the contract is written to confuse the general public and allows for enough leakages so that it will be hard to pin down the average cost. He added that Annex C describes all costs as exploration costs, development costs, operating costs and the pre-contract expense of US$460.2 million.
“There is no cut off period for when exploration, development and pre-contract costs are recovered. This is important from a time value of money perspective and for the long-term average operating cost. The latter will have a direct impact on the 50/50 profit share. Furthermore, it is surprising from a non-discounting valuation standpoint why ExxonMobil would want to spread out long into the future its pre-production expenses such as development costs, exploration costs and the pre-contract expense. This just adds uncertainty to what exactly is the average total cost, which using the lingo of Annex C is the average (or per barrel) cost of exploration, development, operating and pre-contract expenses”, Khemraj said.
Noting Brasington’s assurance that ExxonMobil will be fair with respect to the average total cost, Khemraj said awareness of the global corporate governance framework under which Exxon conducts its business is important. He pointed out that Reuters reported on March 7 that ExxonMobil’s operating margin – the difference between revenues and variable costs – is 5.1%, a number significantly lower than the industry’s average of 13.5%. In the same article ExxonMobil made a commitment to increasing its operating margin by 2025.
“ExxonMobil played its best strategy that allowed the global giant to win a contract in its favour. However, a contract is a contract and there is probably not much room now to get out of it without incurring the wrath of the global capitalists. The Guyana government has signed off on a contract without seeking more information through a more inclusive approach. The APNU+AFC government played a strategy with limited information, which no doubt was motivated by pure political calculations….The result is Guyana will not obtain an optimal amount of revenues while the demand for these will be great’, he stated.