Economists, Janki pessimistic about oil future

-around US$900m in costs already racked up even before first barrel

Guyana has struck oil but for the panelists at a discussion on Wednesday there is no reason to celebrate. In fact one panelist argued that there are actually grounds for saying that government acted illegally in signing to such terms.

On Wednesday, the Moray House Trust held a panel discussion where economists Collin Constantine and Tarron Khemraj along with international lawyer Melinda Janki sought to answer the question ‘What will oil do for Guyana?’

According to Janki, oil will impoverish Guyana; Constantine argued that the current political system is likely to create a social crisis of rising inequality and resentment fostered by grandiose promises while Khemraj argued that a developing oil industry is apt to retard the growth of other industries in a case of Baumol Cost Disease. In short according to Khemraj, Guyana is caught in a prisoner dilemma trap between a rock and a hard place.

Janki began the evening’s discussions with a searing attack on the provisions of the 2016 Production Sharing Agreement (PSA) signed between government and the local ExxonMobil subsidiary.

Later in response to questions she stressed that there are likely several illegalities in the agreement.

“If you look at the things government has agreed to do you have to find authority for everything that a minister does…you must have statutory authority or there must be some legal principle…the question in all of this is what authority the Minister had and it is for people to start asking that and if they don’t get a satisfactory answer to take the matter before the judges because ultimately the only opinion that matters is the opinion of the judiciary,” Janki explained.

According to Janki no matter what beautiful dreams government sells to the population the reality is that the agreement itself makes it clear that Guyana will not get a share of vast profits and the actual royalty is less than 2%.

Guyana, she argued has to pay the costs of oil exploration and production by Esso Exploration and Production Guyana Limited, Hess and Nexen over 600 blocks amounting to 26,806 square kilometers of Guyana’s exclusive economic zone, costs which can run into billions of US dollars.

She stressed that as at October 7, 2016, the Government’s attempt to sell Guyana’s oil has cost Guyana US$900 million in costs normally paid by the oil company doing the exploration.

With specific reference to clauses included in Annex C of the agreement, she noted that pre-contract costs from 1999 to December 31, 2015 were set at US$460 million, a sum Minister of Natural Resources Raphael Trotman has agreed that Guyana will pay while a second set of pre-contract costs from January 1, 2016 to October 7, 2016, the date when the Petroleum Prospecting Licence was granted, is roughly US$400 million.

The costs don’t end there as from October 8, 2016 onwards Guyana pays recoverable contract costs for the oil companies.

“There is no cap on the time period for recovery of the costs. No cap on the amount of costs that can be incurred,” Janki told a packed room.

In the absence of these caps exploration and development costs include every well drilled whether successful or not with the likelihood that each oil–field will be expensive. 

“Guyana pays for pipelines, well heads, equipment, offshore platforms, terminals, direct and indirect services including vehicles, aircraft, power plants, housing, furniture, community and recreational facilities…Guyana pays the legal costs incurred by Esso, Hess and Nexen – even the costs of their in-house lawyers, Guyana pays for expatriate employees to travel to Guyana and rent houses, Guyana pays labour costs including any bonuses that the management decide to pay themselves and Guyana even pays for employees outside of Guyana including employees of companies that are affiliated to the oil companies,” Janki noted, adding that “Guyana pays for every poor business decision and every extravagant business decision”.

Did government read and understand this Petroleum Agreement before signing it, she questioned before noting that once the oil companies rack up huge costs, they can then deduct 75% of those huge costs from the cost oil and remit to Guyana 50% of what remains i.e. profit oil providing of course that  costs do not exceed the revenue. If cost exceeds revenue then they are carried over to the next month and so on.

“In fact after the first month there may not be anything from Guyana because of the costs from the previous months. There is no ring fencing. If Esso, Hess and Nexen spend money on a field that is dry, they simply pass the cost on to Guyana,” she stressed.

For Janki, a key disadvantage for Guyana lies in the fact that it relies on these companies for information, notably the amount of oil in Guyana’s reserves is whatever Esso – ExxonMobil’s subsidiary –  announces it to be, oil production is whatever Esso, Hess and Nexen say that it is and the amount of oil that Esso, Hess and Nexen reasonably require for production is whatever they say it is.

“They don’t have to pay for it. This is free oil,” she lamented.

Further after deducting free oil from the produced oil, the remainder is then sold by Esso, Hess and Nexen who set the price which does not have to be the same as the price quoted on the oil markets.

“ExxonMobil is boasting to its shareholders that production costs in Guyana are low. Perhaps they should have said production costs in Guyana are less than a quarter of normal costs because they get back 75% of whatever costs they say they incurred, they get as much free oil as they say they need and they don’t pay any taxes,” she supplied, before attacking the proposed 2% royalty as “2% of an unknown figure made up of an oil production number supplied by Esso, Hess and Nexen sold at a cost calculated by Esso, Hess and Nexen minus a number provided by Esso, Hess and Nexen for fuel and transportation.”

In this case Guyana can get the royalty in cash but the contract says that the Minister can give the royalty back to Esso, Hess and Nexen.

Janki’s presentation was distressing for some in the audience with one member challenging her presentation as “nothing but doom and gloom.”

He noted that his reading of the contract shows that Guyana is likely to earn billions. In response the lawyer directed him to read Annex C and D.

“Everything is in the agreement,” she stressed.

Constantine’s presentation “Oil Expectations and Crisis” offered a similarly dismal view of the impact oil can have on the Guyanese society.

According to Constantine, a doctoral student at Kingston University, available data justifies the pessimistic view.

 He noted  that across the world the discovery of oil has led to social crises such as increased inequality, resentment and ethnic strife.

“Citizens expect more spending and there is also an upward bias of expectation because of political manipulation with contesting parties playing to this sentiment in electoral cycles,” he noted.

The results of these expectations include a debt buildup as government tries to meet expectations, apathy when expectations are not met and exchange rate depreciation if it is met. There is also a risk of wasteful public investment with capital works exceeding absorption capacity and rent seeking as the private sector attempts to keep up. 

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