We need a more grounded, balanced analysis of the 2016 PSA

Dear Editor,

A persistent naiveté has pervaded much (not all) of the public comments on the 2016 Production Sharing Agreement (PSA). While I give due regard to the genuine concerns driving the comments, they have created, I strongly suspect, a misleading and incomplete understanding in the minds of many. It is not that one always disagrees with the criticisms of the PSA. It is that one is left stranded by the over-simplicity of the reasoning, the use of political rhetoric over objective analysis, and the disregard for or absence of basic comparative information.

In this letter, I do not intend to debate Ram, the editors of SN and KN, and the other contributors who have expressed dissatisfaction with the PSA. Instead, to broaden the discussion and to lengthen the trains of thought, I list below several points for consideration. The list is not meant to be exhaustive or to complicate matters, but if the matter is innately multifaceted, then it should be analyzed as such.

(i) Oil exploration is a high risk venture. Companies can spend hundreds of millions of dollars and find nothing. The more unproven the area (such as the Guyana offshore basin), the greater the risk—and the greater the requirement to incentivize that risk-taking. For an exploration company, that money is an opportunity cost. It is money a company could have spent in other countries. Only the company alone (not any host country) fully knows how its investment opportunities are ranked. For a company as big as ExxonMobil, such opportunities abound worldwide and such ranking is always being made. Guyana was and is not an automatic choice. Are Exxon’s recent moves in Brazil, for instance, going to divert dollars from Guyana in the near future? One also wonders if the highly-tipped but eventually dry well at Skipjack had been ExxonMobil’s first play in the Stabroek Block (instead of the lucrative Liza), if the company would have still been in Guyana today.

(ii) Guyana needs an investment regime that can compete with the rest of world to attract exploration in the first place (bear in mind that prior to the Liza well in 2015, there were only 13 previous offshore wells, the most recent being in the years 2012 and 2000); that can encourage the development of not only highly profitable fields but also small, geologically-difficult, or marginal fields (not all discoveries inevitably lead to production, as some may think); that can incentivize continuous production in the face of price dips and rising extraction costs as fields deplete. The context then is how can Guyana improve its attractiveness to inves-tors, first, to come and, second, to stay until the wells run dry. What should this competitive investment regime look like?

(iii) Companies take risks for rewards. What is a good reward/risk regime for an oil company in offshore Guyana facing an intractable border security threat; an unproven oil basin; extremely deep waters (in 2012, a well drilled by Repsol in Guyana waters had to be abandoned due to drilling complications even in shallower waters); and multi-year low oil prices?

(iv) Then we come to the need for Guyana to establish dominion over its maritime territory. Both the PPP/C (for the 1999 PSA) and the coalition government (for the 2016 PSA) must take credit if the strategy behind giving the world’s largest and most powerful oil company a massive concession smack against our western maritime border was aimed at establishing uncontested control and sovereignty through occupation. Not only that, the strategy must be to get companies to stay in those waters for decades and decades. Exxon’s current arena of activity within the Stabroek Block is focused in the safer eastern portion.  So, most likely, the company may still have some jitters over the border situation. After all, in 2013, the research vessel of Anadarko, a US oil company, was seized by the Venezuelan navy in our western waters.  Wouldn’t it be clever then on Guyana’s part to tweak its PSA to encourage companies to take on the risk of exploring and producing in the illegally claimed territory?

(v) We must not overlook the fact that the PSA awards a 50% share of production to the country as a baseline. Right now, with cost recovery pegged at 75% of production, Guyana’s take of production in the first phase is projected to be 12.5% from the 25% profit oil (disregarding here the 2% royalty). As Exxon recoups its past and new expenditures, a time will be reached where the 75% cost oil will be more than adequate to cover costs and will therefore lead to ‘excess’ profit oil. Guyana’s take will shift from 12.5% towards 50% of production. Of course, while this increase is likely to emerge sooner rather than later (given the touted high rate of returns of the Liza development), the difficulties in auditing cost recovery and the spending of new money (eg on additional exploration and FPSOs) will make the increase of Guyana’s share hard to project. Regardless, what is the problem with a deal that guarantees you an increasing share of profits?

We need a more grounded and balanced analysis of the 2016 PSA.

Yours faithfully,

Sherwood Lowe

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