GRA does not have capacity to review oil contract costs, gov’t should hold approval for Liza 2 until issues fixed

Dear Editor,

It has been reported that the Guyana Revenue Authority (GRA) will review contract costs proposed by ExxonMobil for its work as a contractor to the Government in the Stabroek Block.

If the Government intends to undertake a rigorous review of the contract costs, this is not the optimal route.  Instead, the Government will be taking money from the people of Guyana and handing it to the foreign oil companies.

One might ask why we need to review these costs.  Why not trust the foreign oil companies to give us our share and not to inflate their costs (so as to increase their profits at our expense)?  Look at the countries that get exploited by foreign oil companies and their own corrupt politicians.  Those countries tend not to verify and check, often because their politicians are on the take, so they do not care about the people.  Then look at the countries where the people benefit and the environment is not degraded by oil: these countries tend to review and verify everything.

Below I outline the magnitude of the task of reviewing contract costs. I speak from experience: one of my jobs while working for a major oil company was to propose and negotiate costs with a government, and in another role, I challenged the costs being proposed by a partner (another major oil company).

The review of contract costs and the subsequent negotiations to reduce the numbers proposed by the contractor (ExxonMobil), is a highly specialised Oil & Gas subject area.  And it is not only the pre-FID costs (Final Investment Decision, or project sanction).  The following costs have to be reviewed, challenged and negotiated by the Government:

1. Proposed pre-FID cost of about US$ 460 Million.  These costs relate to work up to mid-2017, for seismic surveys, exploration wells, etc.  Only highly experienced Oil & Gas professionals can understand and review these costs.  Not the GRA.

2. Proposed capital costs (CapEx) for the Liza Phase 1 project (about US$4.4 Billion).  These costs are for building the facilities, such as the boat (FPSO), the production wells, the subsea pipelines, the shorebase, etc, and will be incurred from mid-2017 up to first oil in about late 2019 or early 2020.  Only highly experienced Oil & Gas professionals can understand and review these costs.  Not the GRA.

3. Proposed operating costs (OpEx) which might be about US$200 Million per year or less for Liza Phase 1 alone.   These costs will start at first oil and run for 20 years or more.  Only highly experienced Oil & Gas professionals can understand and review these costs.  Not the GRA.

And this is all just for the Liza Phase 1 project.  Similar costs and reviews for CapEx and OpEx will be needed for the Liza Phase 2 project and subsequent projects (associated with the other fields such as Payara, Snoek, etc).

The Ministry of Natural Resources (MNR) has already failed to review the US$4.4 Billion capital cost for the Liza Phase 1 project.  This review should have been performed prior to the approval of the production licence in mid-2017. 

If one assumes the capital cost for the Liza Phase 1 project could be reduced by 20%, which is not unreasonable, then the MNR effectively gave ExxonMobil US$880 Million of Guyana’s money for no reason. That is more than four Skeldons.  The current government should be trying to compete with the former government in other ways, in ways to help Guyana, and not like this.  Even if the percentage is 10% and not 20%, why would the MNR do such a thing to the people of Guyana?

I believe a real and substantive review still needs to be performed of the Liza Phase 1 project cost before approval of the production licence for the next project, i.e. before approval of the Liza Phase 2 project.  Even though the Liza Phase 1 project has been approved, the Government should withhold approval of the Liza Phase 2 project until they fix these issues.

The GRA does not have the capacity to review nor even the capacity to oversee the review of contract costs.  Furthermore, the GRA should never try to develop the capacity to play such a high-level role.  The role of a tax authority is tax, and tax is only a small part of the contract costs.  Do not get me wrong, the GRA has a very important role to play, but a role focused on tax issues.  Other Government Oil & Gas entities, which do not yet exist or yet have capacity (including the new Department of Energy), should be responsible for reviewing and approving contract costs.  Hence no costs should be approved until Guyana has developed these entities and staffed them with the appropriately qualified O&G professionals.  ExxonMobil can wait a bit whilst Guyana finally starts to get its shop in order.

Yours faithfully,

Dr. Jan Mangal

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