Rational incentive
Based on the economics Nobel Prize winning theory of “incomplete markets”, my previous column posited that, the Parties to Guyana’s 2016 PSA have a rational incentive to re-negotiate the contract, if underlying conditions of the country’s petroleum sector drastically change. This holds true, in spite of declarations by the Parties not to re-open negotiations. The reason for this is that, from the oil companies’ perspective, their goal is to optimize profits for their shareholders, based on their global portfolio of assets and “risk-reward preference function”. The Government of Guyana’s (GoG) perspective at the project level is on whether the financial/social benefits derived from the sector are consistent with its risk level and the preference function it has set itself.
In this context, the performance outcome that matters most to the GoG, is the division of profits between the Contractor and itself. GoG share is known as the “Government take”. I had briefly referenced this metric in the conclusion to last week’s column. That take is the product of a negotiated outcome.
Government take
The take therefore, is not an economic statistic but a fiscal metric. When employed by serious analysts, they define it in order to avoid ambiguity. The metric is also recognized as a preliminary reference, when assessing governments’ negotiations effort. Additionally, analysts admit that: “comparing the take of different projects and/or different countries is a very difficult and often misleading exercise”.
