Dear Editor,
A writer, in a recent letter to the editor, asserted that “oil companies pay royalty on the petroleum produced” and used that assertion to juxtapose a lament that Guyana’s royalty will instead be paid on “petroleum produced and sold.” Then, with a ten-fold multiplication error, ($400,000 multiplied by 50 is $20 million), the writer suggested that on sales of US$200 million, Guyana could conceivably end up with zero royalty. Or, as the writer put it, “Two per cent of nought is nought.”
It is my experience, practice and understanding that royalty is paid on the revenue generated from products that have been sold. I have been receiving a small royalty cheque every month for the last 29 months from an oil company that leases my mineral rights. The royalty is based on a percentage of the total sales of oil and gas for the preceding month. My royalty rate is much higher than Guyana’s but to be fair, I am not entitled to any of the profits from the operation. But I will take a higher royalty over a share of the profits any time because I do not understand or care to learn the intricacies of joint interest oil and gas accounting.
I have been on the other side of gas sales, where a corporation of which I was chairman of the board of directors for 18 years, paid royalty for methane gas recovered from large, cased-in, municipal landfills. We paid five large municipalities in Texas and Louisiana their royalty based on a percentage (again much greater than Guyana’s) of revenue from gas sold. It was always calculated on sales, never on volume produced. We had several instances when, due to hurricanes or flooding in Louisiana, or other unplanned outage, we were unable to sell the gas produced because the buyers’ factories were flooded or out of commission, and therefore did not need our for-industrial use-only gas. Since we did not sell the production, there was no royalty paid, or expected, since both parties knew that royalty was based on actual sales.
It is also my understanding, though this is peripheral to oil and gas, that my author friends get their royalties based on books sold, not on the number of books printed.
The Guyana contract states that Guyana can choose to receive its royalty either in cash or in oil. I hope that Guyana elects to get it in cash, at least initially, until it acquires some experience in oil trading. At a later stage, it might be more advantageous to accept the royalty in oil, for example, if the selling price was hedged on the futures market at a price significantly higher than current prices.
Editor, there are many flaws in the Petroleum Sharing Agreement between the Government of Guyana and Esso Exploration and Production Guyana Limited, Hess Corporation and Nexen. And if the term “renegotiation” is taboo, then the Government of Guyana might want to use the American euphemisms for this activity, widespread and commonplace in American business, to “revisit” the contract, to “tweak” the numbers, so as to make some “win-win” amendments to it.
ExxonMobil did that, just last month with the Government of Angola; and of all people, guess who else? SBM Offshore, the contractor for the Floating Production Storage and Offloading platforms for use in Guyana. Over what? Liza Destiny. Operating where? The Stabroek Block. So, who said that ExxonMobil does not renegotiate contracts? Right. They revisit them. And amend them.
The following is taken directly from SBM Offshore’s 2019 Half Year Earnings report dated August 8, 2019: “Liza Destiny contract covers 10 years of lease and operate but based on discussions with the client, it is expected that the client will purchase the unit after a period of up to two years of operation.”
Sounds to me like Exxon and SBM are “re-visiting” their contract to amend the length of the Lease and Operate from ten years to two years. Hey Guyana, pay attention to the cost recovery implications, particularly the schedules, when that happens!
So why is Guyana scared to even attempt to get an equitable deal for Guyanese? My wife is from Jamaica, and she explains matters like these with a simple Jamaican saying, “Duppy know who to frighten!” There should be no fear that ExxonMobil will walk away from Guyana. It is my opinion that their partner, Hess’ survival depends on the Stabroek Block and, if nothing else, Hess will not let them off the hook.
There are people who claim moral supremacy based on the “inviolability of contracts.” I refer them to the law of equity in contracts. The lopsidedness in knowledge, expertise, and preparedness; and the asymmetry of confidence and resolve are clearly evident in most of the important details within that contract.
Editor, please allow me to assure those who assume that I am angling for a piece of Guyana’s oil pie that I am contented with my tiny sliver of the American pie. I believe that Guyana’s oil bonanza should benefit those Guyanese living in Guyana. I am none of these. I want none of yours.
Yours faithfully,
Dr Tulsi Dyal Singh
