Dear Editor,
I refer to a letter published in your letter columns on July 1, 2022 regarding Guyana’s share of revenues from oil currently produced in the Stabroek Block. The letter is titled “A fair equilibrium for Guyana’s profit share must focus on a New Production Sharing Agreement”, and appears to have been inspired by a report prepared by an accounting firm that produced recent financial statements for Esso Exploration and Production Guyana Limited (EEPGL). There are several arguments advanced by the writer which I fear may add to, rather than reduce, much of the confusion surrounding this subject.
The writer takes issue with a particular claim made by the firm regarding Guyana’s share of profit and royalty relative to the net profit of the contractors, suggesting that such a measure does not take into account the much larger share of total revenue captured by EEPGL, and is therefore deceptive and misleading. Not having read the report referenced by the writer, I am unable to agree or disagree with him on this point. My concern, however, lies with the alternative measure which he has kindly computed for the benefit of your readers. This model essentially shows that Guyana receives 14.5% of Total Revenue while the contractor receives the remaining 85.5%, indicating that the contractor’s share of Total Revenue is 5.896 times that of Guyana’s share and representing, in the writer’s view, “a blatant inequity that must be immediately rectified” in the interest of fairness. Without any reference to the cost of production, this is a complete non sequitur and does nothing to enlighten the reader on this very important matter. To be clear, I am not commenting on whether or not Guyana receives a fair share of the oil produced. I am simply saying that one cannot draw such an inference from the analysis provided.
The writer subsequently introduces cost, but in the context of the 75% cost recovery ceiling allowed by the Production Sharing Agreement (PSA) between our government and the contractor. This cost specification, he asserts, is outrageous, because a cost function ought not to include the price of the product, the implication of which is that, as the price of a barrel of oil increases, so does the cost to produce it. Unfortunately, the 75% cost recovery ceiling is not a cost function. It simply represents the maximum percentage of the total value of oil sold that the contractor can reclaim in any given month as a cost (exploration, development or production, past or present). Even if cost recovery were capped at 25%, the recoverable costs, in absolute terms, would increase as the price of oil increases, and the writer’s rationale would remain unchanged – and just as baffling. It bears noting that the higher the price of oil, the greater the cost recovery in absolute terms, meaning that pre-production costs can be recovered faster during a period of high oil prices than during a period of low, or even average, oil prices. Such a scenario is actually good for Guyana. My comment here does not reflect a position on how high the cost recovery ceiling should be set, but rather, that there is nothing outrageous about such a specification.
The writer also laments the carrying forward of allowable costs not recovered in any given month due to the 75% ceiling, warning that the expectation that, at some point, the past costs will be recovered and Guyana will then enjoy more than its current 14.5% share of total revenue, is “at best a false hope”. His reasoning, here, is that EEPGL will be reluctant to relinquish control of its 75% share of Total Revenue. In this regard, any reluctance on the part of EEPGL is irrelevant. The fact is that, under the current construct, Guyana’s take will increase beyond 14.5% of total revenue at some point in the future. Exactly when this will happen depends on the amount of wells explored before the contractor’s exploration license expires and how many are developed for production.
Editor, the writer also brings to our attention certain inconsistencies in the amounts of total revenue reported for the years 2020 and 2021. His letter refers the reader to a “Table-a’ and a “Table-1”, however, your paper only includes Table-1, making it difficult to determine whether the inconsistencies exist in a single report or between two different data sources. In any event, he reports that the sum of profit oil, royalties and cost recovery differ from total revenue in each year by amounts equal to the royalties for the respective years. Even without the benefit of Table-a, it appears as if this observed discrepancy relates to the issue of how the royalty payment is treated in arriving at profit oil. The Commissioner General of the Guyana Revenue Authority has recently clarified the relevant aspects of this matter; however, it remains unclear if any royalties paid have been included among the costs so far recovered under the contract. I believe the onus lies on the subject minister for the petroleum sector to clarify this.
The purpose of this letter is not to disparage the writer or the analyses he has presented. As a concerned Guyanese, he has expressed a number of apprehensions about our country’s future, many of which I share. So far, I have commented only on his treatment of the specific issues raised in his letter, without injecting my own views on those issues. However, I was drawn to respond by the writer’s concluding recommendation that production be distributed so that the contractor gets three barrels for every one barrel of oil received by Guyana, and his application of this regime to illustrate how this might have altered Guyana’s take in 2020 and 2021. With the greatest respect, I believe this is where the matter becomes a lot more complicated than is generally portrayed in public discussions. One cannot go back and change an input (in this case the terms of the contract) and then return to the present and apply those changes to today’s output, as if that output would have remained the same under both scenarios.
My own simple view is that an oil company will produce more oil in a country where its share of production is high than in a country where its share of production is low. I believe this is supported by the facts surrounding oil production in Suriname, Ghana and Guyana. With its two active projects, Guyana, the last of the three countries to begin production, currently produces close to double the combined total of Suriname and Ghana. Several additional projects are in the planning or development stages. I do not believe it is reasonable to assume that the current scenario would have prevailed under a contract similar to that of either of the other two countries. I would be interested in seeing the current discussions evolve to consider the impacts of a renegotiated contract on the total quantity of oil produced in the Stabroek Block and the total revenues received by Guyana for the life of the contract. Such an analysis should be a prerequisite for any renegotiation.
Calls for renegotiation of the Stabroek Block PSA have been made repeatedly for at least four years and I am yet to see evidence of careful thought applied to how this can be achieved and what are the specific desired and likely outcomes. This would certainly help me to understand precisely what is being proposed. In the meantime, the relinquishment clauses of the Stabroek Block PSA are set to kick in next year with 20% up for relinquishment and a final renewal of the exploration licence prior to full relinquishment in 2026. It is imperative that these clauses be strictly interpreted and applied, with Guyana’s long-term interests in mind. Our offshore basin has been effectively de-risked and the case for ministerial discretion can no longer be made.
Sincerely,
Dominic Gaskin
