Dear Editor,
Reference is made to Christopher Ram’s letter to the Editor of Stabroek News dated October 12, 2022, and part one of my response thereto published in the Stabroek News and the Guyana Chronicle editions of October 15, 2022.
In my response to Nigel Hinds, Chris Ram confirmed that indeed the information Hinds requested of the Senior Minister with responsibility for Finance, Dr. Ashni Singh, is publicly available. He cited the specific source for questions one and six posed by Nigel Hinds, but he then asked of the undersigned to point him to the source where he can find the others. For Chris Ram’s benefit, I had already dealt with this in my response to Nigel Hinds which, unfortunately, Stabroek News did not publish in its entirety. For the readers’ benefit, the other information he is referring to that Hinds requested to be furnished with are as follows:
1. How much is budgeted towards construction contracts for each Region? The regional allocation of both capital and recurrent expenditure can be found in Volume 2 of the budget estimates. For greater clarity, construction projects would be part of the capital budget for the regions.
2. For the nine months ending September 30, 2022, how many contracts have been approved for over GY$100 million; what are the names of the Contractors for the individual Contracts and what is the total value for each contract approved? The awards of government contracts are not state secrets. All of the information can be found in the media. This was my original response to this question. I will go further to say that even if all of the awarded contracts are not reported in the media, Nigel Hinds and Chris Ram can do two things to obtain the information as outlined hereunder.
First, all public contracts are subject to a public tendering process before awarded. The public tendering process is done in a transparent manner.
The minutes are published on the National Procurement and Tender Board Administration (NPTAB). Stabroek News also publishes the list of contractors that bid for contracts. So, Nigel Hinds and Chris Ram can simply refer to the NPTAB website and obtain the list of all contractors that bid for any government contract whether it’s for the supply of goods, services, or construction projects.
Second, if Nigel Hinds wants to have specific information as he requested, all contracts valued over $100 million, the minister is not the appropriate source to ask for this information. In order to do this, it means that the minister would have to call up all of the procurement entities of the State and have them supply him with that information.
There is, in fact, a different process available to anyone from the general public, any tax paying Guyanese citizen who wants to obtain this type of information, that they can initiate. In this respect, reference is made to the Access to Information Act of 2011. There is a functioning secretariat and a Commissioner of Information, whom Nigel Hinds can direct the particulars of his question to, in the form of a letter of request.
Moving onto my letter in response to Professor Hunte, Christopher Ram argued that the terms such as operating expenditure (OPEX) and capital expenditure (CAPEX), do not apply to the 2016 Production Sharing Agreement (PSA). Ram went onto cite specific sections of the PSA that speaks to the details of expenditures in a line-item fashion. In section 2.3 of Annex C, on Annex C page 6, there is a definition for operating cost which is the same as operating expenditure or OPEX. The definition states that, “operating costs are all expenditures incurred in the Petroleum Operations, which are other than Exploration Costs, Development Costs, General and Administrative Costs and Annual Overhead Charge and Service Costs not allocated to Exploration Costs or Development Costs shall be allocated to Operating Costs”. Further, the income and expenditure statements of EEPGL, Hess and CNOOC classify all of the expenditures as operating expenditure.
For the readers’ benefit, the term cost and expenditure mean the same thing in accounting and finance and therefore can be used interchangeably. So, whether it is referred to as operating cost or operating expense, abbreviated as OPEX, it is the same thing. Capital expenditure are those expenditure a business incurs for the acquisition of fixed assets.
Christopher Ram has never conducted a comprehensive forecast analysis of the Stabroek block to inform some of his opinions. For simplicity and for the purpose of financial and economic modelling, using the project economics information together with reasonable assumptions to create different scenarios with sensitivity analysis, and with the application of the fiscal terms in the PSA, this is how a financial forecast model can be constructed. To this end, there are only three organizations that have done a detailed forecast model, namely, the Inter-American Development Bank (IDB), Rystad, and this author’s (SPHEREX Analytics). While Rystad’s forecast seemed heavily inflated, the forecast done by this author / SPHEREX Analytics was closer to that of the IDB. The IDB’s forecast included the project economics of five FPSOs, and an average price of US$50, to derive an estimated government take by 2040 of US$54 billion, while SPHEREX Analytics used an average price of US$60 together with the project economics of four FPSOs, to derive an estimated government take by 2040 of US$49 billion. This has a present value (PV) of US$13.2 billion using a discount rate of 8%.
Ram went onto to argue that the undersigned is mistaken in the reasoning for the 75% cost ceiling. Ram’s contention is that the plain and simple reason for the ceiling is so that in any single month, the host country derives some revenue, no matter how bad the results of that month are. Ram is correct but this is not the ONLY reason or rationale.
In paragraph six of Ram’s letter, he sought to demonstrate my unfamiliarity with the PSA Agreement by citing part of a sentence and misrepresenting the original context of what I said. Here is the full paragraph of what I said and the correct context:
“In essence, the country and the companies accrue far greater value in the long-term by developing and unlocking more of the resources into the future. This, in turn, extends the life of the industry for as long as the industry remains commercially viable, and to the extent that the oil and gas resources which are finite are available in abundance. In other words, the proven reserves in the Stabroek block to date is an estimated 11 billion barrels of crude. Hence, with a production rate of 1 million barrels per day (by the end of this decade) or 360 million barrels per year, the total proven reserves of 11 billion barrels of crude will be exhausted in 30 years’ time. That said, with ongoing exploration over the coming years, should there be fresh discoveries of another 11 billion barrels or more, then effectively, the industry’s life will be extended by another 30 years, all things being equal.”
In other words, I was speaking strictly about the industry and based on the proven reserves and how many blocks are explored with additional commercial finds into the future, these obviously will extend the industry’s life as long as it remains commercially viable.
I never said anything about the life of the PSA.
Yours faithfully,
Joel Bhagwandin
