Last Friday Vice President Bharrat Jagdeo unveiled features of a new model Production Sharing Agreement (PSA) to apply to all oil and gas concessions outside of the Stabroek Block.
The terms continue the 50/50 profit share in the 1999/2016 agreements; increase the royalty from 2% to 10%; decrease the cost recovery limit allowed for operators to pay off project costs from 75% to 65%(so more earlier but less later); and add a 10% corporation tax.
It has been crafted within the larger geopolitical context of the fallout from the Ukraine War which is seeing a move to a bifurcated oil trading system with one side – China and many Asian customers sticking with Russia – and Western customers eschewing Russian oil and gas and looking to secure resources in friendlier neighbourhoods. At the same time the Biden administration has been awoken to the need for reliable supplies but also wants to keep commitments to decrease its carbon emissions. Rather than encouraging more shale or other domestic production, offshoring close to home seems like a compromise. This will likely involve Venezuela. There is also the factor that OPEC plus looks unified in its resolve to maintain high prices as they extract maximum value for their resources ahead of the much vaunted energy transition. This means oil companies may feel more confident that capital expenditures will pay off. As such this was perhaps an auspicious time to revise the PSA in favour of increased government take ahead of the auctions set for early 2023.
Interest in the auctions will hinge on three factors: the known geology of the blocks on offer; the fiscal terms (including how they compare to other regimes); and the regulatory and political risks of the country. There are said to be three ultra deep areas on offer that constitute the old Block C sandwiched between the Kaieteur Block and the Guyana/Suriname maritime border. Then there are the 11 shallow water blocks. In November 2019, then Director of the Department of Energy, Dr. Mark Bynoe had said Guyana was “fairly ignorant” when it came to what potential assets are within its shallow continental shelf and it would not rush into any auction without first doing a seismic survey. This had gone out to tender.
With the change of administration this plan was scrapped, and in June Jagdeo said, “The price of oil is high, and I think it’s the right time if we go to auction, so we’re moving toward using the current data set, not generating future data sets.” The general opinion is that the near shore contains a greater proportion of gas and as such any bidders will be looking at first locating it and then figuring out how to monetise a commodity that involves considerable upfront expense. Jagdeo mentioned that he was encouraging local consortiums to bid on the near shore although the US$10M minimum signature bonus might be too high to encourage much local participation. As for the Ultra Deep, this would be only for the international or national oil companies, the majors, with their deep pockets and technical capabilities to locate and develop the fields. Firstly it is not a given there is oil out in the ultra deep in commercial quantities. The extraordinary success of ExxonMobil in the Stabroek Block is a once in a generation anomaly. It is highly unlikely to be replicated and indeed to this day no other company has made a commercial find in the basin, including in areas adjacent to Block C. Also the rapid speed from discovery to first oil of only four and a half years (May 2015 to December 2019) is not an industry norm although very fortunate for Guyana. The geology of the basin is also not as simple as it might appear when it comes to maintaining production once on line.
In other words after the auction and after the seismic surveys and if oil is found and the wells appraised and if the operator has the skills and the wherewithal to develop the find, we are looking at a timeline of at least ten years before government revenues might start flowing. This does not take into account any external variables such as a far more rapid decarbonisation of the world economy and/or a crash in oil prices. As such the improved PSA terms are simply words on a piece of paper. Also one wonders if the other majors would be willing to accept a fiscal regime so divergent from their competitors in the same basin. Finally one should consider that other countries with exciting finds are emerging, most notably Namibia with a similar deep water play, which might be offering more agreeable terms. In the end an effective PSA is about aligning objectives between the operator and the government so as to spur development and maximise returns to both parties. Both sides need to be comfortable. As we see in Suriname they may have more attractive fiscal terms but it might be why French major Total Energies remains strangely hesitant to pull the trigger on Block 58.
As for the regulatory and political risks, Guyana remains a fragile democracy even with – or perhaps because of – its new found wealth. A change in government is not currently likely but then who among us anticipated the successful 2018 No Confidence Motion or the dangerous anti-democratic rigging attempt of 2020?
Will investors bite given all of the above? They may, they may not and perhaps it doesn’t matter all that much for the following reasons: Firstly the government take from the Stabroek Block is already in the order of magnitude for a minute country that, if well managed, will be more than enough to develop the economy and greatly improve living standards. The recent IMF report had estimated some US$20B in the Natural Resource Fund by 2025; that is seven times our current national budget. The second issue is one of regulatory capacity. The administration is already stretched to regulate ExxonMobil’s operations here as noted in the Auditor General’s 2021 report which cited the GRA as having 36 vacancies to fill in its Petroleum Revenue Department. And as an aside, Jagdeo’s recent remarks on Guyana needing a refinery for its own energy security make little sense. Refineries would need a whole new department of government to regulate. A far simpler solution, if this is truly the reason, would be to build a strategic national reserve. And thirdly, absent some sensible decisions on zoning, the current urban congestion, competition for scarce suitable land and oil sector-induced inflation in the economy would only get worse with new operators.
In a way the new PSA makes sense because it is sending a signal that Guyana is not that thirsty for new energy investors but if they want to come they must pay a premium. Whatever the outcome, oil will not be the story of Guyana in the decades ahead but whether its revenues are deployed for us to become a more prosperous, harmonious and happier people. That is the debate we must start having.
