Dear Editor,
Please permit me to make a few quick comments on Mr. GHK Lall’s letter in SN, May 21, 2023. Of course, ExxonMobil (XOM) will bill any steep increase in insurance cost into cost oil. XOM is not running a sweetie shop. They were the only entity with the knowhow to bring the oil out from hundreds of feet under the seafloor. These are costly endeavours requiring high-end knowledge of engineering, physics and computational mathematics, as well as high startup costs. By the way, do Guyanese judges call up expert witnesses when deciding on these complex financial matters, as they do in the United States? Or is this another Guyanese case of law for the sake of law?
Here I am at my hotel at Grand Coastal eating pumpkin and sada roti and conducting a quick online search in Google Scholar, which in a few short minutes produced a probability of a spill and blowout – a low likelihood or probability, indeed. What I can safely say from a cursory calculation is the radical environmental lobby, most of whom were born in privileged Guyanese upper classes, could cost the people of Guyana billions of US$ over the lifetime of these projects. Hedging, as GHK Lall notes, includes a premium, a monthly premium, which has to be subtracted from cost oil. It means the operating cost (and a fixed element) just skyrocketed given that “unlimited liability” means that any Pooran or Dick can file frivolous lawsuits in the event of a spill.
How will it cost the Guyanese people billions of US$? Here: it means that the government’s oil rents (revenues) will be constrained to the upper limit of 75% cost recovery cap, permanently! The lifetime earnings of the government and people of Guyana will be constrained to a smaller amount of money. Now, I am seeing a very low probability of spill and blow out (it is not zero, but quite low). If that is the case, then what’s the expected payoff of the counterparty selling XOM the financial hedging product? It is a resounding positive in terms of billions of US$ over the lifetime of the projects, meaning XOM loses.
But XOM cannot lose! Its lawyers and financial engineers will enter the boardroom with say the experts at AIG or Goldman and engineer a financial product that will be over the counter (a custom-made financial product). It will not be a standardized contract that is traded in the open exchanges where we can assess its true value. There has to be some form of transfer pricing in this premium arrangement as well. Only the Guyanese people will lose. Now, has anyone ever noticed the radical environmentalists of upper-class background ever fighting to completely jettison and rewrite the pernicious Burnham-Janet-Hoyte-Jagdeo constitution, the source of most of our troubles (in my opinion)? The document that breeds political and economic mal-incentives in Guyana? The document that reproduces entrenched class and ethnic interests? Ask yourself.
Sincerely,
Tarron Khemraj
