One of the most topical matters in the oil and gas industry is the “astronomical” pre-contract cost that Guyana has to pay to ExxonMobil. This cost has amounted to some US$900M.
Kaieteur News understands that much of the pre-contract cost includes expenses for unsuccessful wells.
An international expert explained, “Your country would have been saved from this burden if only the government had protected you guys by employing ring-fencing.”
When ring-fencing applies at a contract area or project, a loss made at one project cannot be transferred to another area/project. Also, all costs associated with a given block or license must be recovered from revenue generated within that block: the block is ring-fenced.
The objective of ring-fencing is to protect the level of current tax revenue. Without ring-fencing; Guyana will have to pay—from the revenue derived from Liza and other oil-bearing wells—for the dry holes. Usually this cost is borne by the Operator / Oil Company.
Before ExxonMobil made the lucrative Liza discovery in 2015, several wells were drilled. In fact, according to ExxonMobil’s work plan, included in the contract, it is supposed to drill at least one well per year. All along, this cost was accumulating to be repaid by Guyana.
Several international agencies noted that “by allowing costs to cross the fence, the host government may end up subsidizing unsuccessful exploration.”
The International Monetary Fund (IMF) said that” in principle, the ring-fencing arrangement ensures that the government’s revenue from the Stabroek Block is calculated based on each field or well separately.”
The Fund stated, “However, this is undone by the Production Sharing Agreement framework, allowing the contractor to allocate cost oil to any field within the contract area.”
In August 2016, ExxonMobil drilled its “Skipjack” exploration well but no commercial quantities of hydrocarbons were found. Based on Esso’s (ExxonMobil) financial statements, Skip Jack alone costs $5B. That is supposed to be an expense to be borne by the company. But Guyana will end up paying for that too.
With the government unwilling to correct some of the ills of the contract, Guyana will continue paying for unsuccessful well in the absence of ring fencing provisions.
Many countries have avoided paying for unsuccessful wells by employing ring-fencing provisions. Uganda, Indonesia and Ghana are just a few of these countries. ExxonMobil is operating in all three of these countries but have not been able to foist costs for dry holes upon those nations.
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