By Kiana Wilburg
When an offshore oil production project is nearing its end, the operators prepare for an activity called decommissioning. This involves the safe draining and removal of pipelines, partial or complete dismantling of platforms, and the safe capping of wells. It is an activity that can cost billions of dollars.
In light of this, oil-producing nations across the world establish special funds or accounts that the oil operator contributes an annual fee to so that when that abandonment period comes, there is enough funding to cover it.
Guyana’s Production Sharing Agreement (PSA) makes no provision for the pre-funding of this activity. As such, University of Houston Instructor, Tom Mitro says Guyana finds itself in a most dangerous situation. He said that at the earliest opportunity, Guyana should correct this loophole that leaves it open to high risk in all contracts, and even its model PSA going forward.
Mitro said, “So what normally happens is that they have an agreement on what will happen with the funding relating to abandonment. Most places require financial security in terms of a fund that the oil company contributes to or a bond or guarantee from a bank. But in Guyana, there is nothing. There is no guarantee other than Exxon and its partners saying ‘trust us, we will pay for that.’ The fact that no pre-funding is required under Section 20.1(ff) of the PSA is highly unusual by today’s industry standards.”
The consultant added, “…It is important to also note that if a large, financially sound company like ExxonMobil ever sells its interests, which it almost certainly will one day, to a smaller, less financially secure or environmentally conscious company, then this represents a significant financial and environment risk to Guyana.”
The University Professor then pointed to another damning observation in relation to this subject matter.
According to Section 20.1(d)(gg) and Accounting Procedure Section 3.1 of the Guyana-ExxonMobil deal, the oil giant can tabulate a budget for abandonment , and recover a portion of that budget in the form of oil, years before it is time for decommissioning.
The Petroleum Consultant pointed out that best practice dictates that some cost recovery for abandonment is important to establish, since there will be no production once a field is abandoned. He stressed however that this only happens after the company starts pre-funding into some sort of escrow account.
“But this provision of allowing them to begin cost recovery, in some cases, 20-30 years before they actually fund the costs is a very significant benefit for the companies from a cash flow and net present value standpoint… It is not the norm. It is the most unusual provision I have ever seen in a PSA,” Mitro stated.
The University Instructor further emphasized that costs to fully decommission large offshore platforms and pipelines can be in the hundreds of millions of US dollars. He noted that the company may end up selling its equity interest prior to the time of decommissioning/abandonment. If that was to happen, Mitro noted that the way Guyana’s PSA is set up, Exxon and its partners would have fully recovered all the costs associated with that activity. In short, only Guyana stands to lose in this type of arrangement.
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