By Kiana Wilburg
Country Manager for ExxonMobil, Rod Henson has told the local media corps that the absence of ring-fencing provisions in the Production Sharing Agreement (PSA) signed with Guyana is actually in the country’s best interest.
But there are numerous industry stakeholders who contend that nothing could be further from the truth, since the absence of ring fencing allows the operator to transfer costs from unsuccessful wells to those that actually are. This results in a reduction of the profits that would be available to split between the government and the oil company.
University of Houston Instructor, Tom Mitro, is one of many who strongly advocates for there to be ring-fencing provisions in all of Guyana’s PSAs.
The Petroleum Consultant said, “I think what the ExxonMobil representative was probably trying to imply is that for a raw untested exploration province having no ring-fence (provisions) can be an attraction to a potential exploration investor. That part may be probably true. However, at the time this agreement was signed, Guyana was by no means a raw exploration province.”
Additionally, the University Instructor stated that having no ring-fencing provisions, perhaps , would not be so objectionable when it is in a small or “normal“-sized license. “But the (Stabroek block) license in Guyana is gigantic,” expressed Mitro.
He continued, “I don’t think I have ever seen one this big before. To me, it’s the combination of the license size, plus no ring-fencing provisions in a well-explored area that makes it so extraordinary, and not in the best interest of any country.”
Mitro who has more than 30 years experience in the oil industry stressed that the unique situations that gave rise to birth of Production Sharing Agreements in the first place was that governments wanted to avoid the “consolidation of losses” phenomenon by oil companies which is present in normal tax and royalty fiscal regimes. He said this very characteristic of PSAs, in that it provides ring-fencing provisons, is what made them so highly favoured in most places around the world.
Furthermore, Mitro who is versed in contract-renegotiation said that the whole reason companies push for having no ring-fence in their contracts is because it creates an advantage to the company at the expense of the country.
“It will mean that when ExxonMobil and its partners drill exploration wells in some other part of the country, in the same giant Stabroek block they can get cost recovery barrels for those exploration costs and that will end up reducing the government’s share of profit oil,” expressed Mitro.
Having exploration costs coming at the expense of the government is a risky business most governments prefer to avoid. “That is normally considered to be at the company’ risk, not the government’s. Therefore, lack of ring fencing is not in Guyana’s best interest…,” Mitro concluded.
Last year March, the International Monetary Fund (IMF) had said that Guyana could very well experience delays in receiving its portion of the profits from ExxonMobil’s Liza Phase One Project. This is due to the fact that the Government failed to include ring fencing provisions in the contract it signed with the American oil giant.
According to the Fund, ExxonMobil can allocate costs from any oil well or even the entire field, to another due to the absence of the said provisions. This means that expenses from the entire Lisa Phase One Project can be carried over to Exxon’s Lisa Phase Two Programme.
ExxonMobil has already told the IMF that the cost to develop the Lisa Phase One Project will be $4.1B. The Lisa Phase Two is projected to cost $10B.
The Fund warned, “This asymmetrical (irregular) treatment of profit and cost oil will benefit the contractor at the expense of delaying government revenue. For example, in the case that multiple fields are developed, the amount of profit oil to be shared from the first producing field will be reduced by costs incurred in developing subsequent fields. This could have significant implications in terms of delaying government revenue, especially in a large, multi-field project.”
The IMF also bemoaned the size of the contract area ExxonMobil has control over. In this regard, it stated that the contract area of Stabroek block is disproportionately large by international standards.
The IMF strongly suggested that the government consider a ring-fencing rule for future developments.
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