By Kiana Wilburg
During its 2019 second quarter earnings call, ExxonMobil spoke extensively about the progress of its development programmes offshore Guyana and other parts of the world. It also spoke of the billions of dollars it earned in revenue. But there were several crucial issues, which it did not address with its investors in hopes that they might simply forget about it. This observation was made by analysts at the Institute for Energy Economics and Financial Analysis (IEEFA).
According to Kathy Hipple, a financial analyst at IEEFA and Tom Sanzillo, Director of Finance at IEEFA, challenges to the lopsided deals Exxon struck in territories like Guyana and Papua New Guinea are just two crucial facts the company would probably like investors to overlook. But Hipple and Sanzillo emphatically stated that they shouldn’t.
The officials noted that ExxonMobil’s contract with Papua New Guinea is being challenged as one-sided and unfair, with the government of that nation being intent on reviewing same. On this matter, Exxon has only said, “We have a contract…” But IEEFA Analysts stress that such commentary obscures the real risks to its business if countries with “contracts,” express grievances and opt to review them.
Further to this, the analysts said that the same situation is found in Guyana where the Production Sharing Agreement (PSA) for the oil-rich Stabroek Block is deemed to be lopsided. Hipple and Sanzillo reminded that terms of Guyana’s contract with Exxon were negotiated with prior governments and appear to be more favorable to the company. They stressed that during Exxon’s earnings call, there was no mention of this emerging issue while reiterating that investors should not ignore same.
(IEEFA conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.)
LOOPHOLES IN GUYANA-EXXON PSA
Just recently, Head of the Energy Department, Dr. Mark Bynoe revealed that the finishing touches are still being added to the new model PSA, which will be used for future licensing rounds. That document is expected to be a significant improvement over the Guyana-Exxon PSA, which leaves the nation exposed to massive revenue leakage.
It is along these lines that Chatham House Advisor and Local Content Expert, Anthony Paul expressed that there are at least 12 key elements which must be included in that document to safeguard Guyana from abuse.
These fundamental provisions Paul recommended are contained in a report he wrote on the request of the United Nations Development Programme (UNDP). That international organisation had commissioned this report for the Government. It was handed over to the administration in 2016.
The Principal Consultant of the Association of Caribbean Energy Specialists Ltd. said that Guyana can readily, and should require in its new model PSA, that all contracts be subject to new laws and regulations and not immune to ring fencing provisions which allow costs from unsuccessful wells to be offset against those that are.
Further to this, Paul recommended that Guyana needs tighter cost recovery provisions. In this regard, he said that Guyana needs to determine what can be recoverable and non-recoverable based on international best practices. Along these lines, he said that there should be transfer pricing controls and suitable sanctions included in the model PSA.
Paul also said that Guyana’s model PSA needs to have stronger local content and capacity development requirements, and if possible, have it attached as a caveat for being able to keep the exploration or production licence.
Furthermore, the Consultant emphatically stated that Guyana’s model PSA needs to have clear rules on the disclosure of the beneficial owners for oil companies involved, capital gains tax, methods to be used for the accounting of all expenditure and where documents should be held, as well as the international benchmarking costs that would be used.
The Chatham House Advisor also said that it would be in Guyana’s best interest to tie the model PSA to signature bonuses, aggressive relinquishment clauses, and the right to refusal of farm-outs or farm-ins following a thorough evaluation of the technical and financial capability of the firm as well as its strategic fit to Guyana.
Also, the Consultant suggested that the new Model PSA should allow the government to have retained equity or carried participation in all new licences.
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