Tullow bills Guyana $64M in pre-contract costs with no explanation

Aug 31, 2019 News

UK based multinational, Tullow Oil, has billed Guyana US$300,000 or $64M in pre-contract costs, while noting that this is what it incurred prior to the effective date it was inked with Minister of Natural Resources, Raphael Trotman.
However, Tullow Oil offered no explanation on why it would even look to recover this sum when industry standards stipulate that it is only to recover development costs.
In addition to this, the details of the pre-contract costs were not stated in the deal that was signed on January 18, 2016.
Furthermore, the International Monetary Fund (IMF) which is providing technical assistance to Guyana on the oil sector has made it clear that it is only the development costs that are supposed to be recovered by the operator.
In its report called, Selected Petroleum Fiscal Issues, the IMF explained that in a Production Sharing Agreement (PSA), an oil company agrees to cover all the costs required to explore for and produce oil in return for a share of production. In the event that the exploration does not lead to the exploitation of a commercial discovery, the Fund said that the oil company has no right to be reimbursed for the costs it had incurred. For this reason, the IMF said that the oil company bears all of the exploration risks associated with an oil project.
But the financial institution did not stop there. It went on to stress, “If the company finds oil in commercial quantities, meaning that the project is economically viable, and decides to exploit it, the contractor will recover costs it incurred to develop the project from a portion of the total value of production. This amount of production used to recover costs is called cost oil. The remaining oil is called profit oil.”
DISCOVERY / EXPLORATION
Due to the 13 discoveries that were made by ExxonMobil on the Stabroek Block, Tullow Oil and its partners, Eco Atlantic and Total, had agreed to bring forward their drilling programme three years ahead of time.
Just a few days ago, the company struck black gold when it drilled the Jethro-1 well. Tullow’s Chief Executive, Paul McDade noted that the discovery could hold more than 100 million barrels of recoverable oil.
The company is now drilling the Joe prospect in hopes of replicating a similar success story.
ORINDUIK JV PARTNERS
In January 2016, Eco signed a Petroleum Agreement and is party to a Petroleum Licence with the Government of Guyana and Tullow Oil for the Orinduik Block offshore Guyana.
Tullow Oil as the Operator of the Block, paid past costs and carried Eco for the first 1000km2 of the 2550km2 3D Survey. Further, Tullow contributed an extensive 2D seismic data set and interpretation.
The Company’s 2550 km2 3D seismic survey was completed in September 2017, well within the initial four-year work commitment the Company made for the initial 1000km2.
In September 2017, Eco announced that its subsidiary, Eco Atlantic (Guyana) Inc. entered into an option agreement on its Orinduik Block with Total, a wholly owned subsidiary of Total S.A. Pursuant to the option.
Total paid an option fee of US$1 million to farm-in to the Orinduik Block. An additional payment of US$12,500,000 was made when Total exercised its option to earn 25 percent of Eco’s working interest in September 2018.
Following the exercise of the option by Total, the Block’s working interests became: Tullow – 60% (Operator), Total – 25% and Eco – 15%. In October, last, the Government approved of the Total farm-in on the Orinduik Block, which has the potential for almost three billion barrels of oil equivalent.
Just a few days ago however, Total sold 10 percent of its interest in the Orinduik Block to Qatar Petroleum. The government is still to grant approval for this farm-in by Qatar.

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