Jan 18, 2021 News
Kaieteur News – To ensure Guyana seizes greater value for its oil, former University of Houston instructor, Tom Mitro has advised Guyana to advocate for a more attractive profit-sharing provision in its future oil contracts. Such a provision he articulated, which would see the country’s entitlement increase when the profitability of producing wells are boosted by higher prices or overall production.
He gave this and other points of insight in an invited comment, after being asked what fiscal terms Guyana deserves for the Canje and Kaieteur block contracts if commercial discoveries are made. The question was posed in the context of the many mistakes Guyana has made in its negotiation of the Stabroek block production sharing agreement (PSA).
ExxonMobil was given a fresh lease on the agreement by Harvard University-trained negotiator and former Minister of Natural Resources, Raphael Trotman in 2016, following a world class discovery in 2015 at the Liza well. The terms have since been widely condemned as unfair and lopsided.
The contract allows the contractor – Exxon, Hess and CNOOC – to recover investments up to a ceiling of 75 percent of the production, after which the remainder of the production is shared 50-50 between the government and the contractor(s).
The production sharing provision is at Article 11.4 of the PSA, and states “The balance of Crude Oil and/or Natural Gas available in any Month after Recoverable Contract Costs have been satisfied to the extent aforesaid (hereinafter referred to as “Profit Oil” and/or “Profit Gas” as the case may be) shall be shared between the Government and the Contractor for each Field in the following proportions: Contractor fifty percent (50%) and Minister fifty percent (50%).”
This is a fixed production sharing scale.
Referring to the profit oil provision, Mitro said “This is fairly standard in many places around the world. It recognizes that there is a windfall with higher prices which should mostly go to the government as owner of the resource.”
The International Monetary Fund (IMF) had made similar comments about the Stabroek PSA in a technical report, calling Guyana’s fixed scale production sharing provision “uncommon”.
It had said that most PSAs around the world usually have a formula in which the government’s share increases as a function of production, a combination of production and prices, or an economic variable such as the ratio of cumulative revenue to cumulative costs, or the project’s internal rate of return.
“Moreover,” Guyana’s development partner said, “in many countries, the top tier government share of profit oil could be as high as 80 or 90 percent.”
Vice President, Dr. Bharrat Jagdeo has accepted that the Stabroek block PSA carries a fiscal regime that is “too liberal” and has vowed to negotiate future PSAs with very different terms. During a February 2020 press conference, Dr. Jagdeo had noted, while serving as Leader of the Opposition, that such negotiations would not exclude the Canje and Kaieteur blocks, which are owned and operated by ExxonMobil.
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