Latest update April 25th, 2024 12:59 AM
Sep 04, 2021 Letters
Dear Editor,
Should oil be found on the Demerara, Kaieteur and Canje blocks during the recently announced drilling campaigns, financial benefits from each block’s Production Sharing Contract (PSC) will also be disappointing because of the negotiated contractual terms. The 1999 Stabroek PSC, 2013 Demerara PSC, 2015 Kaieteur PSC, 2015 Canje PSC, 2016 Orinduik PSC and the renegotiated 2016 Stabroek PSC have the identical limiting contractual terms, repeated mostly verbatim in all six production sharing contracts.
Much has been discussed about the contractual terms that limit the government’s take of oil production, i.e., lack of ring fencing, a perpetual minimal tax regime, a maximum 75 percent monthly production that can be dedicated to cost recovery and the contract stability requirements meant to dissuade changes to the PSCs.
Also limiting is the language in Article 15 Paragraphs 15.6 and 15.4b in the 1999 Stabroek, 2013 Demerara, 2015 Kaieteur, 2015 Canje and 2016 Orinduik Production Sharing Contracts; this language states the government’s profit oil share includes a one percent royalty. There is no separate royalty payment in addition to the government’s share of oil production, in reality; these PSCs have zero royalty payment.
The government’s take from the current Demerara, Kaieteur, Canje, Orinduik and Stabroek PSCs is respectively 13.25 percent, 12.5 percent, 15 percent max, 15 percent max and 14.5 percent of the total available block production. Four PSCs (1999 Stabroek, 2013 Demerara, 2015 Kaieteur and 2015 Canje) were approved under the PPP Government and the remaining two PSCs (2016 Orinduik and 2016 renegotiated Stabroek) under the Coalition Government. The flaws in all six PSCs are repeated throughout the governing tenure of both major political parties, starting with the 1999 Stabroek PSC. A fairly negotiated PSC should have yielded the government somewhere around 25 percent of the total available production during the investment cost recovery period.
It is important to maximise the initial government’s take of total available oil production because: 1) the well production will drop appreciably by the end of the capital investment recovery period, 2) the capital investment recovery period may be much longer because of the lack of ring fencing, and 3) maintenance cost will increase as the production facility gets older. Renegotiating these existing PSCs to achieve a 25 percent total available oil take during investment cost recovery will be impossible mainly because of the minimal tax regime.
The structure of production sharing contract signed by government officials should have yielded revenue from three sources, i.e. royalties, profit oil sharing and taxes.
Deep-water oil production PSCs with typical large investment capital have low- to mid-single digit royalty payments when profit oil sharing is the main part of the government’s contract compensation. Double digit royalties for these PSCs extend the capital investment payback period and project approval will not be justified by typical capital screening analyses (VIR, NPV, etc.). Any royalty increase negotiating the existing contracts will be limited to a low single-digit percentage of total available production.
The perpetual tax-free regime in all contracts loses a minimum four percent total available production by the government for each current PSC. How can the minimal tax regime be changed for so many contracts? Contractors and partners will very unlikely agree to changes to the tax-free regime, making it impossible for the government to receive a fair take of the block production.
There may be an opportunity to increase the government’s take from profit oil sharing by limiting the portion of oil dedicated to cost recovery. Existing deep-water PSCs with typical low to mid-single digit royalties have limited the maximum oil dedicated to cost recovery to around 70 percent (currently 75 percent for Guyana’s PSCs) of the total available production. Some work has to be completed in order to determine whether a case can be built for the government to receive more profit oil sharing, considering the extensive amount of cost recovery in the subject PSCs.
The Stabroek Block contractor’s main affiliate is part of a consortium of oil companies that agreed to a PSC renegotiation with another oil producing country; note the contractor’s affiliate was not the contractor for the consortium. The negotiation was initialed by the country when additional production was planned on an existing producing oil block. The government should be presently preparing for PSC renegotiations especially with drilling on the Demerara, Kaieteur and Canje blocks. The desire to renegotiation these PSCs by contractors and partners is not a given, since these blocks are much smaller than the Stabroek Block and may have fewer prospects. Nevertheless, we can be assured the contractors and partners will be prepared for any renegotiations if necessary. Is the government going to be prepared?
Regards,
D.C. Daly
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