May 11, 2022 Letters
Prof Ganga Ramdass notes in another publication that Guyana is “missing revenue from contractor’s oil profits” in terms of loss of taxes. But Guyana is also losing revenues in other ways as well, all attributed to an appalling deal signed by the coalition. The contract was poorly negotiated on our side.
As oil prices soar, along with that of gas, Guyanese are reminded of the terrible contract arrangement signed by the APNU+AFC coalition on royalty, bonus, and profit sharing. There should have been a clause linked to market price of oil at the ‘spot market’, especially if price ascends, as well as on royalty, bonus, profit sharing, and costs recovery. The price of oil has nearly doubled since the signing of the contract four years ago. Yet the percentage benefits to Guyana remains the same. One can’t blame or hate Exxon or the present PPP administration for the horrific arrangement of the coalition’s.
The company’s interest, like that of any entrepreneur, has been simply to lower expenses and maximize revenues (profits). It has achieved its end while Guyana has failed. One has to salute the company’s negotiators for its lucrative and pecuniary achievement in Guyana.
The royalty of two percent as well as the profit sharing of 12.5% and cost recovery of 75% is impecunious; no country has ever received such a low royalty and profit sharing and high cost recovery. It is inexplicable how the coalition could have made such an unfavorable agreement – of only US $18M bonus when it could easily have fetched in excess of US $1B considering the value (of hundreds of billions of dollars) of the amount of oil discovered. Ditto the royalty and profit sharing and reduction of costs recovery.
The government could have reached out to or consult with independent, nationalistic economists like Prof Ganga Ramdass, Dr. Ramesh Gampat, Prof. Tarron Khemraj, Dr. Thomas Singh, Dr. Compton Bourne, myself, and so many others to review (analyze) the contract or for guidance on how to maximize benefits (revenues) to our country. Guyana’s royalty interest is too low while the oil company’s working interest is advantageous to it. Guyana has lost out on billions of dollars of revenues through a really bad agreement.
Generally, oil and gas royalties, bonuses, and profit sharing are paid on how much are produced and the value of the oil or natural gas at the time of discovery and extraction. Since exploration was ongoing, there should have been a clause in the contract for additional royalty and bonus if further discoveries are made. Since the signing of the contract, the amount of oil discovered have quadrupled and still climbing.
While it is true that the oil companies (given the working interest — term used in economics) took (take) the risk to explore for oil, a very costly venture, after the initial find the probability of hitting more finds, was high. The risk was very low after the first find. And indeed, several finds have been borne out since 2018 as recent as last month. As a non-interest owner (term used in economics), not responsible for the costs of prospecting, drilling, or extracting material and only interested in output, Guyana should have monitored (audited) costs so as to minimize expenses and maximize money received from profit sharing. The oil companies that have leased the working interests to explore for and recover oil would naturally sought to quickly recover costs incurred in its oil investments, maximizing percentage for costs recovery. And in fact, it has recovered a lot of money over the last year of some US $1B.
When the contract was signed four years ago, the price of oil was around $60. Since then, oil price has ballooned reaching $110. Now that the oil company is recovering its expenses faster, there should be a reduction in the time taken to pay off the oil companies for their investments giving Guyana earlier control of Guyana Exxon and total revenues. Alternatively, the oil companies can reduce recovery of costs to amounts similar to what they were in those in 2019. The latter would increase the amount of profits going to Guyana (and Exxon) in the short term, making money available for infrastructure projects.
I should note that in addition to royalty, bonus, and profit sharing, a natural resource owner has executory rights entitling it to lease payments. The oil contract agreement does not give Guyana any lease payments – another loss to the country. This can only be blamed on the poor negotiating skill of the predecessor government.
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