Latest update April 24th, 2024 12:59 AM
Mar 15, 2023 Letters
Dear Editor,
I refer to a letter dated 3-12-2023 and captioned, ‘Let Us Celebrate Exxon’s Discovery of the Oil Off Shore; and Although differing, Thank Dr. Hunte for his Tables Comparing Costs’, submitted by Ambassador Samuel A. A. Hinds, Former Minister Responsible for the GGMC.
Before responding to this letter, permit me to say thanks to Ambassador Hinds for his courteous addition to the debate on the use of our non-renewable resource; and more particularly, on his interpretation, a position with which I disagree, on the timing of the distribution of benefits and costs between Guyana and EEPGL in relation to the extraction and exportation of our oil.
Ambassador Hinds noted that ‘Generally, anyone investing would like to recover and pay back the capital costs as quickly as possible, and may want to allocate all net revenue to capital recovery and nothing to profits.’ .I find this statement to be astonishing, as leaving nothing to profit is questionable for any successful business. More specifically, profit maximization is undoubtedly a key element in determining the market value of any serious business, for it showcases the effectiveness of management; it establishes the company’s platform and capacity to borrow and raise capital, even as it attracts investors through the stock market. Consequently, from day-one, it is pellucid that EEPGL has presented its ‘profitable operation’ in the public domain for all investors to examine and take action; or for suppliers to submit bids for goods and services. Yet on the downside, it is highly improbable that the three owners of EEPGL (Guyana is excluded, and is called a non-owner Associate who owns the resource) would be happy with a profit share of 12.5 percent, given the size of the oil investment; and the fact that the total costs paid to other unknown suppliers capture 75 per cent of the Total Revenue. In this situation, Guyana should perhaps consider cooperating with the unknown suppliers and get a better deal.
While a check in any of the major oil publications around the world will have an EEPGL/EXXON Mobil story, I, nevertheless, question the idea that total cost (TC) is set in advance and made equal to 75 percent of total revenue (TR); that profit is 25 percent of revenue; and that the average cost of a barrel of oil (ACBO) is equal to 0.75 times the price (P), where the ACBO = 0.75P. The reason for this skepticism is that EEPGL is a capital-intensive operation with significant fixed costs. For example, the floating production storage and offloading (FPSO) vessel and the supporting mechanisms/ facilities are expensive; but these costs do not change, they are fixed; and because these costs are fixed, the average fixed cost (AFC) of a barrel of oil decreases as the number of barrels of oil is extracted from the well increases. Recently, it was reported that ‘… Liza Phase 1 and Liza Phase 2, which are producing above design capacity … are currently operating at a combined gross production capacity of more than 360,000 barrels of oil per day (bopd).’ (Melisa Cavcic: https://www.offshore-energy.biz/exxonmobils-new-oil-discovery-off-guyana-could-underpin-future-development/). In this arrangement, if the extraction/production was 120,000 bopd, and it is now 360,000 barrels per day due to debottlenecking (https://onepetro.org/OGF/article-abstract/3/03/57/205372/Debottlenecking-Existing-Offshore-Production?redirectedFrom=fulltext))then the overall productivity has improved by 20 percent per day and this will reduce the ACBO.
Please bear in mind, however, that the destruction-risk to the environment has increased, since the extraction operation is now above its designed capacity, and any failure without sufficient insurance, which the EEPGL does not cover, will be a significant charge under the meager returns that Guyana receives of only 14.5 barrels to every 85.5 barrels that EEPGL receives from every 100 barrels of oil extracted. In other words, for every dollar that Guyana receives, EEPGL captures $5.89. This is part of the inequity that Guyana faces; and reading what Ambassador Hinds stated that we must “Pump baby, pump…”, is a call to throw gasoline on a fire that we will not be able to extinguish without a heavy cost on ourselves and our neighbors, who will be damaged by our negligence; while at the same time, EEPGL, who caused the disaster, will disappear without penalty. In the circumstances, I am certain Ambassador Hinds knows that among his portfolio responsibilities is the important task to always protect the interest of Guyana, both at home and abroad. In contrast, EEPGPL highest responsibility is to its shareholders and not to Guyana; for they are doing a great job in extracting our wealth and patrimony without push back.
Ambassador Hinds also conveys the notion that ‘… when all capital has been recovered, depending on the price of oil and running costs, Guyana could be receiving more that 30% of the price of oil when the price is high…’. Perhaps Ambassador Hinds can show us this outcome in the PSA. Moreover, with no ring fencing, and the fact that Guyana, as the Non-Owner Associate, has to pay from its oil receipts EEPGL taxes and cover the insurance costs, perhaps Ambassador Hinds can say when this burden on Guyana will end.
One of the distinguishing features of the extraction of any non-renewable natural resource, such as oil, is that it has a finite amount of oil that can be profitably extracted. And in this regard, the quantity of oil that can be extracted is placed into three different groupings: ‘Proven Reserves’, which are oil reserves that have no less than a 90 percent probability of being profitably extracted. A second category is ‘Probable Reserves’ which have a 50 to 90 probability of being profitably extracted; and the third category is ‘Possible Reserves’ that have a 10 to 50 percent of being profitably extracted (https://www.investopedia.com/terms/p/proven-reserves.asp). Another concern is the fact that oil extraction from under the ocean has relatively high fixed costs; and therefore, it is imperative that a breakeven point be established, where total revenue is equal to total cost. The reason for this is that if the breakeven quantity of the oil accounts for a significant share of the total resource, profits could be insignificant or even negative. Adding to this concern is the idea that instead of extracting ‘Proven Reserves’ it is revealed that it is ‘Possible Reserves’. Hence, the profitability can be questioned and EEPGL will shut shop and leave. Consequently, knowingnow how EEPGL fits into this three-part model is critical, for companies can start out with high expectations and sell the idea that they have ‘Proven Reserves’, but due to technological difficulties and environmental damage, expectations can be overly optimistic, and expected profits would be unrealized.
In closing, I would contend that it is always in the best interest of the investor, the government, and the Guyanese people to enjoy in a timely manner a fair and equitable sharing in the cost and benefits in this project. And while the existing PSA fall short in this area, it is my belief that reasonable people can sit around a table and come up with a common understanding, and derive a better deal between and among all parties. I am excited about being proven right.
Sincerely,
Dr. C. Kenrick Hunte
Professor and Former Ambassador
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