Kaieteur News – After accusing the former government of “selling Guyana out” to foreign oil companies by failing to ring-fence the Stabroek Block projects, Vice President Bharrat Jagdeo now seems comfortable with the lack of such a provision, since he believes the country could be left with nothing in the future should such a provision be implemented.
‘Ring-fencing’ simply means that each project would pay for itself, thereby allowing for greater profits to be split when development is paid off. According to the Production Sharing Agreement (PSA) Guyana inked with ExxonMobil and its partners, Hess Corporation and CNOOC, 75 percent of the monthly revenue will be deducted to cover costs, while the remaining 25 percent will be split equally (50/50) between the parties to the contract. In this manner, a ring-fencing provision would have allowed Guyana to benefit from half of the revenue generated in a project, after the expenses are repaid.
Without this provision, the oil companies are allowed to give Guyana meager profits while they take the lion’s share to develop other oil projects in the Stabroek Block.
Recognizing the significance of such a major gap in the contract, Jagdeo when he was leader of the Opposition, prior to August 2020 was fuming during an interview when he addressed the former government’s incompetence for failing to ring-fence the two oil projects it had approved.
“They sold us out to the foreigners. The oil companies, every time there is a find out there, our people should be sad because nothing comes our way. We are gonna renegotiate those contracts because that’s not what we had in mind,” Jagdeo said.
He added, “When we were in the early days, we were coaxing the people [ExxonMobil] to go along. They [Coalition] came into office – three billion barrels of proven reserves and they gave up zero royalties, no taxes, no ring-fencing.”
A few short years later, the Vice President now believes that ring-fencing the oil projects in the Stabroek Block could possibly leave the country with nothing to gain in the future.
During his Thursday press conference, the VP said, “Thinking in policy making is much more complex, it’s never a linear way- oh ring-fencing can save all the money in the world; ring-fencing could lead now too to us having nothing in the future.”
The Vice President explained, “We admitted that we are foregoing revenue now in exchange for massive future income because its going into new projects that will increase production and so even with the same share of the 50/50 plus the two percent royalty that the future income, because of the bigger scale will be massive in Guyana’s case and we are deliberately foregoing that in this period for that purpose and then trying to grab this bone now could cause you to lose all the bones, the bigger bones too in the future.”
While Jagdeo fears Guyana not being able to gain revenue in the future from the sector due to a ring-fencing provision, experts in the industry have urged the nation to include such a provision to ensure it enjoys early returns from the sector.
In three separate reports dated 2017, 2019 and 2019, the International Monetary Fund (IMF) stated: “This asymmetrical treatment of profit and cost oil will benefit the contractor at the expense of delaying government revenue.”
Meanwhile, the United Nations Development Programme (UNDP), along with another international expert, Chatham House and the World Bank called on Guyana to include a ring-fencing provision for each project.
Painting a more graphic picture in one his reports on Guyana was Director of Financial Analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), Tom Sanzillo.
IEEFA estimated that Guyana should receive upward of $6 billion annually by 2028 or sooner, however, the organization believes that due to all of the new costs, Guyana will be shortchanged until the 2030’s, if not longer.
It would be poignant to note that last year, the Stabroek Block generated a whopping US$9.8 billion, but Guyana only received US$1.4 billion in profits and royalty, while Exxon took US$7.4 billion to recoup their investments across the Stabroek Block.
Consequently, Sanzillo noted, “The lack of contract protections means that every time Guyana announces it has received more revenue it is actually being shortchanged…the country may never see the promised annual revenues in the billions of dollars.”
Falling oil prices
Another major factor that can affect the country from enjoying the “bigger bone” in the future, as anticipated by the VP is the declining oil prices. Government in its Half-Year Report has already indicated that the country is likely to earn lower revenue from the industry this year than earlier projected.
It said this is as a result of declining oil prices on the global market triggered by a slide in demand for supplies. The report noted that petroleum deposits for the year are now projected to total US$1,629.3 million, compared with US$1,631.7 million projected at the beginning of the year. This means that the country will receive US$2.4 million less than anticipated or approximately GYD$480M.
Kaieteur News had reported that the plummeting oil price on the global market can be dangerous for newcomer to the sector, Guyana, especially as oil major ExxonMobil continues to pump billions of US-dollars to develop the resources discovered in the Stabroek block. The country can easily find itself unable to repay the investments or enjoy profits from the industry should this trend extend.
AUBREY NORTON FRIGHTEN RENEGOTIATION AND RING-FENCING
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