Kaieteur News – Guyana has been advised by a number of independent experts in the past to ring-fence its oil projects to enjoy the early benefits of its sector and safeguard revenue for its people.
However, President of ExxonMobil Guyana Limited (EMGL), Alistair Routledge defended the lack of a ring-fencing provision during a press conference at the company’s Duke Street, Kingston, Georgetown office on Tuesday.
A ring-fencing provision would simply allow each oil project to pay for itself and allow Guyana to benefit from a greater share of profits early on. In the absence of such a provision, the oil companies are allowed to use the revenue generated at one project to pay for others that are yet to commence production activities.
In addressing the subject, the ExxonMobil Country Manager maintained that ring-fencing has been “misunderstood”.
He explained that “Ring-fencing fundamentally is where you take individual projects which may be located right next to one another and you say all the cost and the revenue for that particular project are ring-fenced into a set of accounting.”
Routledge continued, “So you account for all the investment, you account for all the operating costs and then the revenue that offset those as one ring-fenced project and then a project right next door is completely separate.”
Consequently, he pointed out that ring-fencing merely affects when costs are paid back rather than the amount of revenue that go to government.
He said when the projects are ring-fenced, the costs would take longer to be repaid and revenue would be streamlined to the country earlier but would amount to the same if received later.
Delving deeper into his explanation, the Exxon official said from his experience, ring-fenced projects can result in stranded resources.
According to him, “The potential downside of what we have seen from our experience is that in doing that [ring-fencing] what we can sometimes end up with is you strand resources because you tie a project and you say well there’s some resources outside of that ring-fence but on a standalone basis they are no longer economic or they struggle to compete for investment.”
He urged that the cash flow timing was critical to the profitability of oil projects from an investor’s point of view.
The Country Manager told reporters that from his experience in most countries “what matters to the government and the people are really maximizing the development of the resource and maximizing the revenue optimally into the natural resource fund and operating without the ring-fencing is what will help do that.”
He was keen to note that without a ring-fencing provision, the company would be able to deliver the maximum recovery of resource and the maximum revenue generation. “It doesn’t disadvantage the country, it just affects the timing of cash flows in fact I would say it really sets up for better development of the resource,” Routledge said.
Just last week, Vice President Bharrat Jagdeo during an engagement with the press said the country could be left with nothing in the future should such a provision be implemented.
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, 2018 and 2019, the International Monetary Fund (IMF) urged Guyana to ring-fence its oil fence its projects. In one of the reports, the 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.
Director of Financial Analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), Tom Sanzillo painted a more graphic picture in one his reports on Guyana.
He said, “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.”
This position has already been confirmed as 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 Block.
AUBREY NORTON FRIGHTEN RENEGOTIATION AND RING-FENCING
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