Kaieteur News – Bharrat Jagdeo’s failure to ring-fence the various field development plans that have come to his government for approval is depriving the country of critical revenues. Those revenues are being used by the oil companies to further their exploration plans at the expense of Guyana.
To put it simple, when the oil is produced in a field, the oil companies are allowed to deduct their expenses for that field’s development. After the deduction of the expenses, the profits are then split with Guyana half and half. The less deductions for expenses, the greater will be the profit.
What the oil companies are doing is that not only are they deducting the expenses for the particular field they are working but they are also adding exploration expenses for other fields. In other words, they are adding in to their expenses, exploration works in other fields. Without ring fencing provisions these other expenses are allowed. The effect is that Guyana receives less revenues than it ought to have been receiving.
Whenever Jagdeo is asked about this, at his press conferences, he displays an arrogant and abrasive attitude. He tells reporters that Glenn Lall needs to go and understand what is ring- fencing. Or he dismisses questions about the lack of ring-fencing by claiming he answered those questions before and is not going to repeat himself.
The nation’s future cannot be entrusted to someone with that sort of attitude. Ring-fencing is of vital importance to our country’s management of the oil and gas sector. It was expected, based on the PPPC’s pronouncements when in Opposition, that it would have insisted on ring fencing as a condition of approval of field development plans in the Stabroek Block.
Jagdeo has walked back on his declared intention, when in Opposition, to renegotiate the Production Sharing Agreement. Instead, he has attached new terms to future contracts. But as has been pointed out before, no production is taking place outside of the Stabroek Block so his draft new contract does not alter the balance in Guyana’s sovereign wealth fund.
More than two years ago, the Institute for Energy Economics and Financial Analysis (IEFA) issued a damning report on the government’s failure to ring fence the country’s oil operations. In that report the IEFA observed that the Production Sharing Agreement (PSA) permits the oil companies to allocate exploration expenses across the contracted area and immediately offset 100% of these costs against the operational wells.
As such, the oil companies can conduct oil exploration at sites like Tanager and Redtail and apply the incurred expenses against Guyana’s oil revenue from the Liza 1 site. Consequently, Guyana’s earnings from the Liza 1 site are diminished due to this loophole. In essence, the profits for Guyana in the fiscal year 2021 will be diminished to cover the costs of oil and gas exploration, which may not yield extraction until 2030 or beyond.
The IEFA noted that “The government of Guyana gave away important protections when it agreed in the contract to postpone payments of its profits to encourage more exploration of oil. It failed to include a “ring-fencing” provision. In effect, the lack of such a provision means the contractor is able to charge Guyana for the cost of new wells before they start producing oil.”
The IEFA notes that the consequence of this is that Guyana is at risk of delaying the receipt of substantial funds, possibly reaching into the billions, until well into the 2030s because of the government’s failure to safeguard against front-loaded expenses in its oil and gas contract. The International Monetary Fund had cautioned about this situation, and IHS Markit, a global oil and gas services company, had determined that Guyana is obtaining a below-average share from the contract. Yet Jagdeo refuses to correct this elementary deficiency, something that he can easily do by insisting on ring fencing.
As this newspaper has reported, even before oil production commenced, Guyana was also advised by Chatham House, World Bank and the United Nations Development Programme (UNDP) to include a ring-fencing provision to ensure the country benefits from its oil resource early on. After all, are we not told that a bird in the hand is worth two in the bush.
Noting that Governments typically utilise ring-fencing provisions to prevent oil companies from using losses incurred on one site from sheltering the profits from other, more lucrative investments, the IEFA characterised the absence of ring fencing as a case of Guyana subsiding future exploration by Exxon. The government’s only defense is that the lack of ring fencing will ensure long-term benefits. But there is no guarantee of this happening. The government’s justification for the absence of ring fencing goes against the grain of Jagdeo’s belief that Guyana has a narrow window period to exploit it’s oil resources before the phasing out of fossil fuels.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions and beliefs of this newspaper and its affiliates.)
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