10% royalty on Exxon would have put US$120M in budget 2024

Jan 22, 2024 News

Kaieteur News – Had Guyana applied a 10% royalty rate instead of the existing 2% rate on Exxon’s oil projects, the country would have had an additional US$120M (GY$25B) to allocate for its 2024 budget. The government now finds itself in a position, in which, instead of heeding the calls of advocates for a better oil deal, it intends to change the withdrawal formula of the Natural Resource Fund (NRF), so that it can spend more of what is there, to help fund its GY$1.1T budget.

In 2023, US$1.617B flowed into Guyana’s NRF. This sum comprised approximately US$1.4B in profit oil sales and US$218M in royalty payments. As per the Stabroek Block Production Sharing Agreement (PSA), ExxonMobil and its partners are mandated to pay a 2% royalty on the value of all crude oil produced and sold, which for 2023, translated to the US$218M figure.

Critics have pointed out that this 2% royalty rate does not do justice to Guyana’s dignity as a sovereign nation rich in natural resources, while Exxon carts off with the lion’s share. Advocates for a higher royalty rate argue for 10%. Under such a rate, the royalties in 2023 would not have been US$218 million but a staggering US$1.09B. This increase, when combined with the US$1.4B from profit oil sales, implies that Guyana would have received approximately $2.49B in 2023 – US$872M more than the current figure.

The impact of this hypothetical increase becomes more pronounced when one applies the withdrawal formula of the NRF. The current formula restricts annual withdrawals to the funds accrued in the previous year, with a tiered percentage applied to different tranches of revenue. Under this rule, the maximum allowable withdrawal for the 2024 budget based on the actual 2023 inflow of $1.617B is approximately $1.154B. However, had the 10% royalty been in place, applying the same withdrawal rule to the higher inflow of $2.49B would have resulted in a maximum allowable withdrawal of about $1.274B. This scenario presents an additional US$120M for the 2024 budget compared to the current permissible amount.

Despite the potential benefits of a higher royalty rate, the government has been reluctant to renegotiate the Stabroek Block PSA. The official stance is that the current contract terms incentivize investment and that altering them could jeopardize Guyana’s long-term investment prospects in the oil and gas sector.

As it stands, with the US$1.154B in oil revenues available for the massive 2024 budget, the government plans to change the withdrawal formula. This proposed revision aims to access a more significant portion of the funds in the Natural Resource Fund. If a 10% royalty rate had been implemented, such a revision to the withdrawal rule might not have been necessary.

Vice President Dr. Bharrat Jagdeo has not said the exact amount the government seeks to withdraw from the fund. He said during a press conference last week that the legislation to revise the rule is currently in draft, and details regarding the government’s intended withdrawal and the new formula will be disclosed by the Ministry of Finance in due course.

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Exxon, Natural Resource Fund, oil project, oil revenue, Stabroek Block

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10% royalty on Exxon would have put US$120M in budget 2024

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