Local content requirements should be specified in oil contracts

Oct 30, 2017 ExxonMobil, News

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– TT’s former energy Minister

Former Energy Minister of Trinidad and Tobago, Kevin Ramnarine is of the firm view that local content requirements should not only be made into law but more importantly, clearly stated in all oil contracts.
Ramnarine made this, among other comments during a recent consultation on oil and gas.
The Strategic Advisor said that in certain countries, the implementation of local content policy is done through moral suasion. He said that this often poses much difficulty.
With this in mind, the former Energy Minister said, “My recommendation would be that local content law and local content requirements be specified in the Production Sharing Contracts with the companies being engaged. If you leave it up to the good intentions of the multinationals, you would probably not get the impact that you want.”
“You want as much as possible, the supply chain of this industry to come from Guyana. No one here can supply a drill ship for example with the things it needs but there are other things which you can supply.”
Ramnarine shared that in the 1960s and 70s; Trinidad and Tobago supplied the oil industry with rented cars, homes, and food. He said that this has now changed with a lot of the cementing and drilling needed for the sector, being provided by TT locals. Ramnarine said that this process takes time.
“That took almost a generation for that skill set to emerge in Trinidad and Tobago. We got to a point where we are able to export those skill sets around the world. So it will take time in Guyana’s case but you need to have the political will in order to make that happen.”

PROS AND CONS
In the interim, Government has taken a decision to review the pros and cons surrounding the continued use of Production Sharing Agreements (PSA) in the oil and gas sector.
This is according to Minister of Natural Resources, Raphael Trotman.
In an interview with this newspaper, Trotman said that there are different types of Agreements or Contacts which are entered into between governments and oil and gas companies.

He noted however that in 1999, when a PSA was signed between the Government of Guyana and USA oil giant, ExxonMobil, the Production Sharing Agreement model was considered “avant-garde”.
The Natural Resources Minister said that Production Sharing Agreements were the standard in the industry and so across the world, that was the model that was being utilized.
Trotman sought to remind as well that in 1999, Guyana was seen as a place where no one wanted to do business and deep water exploration was considered very risky and costly. He emphasized that many companies shied away from it.
Trotman said too that Guyana during that time had no known signs of oil in the manner and scale it does today. He said that it was just seen as a possible frontier. Compounding the issue often times was the threat from “next door” thus investors were often scared away, Trotman expressed.
He said, “So when Guyana began its endeavours around that period to attract companies, Exxon was just one of them. But this government has not given out a single new contract. All of the contracts right now are Profit Sharing Contracts and that is the model this country has used.”
The Natural Resources Minister continued, “We don’t condemn it. There are different models of course, such as Strict Royalties; some say a Partnership where you get 50 percent of the profits, but what is most important is what you do with the money when you get it. Both (contracts/agreements) will give you a desired outcome depending on how they are structured—that is that you earn revenue.”
Trotman added, “In the case of the profit sharing, you don’t make any investments, the operator comes and takes the risks because if you miss by 10 feet, in drilling a hole where the oil is, then it could cost you US$6 to US$7M…”
With this in mind, The Natural Resources Minister said that Government will be doing a review of the kind of agreement to be used for future. He said that the review will consider if Guyana should maintain the use of Production Share Agreements or switch to another that might be in the nation’s best interest.
The Leader of the Alliance For Change (AFC) said that one must bear in mind this kind of arrangement is what the coalition administration inherited. He said that when governments change, it is expected that the incoming party would honour the contracts before especially when they have to do with firms from international communities.

PRODUCTION SHARING AGREEMENTS
According to the International Monetary Fund (IMF), a Production Sharing Agreement (PSA) is a contract between one or more investors and the government in which rights to the prospection, exploration and extraction of mineral resources from a specific area over a specified period of time are determined.
As it relates to the terms of a standard PSA, the government hires the investor (-s) as a contractor for the extraction of mineral resources, but the government still retains ownership of the resources.
The investors carry out the works at their own expense and risk sharing with the government, part of the production output in accordance with the agreement.

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