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Make the Exxon deal right!

Dec 20, 2017 Features / Columnists, Peeping Tom

 

Lionel Messi has just agreed to a signing bonus of US$100M to stay on at Barcelona Football Club. This is in addition to his US$670,000 weekly salary. Guyana which is sitting on three billion barrels of oil has agreed to signing bonus of US$ 18M from Exxon Mobil.
A signing bonus is a means by which a government can get revenue money upfront. It is not linked to what happens during the tenure of the contract. The country gets an upfront payment which is what at one stage the Minister of Natural Resources had been calling for.
A signing bonus is also a way of ensuring that the company with which it is doing business commits to the contract. No company which pays a significant signing bonus is going to walk away from that bonus.
Yet for some inexplicable reason, Guyana settled for a few crumbs from Exxon, a sum which is grossly inadequate to commit Exxon and which will be principally used to pay legal fees.
The signing bonus which was negotiated by the government was a post-exploration bonus. It was signed after Guyana knew what reserves it had. Guyana is sitting on one of the largest oil reserves in the world. Exxon has boasted as much. Yet, the government agrees only to an amount to cover legal fees and some other training costs.
Guyana has not provided the public with a reason why it opted for such a minuscule signing bonus. The government clearly wants oil revenues to be rolling in before the next elections. It therefore has every reason to try to tie Exxon to a substantial signing bonus which would have forced the company to meet its 2020 deadline. The government has not said whether it has agreed to production bonuses which are quite usual also.
Oil is an exhaustible resource. And by the way so is natural gas. Natural gas cannot by any stretch of the imagination be considered as renewable. Guyana could not interest Exxon in establishing a natural gas energy plant. Exxon is therefore only interested in plundering our oil, extracting it and not bringing on shore but shipping it out to an external refinery.
As Exxon extracts Guyana’s oil, the volume and the value of the oil reserves will logically decrease. This is why most countries negotiate royalties. It is a means of compensating for the decline in asset value of a country’s oil reserves.
Guyana, despite knowing that it was sitting on three billion barrels of oil opted to go for a 2% royalty. It has sought to justify this by claiming that the original contract signed by Janet Jagan had only agreed to a 1% royalty.
But this 1% royalty was at a time when it was not known that Guyana had such reserves. That agreement was a pre-exploration agreement. Now that Guyana knows the value of reserves that it is sitting on, it ought to have done much better than 2%.
Brazil’s sets a minimum and maximum benchmark for royalties. Brazil’s laws set royalties at a minimum of 5% and a maximum of 10%. One local analyst with an accounting background says Guyana should have negotiated a 7% royalty but no basis as to how this figure was arrived at was given.
The government needs to have a press conference dedicated to this contract it has signed with Exxon Mobil. There are too many contradictory statements being made. The President said that he was accepting responsibility for the deposit of the signing bonus in a Bank of Guyana account. But he did not state whether he is accepting responsibility for the royalty of 2% and the quantum of signing bonus of a mere US$18M.
He said that not all Ministers knew of the deal. This is passing strange because, at the minimum, one would have expected that an agreement of such importance to Guyana would have been deliberated for days by a full assembly of Ministers.
What is clear is that Guyana has signed a rotten deal, one of the worst deals signed by any government. The APNU should agree to a moratorium on all future deals. It should not sign any further deals until it makes this one right.
How to make it right? A signing bonus of US$500M plus a 5% royalty and a 50% production rather than profit-sharing.

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