Possible oil contract risks and associated solutions

Feb 06, 2018 Letters

Dear Editor,
According to Section 32 of the released contract, it is clear that in the event of an oil spill, the contractors Hess, Esso (Exxon) and CNOOC Nexen will be responsible for the clean-up and associated costs of an oil spill. However, it is still the responsibility of the Environmental Protection Agency to ensure that clear provisions are made based on the environmental impact assessment in the case of such an event.
The contract outlines the usage of US$300,000 for annual environmental projects, but does not make clear what has been set aside in the event of an oil spill. This is an area of opportunity, as in the event of an oil spill, it is not clear what impact this will have on resulting profit sharing.
A financial provision for such an event could possibly be carried on the government’s books, thus safeguarding a section of the earnings for such an event. Creation of such a liability in ExxonMobil’s books may not be possible given existing accounting rules, however this should be discussed and further investigated.
Another point that could be further clarified is whether 100% of these costs will be considered as operating costs or categorised in such a way that it only impacts the contractors’ portion of the profits – thus creating a liability for the contractor in the event of a spill.
This is important to ascertain given the current level of risk sharing in such an event; that is to say, the portion of operational control held by the contractor is significantly higher than that of Guyana. However, it should be noted that in Section 8 there is a requirement for training of Guyanese nationals with the involvement of the GGMC to ensure the safety of petroleum operations.
Given the possible evolution of involvement by the Government in the future, it will become a bit more ambiguous as to how much fiscal responsibility could be placed on the Government for the cleanup cost of an oil spill, as would be reflected in the after tax earnings if such an event was to occur. It does not hurt to make this clear within the contract, even if discussed verbally during the creation of Section 32.
Of further concern is that Section 26 places arbitration in the hands of organisations that are heavily influenced by the USA, and, given the influence that ExxonMobil’s ex CEO has in Washington DC, could make the favourable resolution of such a dispute tenuous at best.
It should be noted that Section 26 also impacts any dispute associated with the abandonment programme and its corresponding budget. Thus the terminal value of the contract could be negatively impacted in a significant way. Mitigation of this risk could be achieved if this portion of the development plan is clearly outlined in the annual review with a clear understanding of the associated costs, thus also helping in clarifying long term profitability prospects.
Best regards,
Jamil Changlee

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