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Oil don’t spoil

Feb 21, 2018 Features / Columnists, Peeping Tom

Yesterday’s column should have read that under the petroleum laws of Guyana, a company’s prospecting licence can only be renewed two times, for up to a total of six years after the expiration of the original licence.
Exxon, therefore, was not doing Guyana a favour when it signed a new agreement with the Government of Guyana in 2016. Exxon needed to have a production licence, so it had to sign a new agreement.
It also had to sign a new agreement because the original contract was between itself and the PPPC, while the new contract had some additional parties. Therefore, the excuse that the government was bound by the 1999 contract does not hold. The government negotiated a new contract.
Another of the old, worn-out arguments which is being made is that Exxon is the company making the investment; Guyana is not making any investment. It is said that if Exxon did not find oil, it would have been forced to carry all the costs associated with exploration. Therefore, it is being argued that Exxon is taking all the risks and has to be favourably compensated for all those risks.
All investors take risks. A person associated with this newspaper was among the first Guyanese to invest in missile-dredging in Guyana. The operation, however, did not yield much gold. The workers were advising the person to take the operations further up the river but this would have entailed, at the time, a further outlay of hundreds of thousands of dollars. The operations went bust, because the returns were not good. That is a daily risk that all investors take. You can hit or you can miss.
When ExxonMobil came here, there was no discovery of oil. It got a good deal from the PPPC to conduct exploration. It held its 600 blocks on its books while it explored. It found oil in 2015. It struck a hit. It went ahead and signed a production deal that was highly unfavourable to Guyana.
ExxonMobil can put this right. It can renegotiate this contract to ensure that Guyana gets a better deal. The government should not be fearful of saying that it supports renegotiation. Both the government and Exxon will lose, unless this deal is renegotiated.
When Exxon negotiated its contract with Guyana in 2016, the price of oil was below US$50. It is now around US$65. So let us use that as a base price for when production begins, because it is being said that Exxon can profitably produce at even US$40 per barrel in the Stabroek block.
The royalty of 2% is taken off the top of $65. This gives a royalty of $1.30 per barrel which comes to Guyana, leaving a balance of US$63.70. Out of this, Exxon will cream off 75% cost recovery or US$ 47.78. This leaves US$15.92 profit oil. This is then split half and half with Guyana, meaning that Guyana gets on each barrel US$7.96. In total, Guyana therefore gets US$7.96 profit oil plus US$1.30 royalty per barrel, which totals US$9.26. At 120,000 barrels per day, this is slightly more than the US$1M per day which both Exxon and the Guyana government say that we will receive.
If you divide that by the total population of Guyana, we get a per capita of US$40 per month per person. That cannot even pay a ‘special hire’ taxi fare from the East Coast to the Georgetown Hospital and back. This is the deal that Exxon gave us.
There are no oil riches to be derived here, even if production is ramped up and the price of oil goes up. Now redo the calculations at 10% royalty and 27.5% taxes, and notice the difference.
So when people encourage Guyanese not to worry about what we are getting but how we will spend it, they are asking Guyanese to plan how they will spend that G$8,000 that will be coming their way every month in the form of a cheque. And that is if you will get any money in the mail, because there are others who are advising the government not to pay out the money to Guyanese but to use it for infrastructure.
The other argument is that if we fret too much, Exxon will walk. Well, Trinidad and Tobago’s first Prime Minister, Eric Williams, used to say that “oil don’t spoil”. The oil is not going anywhere, so why worry if Exxon walks. Let them walk if they do not wish to renegotiate the 2016 agreement.

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