Lopsided oil contracts…Nearsighted negotiators leave Guyana open to burden of decommissioning costs – Ramson

Apr 01, 2018 ExxonMobil, News

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– Says hundreds of millions, at minimum, to be wiped away

By Abena Rockcliffe- Campbell
Gone are the days when countries were so obsessed with first oil that they neglected to acknowledge the financial ramifications of not establishing a proper framework for the handling of abandonment or decommissioning of oil wells.
However, Guyana, in contracts signed post 2015 when oil was found, failed to make contractual provisions to protect the nation from having to bear the cost of decommissioning of wells.

This was pointed out by oil and gas consultant, Charles Ramson.
During a recent interview with Kaieteur News, the former Member of Parliament said, “Guyana will have to foot the bill for abandonment costs or what is known in the industry as “decommissioning” at the end of the respective projects sum which could amount to hundreds of millions of US dollars”
Decommissioning involves the safe plugging and abandonment of the hole drilled in the earth’s surface from which oil and gas are extracted and the safe disposal of the equipment used in production.
Ramson, an Attorney-at-law, noted that Article 20 of the ExxonMobil contract states, “All funds required to carry out the approved abandonment programme shall be made available by Contractor when the cost for abandonment are incurred” and “All cost included in the approved abandonment programme and budget shall be recoverable as operating costs”.
Therefore, while Government officials remain bullish about the revenues to be gained from ExxonMobil, the huge cost associated with abandoning a well or production facility will be borne by Guyana and can significantly affect revenue in the sunset of any particular oil project.
Ramson resigned from Parliament to pursue a Masters degree in Oil and Gas Management in the United Kingdom. He said that while he was in the UK, matters surrounding the decommissioning of wells in the UK’s North Sea were topical. “It was a huge issue,” he said.
He cited a UK Oil and Gas Authority report published in 2017, which stated that decommissioning costs in the UK continental shelf are best estimated to be about US$80B. That sum exceeded the remaining net tax revenues from UK oil and gas production.
Further, the Guardian reported that British taxpayers “face paying billions of pounds more than previously expected for dismantling the North Sea’s oil rigs in a further sign that the industry is becoming a burden on public finances.”
It stated, “Decommissioning oil and gas facilities across the UK continental shelf will cost an estimated £59.7bn, according to a report by the Oil and Gas Authority (OGA). About half of that will be borne by oil companies, the rest by the public purse through tax relief.”
A government regulator reportedly said that in its worst-case scenario the bill could jump to £82.7bn.
Oil companies enjoy between 40% and 75% tax relief on their clean-up costs because of their contribution to Treasury coffers during production years. But decommissioning and a slump in oil prices meant the oil and gas sector was a net drain on the Treasury of £396m in 2016. Read more at https://www.theguardian.com/business/2017/jun/29/taxpayers-face-growing-burden-for-dismantling-of-north-sea-rigs.
The Telegraph reported that decommissioning of North Sea oil rigs is threatening to “wipe out” all future tax revenues. Read more at: https://www.telegraph.co.uk/news/2017/01/09/cost-decommissioning-north-sea-wipe-future-tax-revenues/.
Ramson noted that Territories like Alberta and Texas face billions of dollars in abandonment costs and while Guyana will not have nearly as many wells, wells here are more expensive to drill because they are offshore “deep” and therefore more expensive to decommission to international standards.
Ramson noted that in the first and second phase of production alone, there will be over 50 wells being used either for production or injection. He said that the decommissioning costs for the Liza production alone could well be in the hundreds of millions of US dollars.
“That cost can then run into billions if the other discoveries like Snoek, Turbot, Payara, and Ranger come on-stream. It will mean that ExxonMobil will write off any decommissioning costs as expenses and that will lessen significantly future revenue for Guyana.”
Ramson said in offshore production (such as where Guyana’s will be located), the costs can range in the region of a few million dollars to over US$500m per oil and gas reservoir for which plugging and abandonment is one of the highest cost factors – representing about 60% of the total decommissioning cost.
The politician said that in 1999 when the original agreement was entered into even before any commercial quantities of oil were discovered, the importance of decommissioning was never even on the radar globally.
“The focus was on exploration and production and how to get more revenue (both from the company and country perspective) which in 2016 is very similar to the Guyana situation at the moment. Globally, that has now changed significantly especially for mature basins.”
Ramson opined that the David Granger-led government should have been advised better about these costs and should ask ExxonMobil to share these costs or to establish a fund, which takes out a nominal percentage in preparation of this large costs later in the future.
Ramson said that statements made by Minister of Natural Resources, Raphael Trotman, to the effect that shared by the government and ExxonMobil are “simply not true and Guyanese could read the Contract at Article 20 (d) (iii) and judge for themselves.”
Indeed, several countries are making moves to protect themselves against the burden of decommissioning cost.
Canada, for example, has set up a fund to handle decommissioning.
It is called the Abandonment Fund Reserve Account and is established under Section 172 of The Oil and Gas Act (“the Act”) of Canada. The Abandonment Fund may be used as a source of funds to operate or abandon a well or facility that is non compliant with the Act where the licensee or permittee of the well or facility fails to comply.
The Abandonment Fund may also be used to rehabilitate the site of an abandoned well or facility or to address any adverse effect on property caused by a well or facility.
http://www.manitoba.ca/iem/petroleum/infonotes/15-03.pdf

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