Guyana will pay at least US$208M to cap Liza phase one wells

Apr 20, 2018 News

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By Abena Rockcliffe-Campbell

Decommissioning of the 17 wells drilled in the Stabroek Block for Liza phase one will cost Guyana nothing less than US$208M. This is the figure quoted by the International Monetary Fund (IMF) in a 2017 report it handed to the government titled, “A Reform Agenda for Petroleum Taxation and Revenue Management.”
Decommissioning involves the safe plugging and abandonment of the hole drilled in the earth’s surface from which oil and gas are extracted.
The US$208M cost quoted by the IMF will be incurred at the tail-end of the project when revenue is at its lowest.
The fear is that Guyana may have to utilize the money it secured early on in the project just to cover this cost. Worst case scenario, money may have to be taken from elsewhere to service this debt.
It must be noted that the US$208M only covers decommissioning of wells under Liza phase one that has 17 wells.
The cost of decommissioning has proven to be a burden to many countries around the world. But 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 wells.
While some countries like Canada have put mechanisms in place to safeguard themselves, other jurisdictions like those in the United Kingdom continue to reel from the tremendous debt on their shoulders.
Yesterday, Attorney at Law and Oil and Gas Consultant, Charles Ramson Jr. said that Guyana should not have to deal with that debt alone, “but that is what our nation’s negotiators agreed to.”
Ramson said that Guyana should have followed modern mechanisms employed by countries to deal with decommission cost. The lawyer said, “We have to always think of the future, there should have been provisions for a fund to be set up to handle this expense.”
Canada, for example, has set up a fund to handle decommissioning. It is called the Abandonment Fund Reserve Account. It is established under Section 172 of The Oil and Gas Act (“the Act”) of Canada. (http://www.manitoba.ca/iem/petroleum/infonotes/15-03.pdf)
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.
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.
In a previous interview with this newspaper, Ramson 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.
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/.
“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.”
Given the aforementioned, 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. Indeed, several countries are making moves to protect themselves against the burden of decommissioning cost.

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