Latest update November 29th, 2024 1:00 AM
A flawed conclusion from flawed information
Dear Editor,
Respectfully, the Stabroek News editorial on Sunday about the Lisa Phase 2 development misrepresented several important financial aspects of oil development. It ignored journalistic ethics by including Jan Mangal’s unsubstantiated and unsourced claims about costs.
The editorial repeatedly questions why the government did not “test” the US$4.4 billion budget associated with the Liza Phase 1 development plan. What was left out of the editorial is that this number was simply the ESTIMATED budget for the project.
Worley Parsons, the international oil consultancy, scrutinized the technical aspects of this budget estimate before the government approved it. No matter how it was evaluated the project; the budget was always an estimate of the costs.
No amount of enhanced evaluation would make that number any more certain. It is, and always will be, the best guess at the time.
Think of it from the perspective of a homebuilder—he can estimate what he thinks it might cost to construct a home and explain what he expects to spend on materials, subcontractors, etc. But until the job is finished, he can’t tell you for certain what it did cost.
Stabroek News suggests there is something unethical at play here, but the government can, and will, audit the actual costs of the project after it is completed. The government has a clear responsibility to ensure accuracy once costs are fully known.
The editorial board also cites Jan Mangal’s often-repeated claims that Exxon could be inflating costs by as much as 20 percent. But he has never provided a source for these claims and they continue to defy common sense.
This isn’t about blind faith in the morality of Exxon or its partners. It’s a simple question of who would gain from this kind of deception. And the answer is no one. Exxon, its consortium partners, and the government are all incentivized to keep costs as low as possible. Why? Because this will maximize profit for all of them.
Mr. Mangal seems to think that “cost recovery” is Exxon writing a cheque to itself. But this is the opposite of how major energy development projects actually work. Looking at the “big ticket” items already known to the public reveals Mangal’s claims to be foolish.
The drill ships off the coast charge hundreds of thousands of US dollars per day for their services, forming a large part of the estimated $4.4 billion in costs. But Exxon doesn’t own the Stena Carron and the Noble Bob Douglas. They’re owned by Noble Corporation and Stena Drilling, independent companies that are currently billing Exxon for their services.
When Exxon “recovers” these costs, it won’t be paying itself, it will be paying the bills sent by these sub-contractors and other companies.
Another item, the Floating Production Storage and Offloading (FPSO) vessel that will produce oil from the Liza field will cost more than one billion US dollars to build and outfit. Mr. Mangal seems to imply that Exxon has an incentive to inflate these costs and “overbill” Guyana. But Exxon isn’t the one building the FPSO. It’s being built in Singapore by a Dutch multinational shipbuilder called SBM.
The list goes on and on. Seismic studies were done by the French engineering firm Technip FMC. The undersea control systems will be done by Italy’s Saipem. Why would Exxon inflate these costs when it wouldn’t be the one benefitting?
Mr. Mangal has a responsibility to the Guyanese people to either cite real sources for his claims or admit that by accident or choice he is misleading readers.
Stabroek News has every reason to encourage a full and accurate accounting of costs. But it also has an obligation to correct these errors and give the Guyanese people accurate information with context and free of innuendo and fear mongering.
Sincerely,
Clement Smith
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