Difficult to renegotiate Orinduik contract if Exxon deal remains unchanged –University of Houston Instructor

Sep 01, 2019 News

By Kiana Wilburg

Since the revelation by this newspaper that the Production Sharing Agreement (PSA) covering the Orinduik Block allows the operator, Tullow Oil, to recover a measly one percent royalty which would be paid to the government, renegotiation calls have surfaced.

University of Houston Instructor, Tom Mitro

But University of Houston Instructor, Tom Mitro, categorically states that Guyana will have a difficult time pursuing the renegotiation of the Orinduik PSA if the lopsided deal with ExxonMobil and its partners for the Stabroek Block remains unchanged.

The official said that having an unfavourable deal for ExxonMobil will mean that operators of other blocks will also try to insist on a similar deal. The Oil Consultant with over 30 years experience in the field said, “It gets harder to push for better terms in other blocks if the Exxon terms are allowed to remain unchanged. Not impossible, but definitely more difficult.
The converse would also hold true.”

Mitro added, “If Exxon were forced to renegotiate then consistency and fairness would dictate that the Tullow Block operator should be forced to be renegotiated also. And the model PSA might also have to be redesigned in order to be consistent, so one change will create a domino effect.”

The University of Houston Instructor said that this can be a good thing, but it would require a lot of time and resources and planning. Ideally, Mitro commented that the government should develop a detailed strategy for how it would do this and still remain consistent. He commented that such a strategy would also require ensuring they have the personnel and expertise available to carry out such an undertaking before leaping in to it.

Further to this, Mitro said, too, that developing the message the government wants to give to industry investors will be important.

“No country wants to be known as one that is constantly changing contractual terms. Most typically, it would want to do what it can to assure current and potential investors that this is a special circumstance and not a continuing threat or something that is done without valid reasons,” the official noted.

WORSE THAN EXXON
In a previous interview, the University of Houston Instructor had emphatically stated that the Tullow oil deal is worse than the Stabroek Block deal. He noted that the latter sees the nation receiving a mere two percent royalty and a 50 percent take of the profit oil while the Orinduik PSA offers a one percent royalty that can be recovered.
But Mitro noted that the Orinduik PSA is also worse because it has most of the troubling characteristics as the Exxon PSA namely: taxes paid out of the government’s profit oil, a cost recovery cap of 75% per year, abandonment costs allowed to be recovered in advance of actual spending the funds, interest on loans allowed to be cost recovered without any caps, and captive insurance company premiums allowed to be cost recovered. The Petroleum Consultant with over 30 years experience in the field noted that the Orinduik PSA also has no ring-fencing provisions which ensure that costs of unsuccessful wells are not carried over to those that are successful.
The University of Houston Instructor said, “At this point, I would say the main lesson that might be learned is that taking adequate time to fully and critically review all aspects of any new Development Plan would be essential.”
He concluded, “That is the point at which the government typically has the most power to influence the ultimate results, not only the technical aspects but the costs, rates of production, the local content, contractor selection criteria, PSA interpretations, and other societal and environmental aspects.”

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