With Guyana losing $Billions, Oil Royalty must be challenged

Sep 02, 2019 Letters

DEAR EDITOR,

Thank you for the focus on the coming oil and gas industry and how Guyana has been short changed of a fair deal (royalty) that is normal in the industry; Guyana gets way below normal industry rate. The below information is obtained from research from varied websites as pertains to the industry in varied countries and is applied to Guyana
A royalty is a payment to an owner (people of Guyana) for the use of asset (oil and gas). The government grants a license or contract to energy companies and receives a fee (a percentage) of the market value of the oil or gas as a royalty payment. Royalties are free of all costs associated with exploration, drilling, recovery, and production of oil or any taxes. The production company bears all the costs of the exploration, production, and marketing which are deducted from the total revenues to be shared between the energy companies and Guyana as profits. Reproduction costs can never be a factor in calculating royalties. That would be a violation of industry practice and grounds for reopening the contract.
The industry rate for royalties was generally around 12.5% but in recent years it varied between 18% and 25%. Guyana gets 2% in the case of Exxon and 1% in the case of Tullow. It is not known what the rate is for other energy companies that have signed leases with Guyana. Contracts and agreements are kept secret.
Guyana is losing out on US billions of dollars of revenues annually. As an illustration, at a rate of US$60 a barrel at 100,000 barrel a day, total revenue is $6M a day. Guyana will get less than 2% or less than 1% (costs are first subtracted from the revenues) or less than $60K a day out of the $6M. After a month, Guyana gets less than $1.8M while the company gets $180M (with expenses of about half of that). After a year, Guyana $21.6 million while the company collects $2.16 billion (about half would be expenses and so it still has a profit of nearly a billion US dollars after a year). Those numbers are for 100K barrels a day. Production is expected to double after a few months and reach more than a million barrels a day in a year. At a million barrels a day, at a rate of $60 per barrel, Guyana will receive less than US$216 M a year while the energy company will collect $21.6B (with an estimated profit of about $10B). Guyana will get about 2% of the generated revenues while the company collects the rest.
Clearly, Guyana is cheated in several ways. It is not getting 2% or 1% royalties because expenses are first deducted from revenues and then offered royalties that the government agreed to accept. Guyana is not getting industry wide accepted royalties of 12.5%. Even if Guyana is to get 10% royalties, it will be considered as fair. It means Guyana’s royalties will increase tenfold to $2.16 billion at 1% royalty and $4.32B at 2% royalty. That is more than enough money to make every family a millionaire in American dollars term. The country’s standard of living will rise rapidly and immeasurably. Quality of life will improve substantially.
Regrettably, the government of Guyana signed a royalty clause that gives away the country’s prime assets. The people who negotiated those contracts need to be questioned and not allowed in any further government negotiations for any contracts with any companies on any resource. In both known cases of royalty clauses signed with the oil companies, there is a violation of industry practice. The royalty rate is calculated after expenses – a clear violation of international standards and by extension international law. The rate can be renegotiated since there is a violation. The government should turn to reputable lawyers (international if necessary) who know royalty law and international law (acceptable practices and common law rules). Public interest law can also be invoked to bring the parties to court and force renegotiations of royalty payments. Guyana stands to lose hundreds of millions (if not billions) American dollars annually if it does not demand that the oil contracts be opened for renegotiation. In Trinidad, human rights lawyers successfully challenge the government and private companies for violating basic tenets of industry-wide practices. The Privy Council upheld those challenges. The public (through concerned lawyers) should consider going to court to get Guyana a fair royalty contract since politicians are not prepared to touch the subject.

Yours truly,
Dr. Vishnu Bisram

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