Orinduik PSA very unusual by any standard – Energy Consultant

Sep 03, 2019 News

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By Kiana Wilburg

When one examines the fiscal provisions of the Orinduik Production Sharing Agreement (PSA), it is very unusual by any standard says Partner and Lead Consultant at Global Energy Advisory Services, Randall Mohammed.

In one of his recent commentaries on the Guyana oil industry, the Trinidadian who is working in the United Arab Emirates, said he found the provision that allows for a measly one percent royalty to the State to be recovered, troubling.
The Lead Consultant at Global Energy Advisory Services said, “… A one percent royalty is very low… This is one of the disadvantages with frontier plays, it’s risky for investors and they require a greater level of financial incentives to de-risk the prospect, more so in territories where governments don’t have the experience or financial strength.”
Mohammed noted, however, that there are cases where governments, aware of their inabilities, took the time to learn what is necessary before going to the negotiation table with experienced oil majors.
In this regard, the Trinidadian said, “I recall the scenario in Tanzania whereby the government hired experts on a three-year contract to train and impart knowledge to the Government’s Negotiating Team before going to the negotiation table with investors in a planned LNG project.”
Mohammed alluded to the fact that this is the type of cautious approach governments new to the oil industry need to take a note of.
In addition to this, Mohammed cited the recent revelation by Kaieteur News that Guyana is being billed $64M by Tullow Oil and its partners for costs incurred prior to the deal being signed in 2016 with the Granger administration.
The Consultant noted that recoverable costs by the oil company may include exploration and development cost or be limited to development cost. He asserted that usually, oil companies want to recover all the costs incurred to bring the resources to the surface. Mohammed added, “At times, it appears to be a one-sided game, as governments new to oil and gas have little expertise and experience to identify costs that are applicable.” Considering this, Mohammed stressed that training of government officials on these matters is essential.
IMF ADVISES
The International Monetary Fund (IMF) which is providing technical assistance to Guyana on the oil sector has made it clear that it is only the development costs that are supposed to be recovered by the operator.
In its report called, Selected Petroleum Fiscal Issues, the IMF explained that in a Production Sharing Agreement (PSA), an oil company agrees to cover all the costs required to explore for and produce oil in return for a share of production. In the event that the exploration does not lead to the exploitation of a commercial discovery, the Fund said that the oil company has no right to be reimbursed for the costs it had incurred.
For this reason, the IMF said that the oil company bears all of the exploration risks associated with an oil project. But the financial institution did not stop there. It went on to stress, “If the company finds oil in commercial quantities, meaning that the project is economically viable, and decides to exploit it, the contractor will recover costs it incurred to develop the project from a portion of the total value of production. This amount of production used to recover costs is called cost oil. The remaining oil is called profit oil.”
DISCOVERY / EXPLORATION
Due to the 13 discoveries that were made by ExxonMobil on the Stabroek Block, Tullow Oil and its partners, Eco Atlantic and Total, had agreed to bring forward their drilling programme three years ahead of time.
Just a few days ago, the company struck black gold when it drilled the Jethro-1 well. Tullow’s Chief Executive, Paul McDade noted that the discovery could hold more than 100 million barrels of recoverable oil.
The company is now drilling the Joe prospect in hopes of replicating a similar success story.
ORINDUIK JV PARTNERS
In January 2016, Eco signed a Petroleum Agreement and is party to a Petroleum Licence with the Government of Guyana and Tullow Oil for the Orinduik Block offshore Guyana.
Tullow Oil as the Operator of the Block paid past costs and carried Eco for the first 1000km2 of the 2550km2 3D Survey. Further, Tullow contributed an extensive 2D seismic data set and interpretation.
The Company’s 2550 km2 3D seismic survey was completed in September 2017, well within the initial four-year work commitment the Company made for the initial 1000km2.
In September 2017, Eco announced that its subsidiary, Eco Atlantic (Guyana) Inc. entered into an option agreement on its Orinduik Block with Total, a wholly-owned subsidiary of Total S.A. Pursuant to the option.
Total paid an option fee of US$1 million to farm-in to the Orinduik Block. An additional payment of US$12,500,000 was made when Total exercised its option to earn 25 percent of Eco’s working interest in September 2018.
Following the exercise of the option by Total, the Block’s working interests became: Tullow – 60% (Operator), Total – 25% and Eco – 15%. In October, last, the Government approved of the Total farm-in on the Orinduik Block, which has the potential for almost three billion barrels of oil equivalent.
Just a few days ago however, Total sold 10 percent of its interest in the Orinduik Block to Qatar Petroleum.

 

 

 

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