THERE IS NO 52% TAKE FOR GUYANA

Feb 21, 2020 Features / Columnists, Peeping Tom

There are a lot of pretenders out there claiming to understand the oil contract which the government signed. Their mission, however, is to defend a government which they would like to see returned to office.
Some persons – especially some on social media – do not understand what Guyana is supposed to be receiving from the oil companies. They have read about the 50% profit oil which Guyana is supposed to be receiving, and they are adding that to the royalty and claiming that the country will receive 52% of the oil production. That is far from the truth.
Guyana gets 2% off the top. So no matter how much is produced, Guyana gets 2% of its value. This is not discounted from the total production. From the total production, Exxon has to deduct its costs. Now there is a cap of 75% of costs, which means that Exxon cannot claim more than 75% costs at any one time. The remaining 25% is what is called profit oil.
It is 50% or half of this profit oil which Guyana is entitled to. This means Guyana is entitled to half of 25% or 12.5%. So Guyana’s total take, will be the 2% plus the 12.5% which is 14.5%. Not 50% plus 2%.
These are just the crude calculations. A number of additional things, however, have to be factored into this formula.
Firstly, Exxon is entitled to reclaim the costs of the oil which it used in production. This is part of the contract. Exxon is not only producing oil, but it is using oil. It can reclaim this.
Secondly, Guyana has to pay Exxon’s taxes. There have been concerns raised about the ethical propriety of this arrangement. The government has not offered an explanation as to why it agreed to this arrangement. But surely that cannot have anything to do with Venezuela.
Thirdly, there is no “ring fencing’. In broad terms, what this means is that if Exxon drills a well and it does not find oil, it can put these costs onto those wells where it found oil. This reduces Guyana’s potential take.
And yet persons are arguing that Exxon was taking a lot of risks. What risks? There is no ring fencing, and so there is no worry about the risk of striking an empty well. Guyana, on the other hand, has to foot the bill, whether oil is found or not. But having found oil in the Stabroek Block effectively de-risked the block.
Fourthly, Guyana still has to pay field development costs which run into billions and pre-contract costs which are estimated at close to US$1B. This is a huge bill and should be properly audited.
Fifthly, Guyana will get cash for its royalty, but has to sell its own oil. And there is a big commission involved here for the company which has to sell the oil. That further reduces Guyana’s take.
Sixthly, Exxon estimated that it will produce 120,000 barrels per day for the first year of production. We are now into the second month of production, and it is still nowhere near that number. Guyana, therefore, may end up receiving far less than the US$300M which it had expected in the first year.
People have to stop deluding themselves into thinking that regardless of the poor deal which was signed, riches are coming the country’s way. They have to stop being hypnotized by promises being made on the campaign trail. The money is not going to be there to do those things.
Whatever crumbs are received will have to go to fixing the big hole that exists in the economy. Foreign reserves have declined to dangerous levels. The dollar is trading at around G$215 to US$1, with businesses having to pay an extra G$3 above this rate. In addition, business costs are climbing daily.
People want to be positive and hopeful, but the indications are clear that the economy has serious problems and is waiting on an oil bailout. That bailout will mean less for you and me.
The 2% royalty will be enough to give you and me three loaves of bread each per month. With the profit oil take, this still is not enough to allow for a loaf of bread per day. That is why Guyanese should do the math and be careful with the election promises which are being flaunted without counting the costs of delivery.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper)

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