ExxonMobil to recover millions in decommissioning costs 20 years in advance

Mar 02, 2020 News

Modify all Production Sharing Agreements quickly – Industry Expert

When oil projects are nearing the end of their lifecycle, an exercise called decommissioning is activated. This allows for the safe removal of all pipes and other infrastructure that were put in place for the extraction of the resource.

University of Houston Instructor, Tom Mitro

Since this exercise runs into millions of dollars, oil producing countries establish a fund so that the operator can make deposits to handle those expenses when the time comes. This is standard industry practice. But Guyana’s Production Sharing Agreements (PSA) with ExxonMobil and other operators do not require any advanced funding for this expensive exercise. What it does allow however, is for the company to begin recovering costs for the decommissioning more than 20 years before it is required to fund the said exercise
During an exclusive interview with Kaieteur Radio on its programme, Guyana’s Oil and You, University of Houston Instructor, Tom Mitro said this arrangement Guyana has in place is quite unusual.
The industry expert said, “Decommissioning is an exercise that costs millions of dollars. It is a large amount of money the companies are required to spend in a time when the oil is no longer pumping and therefore, no money is being generated. And there is a risk in that period.”
Mitro said that often times, when oil fields are in their last days, big companies are known for selling out the projects to smaller companies which do not have a strong financial backing as they do. And it happens all over the world he said. Mitro noted that in many instances, the smaller company files for bankruptcy and the country is left with the bill.
The industry expert said, “As a result of this, most agreements and regulations in the world ensure there is an advanced funding mechanism in place because they don’t want to rely on companies that will look to take short cuts or file for bankruptcy.”
He added, “But in Guyana, you do not require any pre-funding for decommissioning. You allow the companies to take oil to recover future costs, so they take the oil in advance, 20 or 30 years in advance without having to put out the cash. This is pretty unique. I have not seen this anywhere else.”
Mitro said that unusual provision is highly beneficial to the company.
He said, “Companies always look at something called net present value which is basically any money you get now is worth more to you now than money you will get in the future or any money you can defer spending now is better for you in the future and that drives the decisions they make. My rough estimate of the benefit is that the companies make US$100M more in net present value and that is a fairly significant amount.”
The University of Houston Instructor said he would advise Guyana to put regulations in place to protect itself along with making modifications to Production Sharing Agreements (PSAs) which require a pre-funding arrangement.