Guyana starts out with a loss!

May 06, 2021 Features / Columnists, Peeping Tom

Kaieteur News – The risks that ExxonMobil took during the exploration phase was said to have been the justification for the generous terms and concessions granted to that company, under the 2016 agreement. It is argued that if the company did not find oil, they would have had to bear the full costs associated with exploration.
What persons making those arguments did not disclose is that when oil is found, all those costs are recoverable. In other words, the Basin was de-risked. Exxon, in fact, even before it commenced oil production, had billed Guyana to the tune of US$460M in pre-contract costs.
Even before Guyana received its first dollar of oil revenues, it had incurred a liability for the costs associated with the “risks” which Exxon was taking since 1999. Exxon was therefore merely operating under a conditional risk. If it did not find oil, it would have had to bear the costs of exploration, but once it finds oil, that money now becomes payable by the government.
But why should this be? Why should a small nation, now entering the oil industry, have to carry on its books, even before oil revenues are received, the costs of exploration or what is now being referred to as pre-contract cost?
Pre-contract cost includes contract costs, exploration costs, operating costs, service costs, general and administrative costs and annual overhead charges as those terms are defined in the 1999 Petroleum agreement.
Guyana starts out with a loss. Guyana owed Exxon US$460M before it has received a blind cent from that company. And this sum only covers up to 2015. This sum does not cover the 2016 costs and beyond which will also form part of cost recovery.
The Petroleum Sharing Agreement states that the pre-contract cost “shall include four hundred and sixty million, two hundred and thirty seven thousand and nine hundred and eighteen United States Dollars (US$460,237,918) in respect of all such costs incurred under the 1999 Petroleum Agreement prior to the year ended 2015.” To this will be added costs between January 1, 2016 and the effective date of the 2016 contract.
Production did not commence until December 2019. Therefore, pre-contract costs would have increased further.
In light of this, Guyana ought not to have gone for a 75 percent cap on cost recovery. It should have spread its liabilities out so that cost recovery, at best, would have been capped at 50 percent, given that this is a long-term agreement.
Annex C of the Agreement provides for cost recovery for categories of costs which do not require, (DO NOT REQUIRE) further approval of the Minister. These costs include, the salaries and wages of employees of the Contractor (Yes, Guyanese are paying those fat wages and salaries of the employees of Exxon engaged in petroleum operations). Cost recovery also includes holiday, vacation, sickness allowances and disability payments of employees. It covers the travel, personal and transportation costs of employees, equipment and supplies. It covers, also, third and affiliated parties’ costs and legal fees.
All of this will eat into cost recovery – even more reason why these costs should have been spread more evenly over the life of the investment. The initial outlay to commence production is going to be high but as production begins, these costs will begin to reduce relative to the cost oil. As such, it would have made practical sense to have asked for a low cap on cost recovery, especially considering that Guyana will be starting in the red.
However, after examining the contract, the APNU+AFC government said it was satisfied. It said that the contract is final. Moreover, guess what, it means it is not going to renegotiate the contract even though its own advisor had indicated that contracts could be renegotiated.
When a government can take such a stand, then Exxon has no reason to worry. It is under no pressure to come back to the negotiating table. The PPP/C came in and now says that it will not renegotiate the contract but will seek better terms for future contracts.
Guyana is bonded, our hands and feet shackled with this contract for the next 40 years.
In addition, the most painful insult of all is that despite us having to pay pre-contract costs and cost recovery, Guyana has no say in what is spent, how it is spent and on what it is spent.

(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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Guyana starts out with a loss!

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