Guyana’s royalty is for oil sold but Exxon recovers costs on everything produced

May 09, 2021 News

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Kaieteur News – Much has been said about the quantum of the Royalty that is received for crude being produced from the Stabroek Block, with stakeholders promulgating that the Production Sharing Agreement (PSA) gives Guyana a two percent royalty along with a 50/50 split on profits.
This equation has led many to believe that Guyana’s take from the oil produced in the Stabroek Block is 14.5 percent on everything.
This, since a 75 percent cap has been placed on cost recovery for any given month and as such with a two percent royalty paid over first –75 percent cost recovery would mean that the 25 percent remaining is to be divided in half.
As such, profit at half of 25 percent would equate to 12.5 percent, together with the two percent royalty representing Guyana’s take.
Royalty is traditionally a payment that a licensee makes to a licensor in exchange for the use of their licensed asset, and as such is paid over before any other deductions are calculated, such as personal, corporation and other taxes.
Despite this being the prevailing position adumbrated by industry and government officials; this is not the case for Guyana and its oil.
Under the provisions of the PSA with Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana—and its partners, Royalty is calculated at two percent of oil that is produced and sold. As such, royalty is not calculated against the total production for each month.
Cost recovery on the other hand, is calculated against the total production for the month—minus what is required for the petroleum operations, such as crude stored in pipelines and gas used to power the Liza Destiny.
What this equates to, in the event of, for example 100 barrels being produced and sold, royalty for that month would be calculated to be equivalent to two barrels for Guyana. Should 150 barrels be produced but only 100 barrels sold, it would mean royalty for that month is calculated against the amount sold—100 barrels—and not the amount that was produced which could have resulted in royalty being three barrels. Juxtaposed against the calculations for cost oil to be deducted for the period, under the PSA, it would mean that if 150 barrels is produced but only 100 sold, royalty is calculated against the 100 barrels, while cost oil would be calculated against 150 barrels produced for the period.
As such, while royalty for that month would be two barrels, calculated against what was sold, the deductions in cost oil for that month would be 75 percent of 150 barrels produced and not the 100 sold.
This would result in a total deduction for cost recovery, for that month, to equate to 112.5 barrels. Simply put, in a month where 150 barrels were produced but 100 sold, Guyana collects two barrels for royalty on what was sold, but the country pays over to the oil operators, 112.5 barrels, since the recovery is being calculated against the 150 barrels that was produced.
Similarly, in a month where 100 barrels is produced and sold, it would mean two barrels for Guyana and 75 towards cost oil, since the calculation is against the total amount produced.
This would mean that 75 barrels for cost and two barrels for royalty are deducted from the total amount produced and sold, leaving 23 barrels as profit oil. This divided in half would leave 11.5 barrels for the two partners—the EEPGL led consortium which includes China National Offshore Oil Company (CNOOC) and Hess Corporation along with the Guyana Government.
This means, instead of the 14.5 percent take for Guyana, in a month where 100 barrels represent the total production for the month and all is sold, the country would instead be getting 11.5 barrels in profit along with two barrels royalty, or 13.5 percent.
This would result in Guyana’s take being one percent less than is being peddled and with more than nine billion equivalent of already proven resources in the Stabroek Block; it would mean Guyana stands to lose out on 90 million barrels of oil.
This obtains, since crude sold at the current market price, would amount to US$5.850 billion more, which is handed to ExxonMobil and their partners in cost recovery.
Guyana received its first royalty payment in May 2020 of US$4.9 million followed by its second payment in July of some US$3,698,152. A third payment was collected in November that year, bringing to total for the year to US$12.9 million. It would mean that this represents two percent of oil produced and sold from December 2019 to the end of the reconciliation period for which the payments represents. As such, would mean that some US$645 million worth of crude was sold for the period.

 

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