Exxon decides when and how much oil money Guyana gets

Aug 17, 2021 News

…Country in need of corrective action plan – Sanzillo

Kaieteur News – The Production Sharing Agreement (PSA) that was signed in 2016 between the Guyana Government and Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana—has seen the country ceding control over how much revenue it will receive, and over the scope and pace of future development.

IEEFA’s Director of Financial Analysis, Tom Sanzillo.

These are among the findings of the Institute of Energy Economics and Financial Analysis’s (IEEFA) Director, Tom Sanzillo, who in a recent report noted that the lack of a ring-fencing provision substantially slows the pace of revenue that will flow to Guyana and that there is need for “a corrective action plan that is more equitable that would serve the interests of both parties in the long run.”
He noted in his report that the lack of a ring-fencing provision could be considered a legitimate incentive to encourage the contractor to continue exploration efforts even while it drills and produces oil at existing fields.
Currently, the Liza Phase of the plan is producing oil, and various other exploratory efforts are under way.
According to Sanzillo “the lack of the ring-fencing provision provides certainty for the contractor as it continues to explore for new discoveries.”
Governments, he noted, typically utilise ring-fencing provisions to prevent oil companies from using losses incurred on one site from sheltering the profits from other, more lucrative investments.
He cited as example, “by setting up one company for one field as the taxable entity, the revenue and expenses from the one site creates a clearly defined universe of profits and loss.”
As such, losses experienced at other locations would not be used to decrease profits from a productive oil field.
Sanzillo in his report documents however that “unfortunately, Guyana has granted the contractor a blank check with regard to future development. The result is that the contractor has a powerful incentive to continue to add costs to the project. The net effect is to push back the point at which Guyana maximises its cash benefit.”
To this end, Sanzillo noted that the Guyana Government failed to protect itself from front-loaded costs in its oil and gas contract signed with ExxonMobil and its partners and as such, receipt of hundreds of millions, if not billions of dollars due to Guyana will be held back well into the 2030s.
Sanzillo in his report noted that given the provisions in the Production Sharing Agreement (PSA) signed with ExxonMobil, “over the next five years, revenues from Guyana’s newly discovered oil reserves being developed by an ExxonMobil-led development team will not be enough to cover Guyana’s budget deficit, support new spending and build its wealth. Over the longer term, a declining oil and gas sector is highly unlikely to provide Guyana with the robust revenues promised.”
In fact, the IEEFA director in his analysis drew reference to the fact that the International Monetary Fund has issued a warning and IHS Markit, a global oil and gas services company, has concluded that Guyana is receiving a below-average take from the contract.
According to Sanzillo, “the Government of Guyana gave away important protections when it agreed in the contract to postpone payments of its profits to encourage more exploration of oil.”
He pointed specifically to the fact “it failed to include a ring-fencing provision” and explained that “in effect, the lack of such a provision means the contractor is able to charge Guyana for the cost of new wells before they start producing oil.”
To this end, Sanzillo concludes, “it is unlikely that Guyana would receive annual payments in the $6 billion range until well into the 2030s, if at all.”
He asserts the “the contract is front-loaded, which means the contractors receive more than Guyana in the early years of the contract.”

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