‘Guyana will lose big with National Oil Company’ - Analyst says country better off seeking higher royalties in future contracts

‘Guyana will lose big with National Oil Company’ – Analyst says country better off seeking higher royalties in future contracts

May 16, 2022 News

Arthur Deakin, Co-Director of the Energy Programme at Americas Market Intelligence

By Kiana Wilburg

Kaieteur News – Guyana would be better off pressing for increased royalties in future oil contracts rather than rushing ahead with plans to set up a national oil company, Arthur Deakin, Co-Director of the Energy Programme at Americas Market Intelligence has said.
It was Vice President, Bharrat Jagdeo who had announced earlier this year government’s interest in setting up such a company ahead of an oil block auction in September. Ever since his announcement, there has been a lot of push back to his idea, which he has disregarded.
Locally, some sections of the media have resurrected arguments by the International Monetary Fund (IMF), which has worked closely with Guyana since 2015. The financial institution has contended that there is simply no business case for a NOC here. There are quite a few persons who agree.
Deakin for example, recently told Energy Advisor that the drawbacks of creating a NOC in Guyana far outweigh the benefits. The analyst reminded that the Guyanese Government has said it is looking for an open, public bidding process for its remaining oil blocks where the most competitive bidder wins. Deakin said that awarding the block/s to a state-owned oil firm, or limiting key players such as ExxonMobil from participating, goes against that—especially since some of the participating companies (like Exxon) have local experience that could lead to economies of scale.
Further, Deakin reminded of the government’s desire to accelerate its oil production to ensure that it does not get ostracized by global climate targets.
The analyst argued however that a NOC with little to no experience and wherewithal would potentially delay this accelerated pace of oil development, as the government would need to create the supporting legal and regulatory structure around the company.
Deakin said too, there is a strong risk of corruption and nepotism that comes with creating a NOC. He said this is seen by regional peers; such as, PDVSA in Venezuela, Petrobras in Brazil and Pemex in Mexico. The analyst said, “Perhaps more important is that since the blocks are prospective, the NOC would mean new risks and costs for the government. A simpler way to increase their percentage of profits, while avoiding taking on new risk, is by increasing its royalties in future production-sharing agreements.”

Vice President, Dr. Bharrat Jagdeo

Regarding the oil curse, a term which describes the political and economic dysfunction that occurs when leaders fail to properly manage and invest oil revenues, Deakin believes it is too soon to tell whether Guyana will be able to dodge it. He said, “It has set up a relatively promising sovereign wealth fund, but it is unclear how transparently and efficiently it will spend its oil money.”
To ensure further economic diversification, and encourage local entrepreneurship, Deakin said Guyana needs more government incentives, more robust technical training and easier access to financing.
IMF ADVICE
In one of its analytical reports, the financial institution noted that many countries have a National Oil Company, which allows the government to participate in the block like an investor would. The IMF said that this move also allows the government to have a “seat at the table” for decision-making. The Fund noted, however, that given the substantial regulatory powers the government can have over the upstream petroleum sector, it is not evident that participating would necessarily be adding much more value.
Furthermore, the financial institution warned that participating interest by government requires it to contribute to handling a portion of the costs, including in the development phase of the oil block. It was keen to note that the government can raise its own money to handle those expenses, or it can lean on the operator and repay the oil company with interest. The Fund noted that the latter option delays the receipt of any major benefits for the government.
As such, the IMF said that the government might be better off securing a higher government take in the contract itself.
Be that as it may, Vice President, Dr. Bharrat Jagdeo has expressed the view that the IMF does not have the country’s interest at heart; therefore, it is the government that will decide what would be the best way forward on this subject.