Is Jagdeo out of his depth?

Jun 05, 2022 Features / Columnists, Peeping Tom

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Kaieteur News – Guyana’s Second Vice President was asked a simple question by a Kaieteur News reporter. But even to that simple question, he could not provide a coherent answer to a questioning about decommissioning costs.
During his last press conference, a Kaieteur News reporter asked whether there would be any changes in the contract to the clause dealing with decommissioning. Jagdeo could not provide a straight answer, preferring to dance around the issue, thereby raising concerns as to whether he is out of his depth in this sector or was simply being defensive.
As this newspaper has been pointing out since 2020, when oil fields near the end of their lifecycle, an exercise usually begins to decommission the wells. This usually involves capping the oil wells and removing the pipelines attached to the ocean floor. It is akin to a clearing-up exercise which is usually done when a contractor finishes construction. The equipment and other apparatuses used are usually taken away.
Again as this newspaper recently pointed out this is an extremely costly exercise. In order to cater for these high costs, the standard industry practice is for monies to be set aside, and usually placed in a fund, to handle future decommissioning costs.
Unfortunately, the APNU+AFC had not inserted, into the Production Sharing Agreement, any provision for the setting aside of advance funding. Instead, it allowed for the oil companies to begin recovering decommissioning costs more than 20 years before the said exercise.
The oil companies are allowed to take oil to recover these future costs. And they are allowed to treat these costs as operational expenses. This makes these expenses subject to cost recovery which has to be paid by Guyana.
Article 20 of the ExxonMobil contract states, “All funds required to carry out the approved abandonment programme shall be made available by Contractor when the cost for abandonment are incurred” and “All cost included in the approved abandonment programme and budget shall be recoverable as operating costs”.
The Center for International Environmental Law (CIEL) recently observed: “the Production Sharing Agreement for the Stabroek Block does not require the companies to set aside any money for decommissioning in a dedicated fund, or provide any form of financial security while the wells are producing. Instead, the Agreement permits the ExxonMobil-led consortium to deduct the estimated future costs of decommissioning as current operating expenses…”
University of Houston Instructor Tom Mito was left amazed at this development. He described it as pretty unique and is something which is not seen anywhere else in the world. He noted that this arrangement is highly beneficial to oil companies.
He is not alone in this view. In an interview with this newspaper in 2018, the now Minister of Culture, Youth and Sport, Mr. Charles Ramson Jr., was reported as saying that the David Granger-led government should have been advised better about these costs and should have asked ExxonMobil to share these costs or to establish a fund, which takes out a nominal percentage in preparation of this large cost later in the future.
While the oil companies benefit from the present arrangements, Guyana loses. As CIEL points out, the recovered costs reduce the amount of profit oil which is shared with Guyana, and effectively hands Guyana the tab for decommissioning.
Obviously, Exxon is not storing in some depot the oil that is appropriating for decommissioning costs. So where is that money going? Exxon is holding that money and it will have to hold it for as much as 20 years. It can invest this money and profit off of it. Guyana gains nothing from Exxon holding these proceeds.
The oil companies can benefit twice. They benefit from not having to shoulder any of decommissioning costs while at the same time having free use of those decommissioned assets in other areas.
The PPP/C administration had promised to claw back greater benefits from Exxon and its partners. It is settling for scraps rather than addressing issues such as decommissioning costs.
It has failed to use the recent renewal of the Liza-1 environmental permit to claw back significant benefits. It could have done so.
Decommissioning costs are not devoid of environmental considerations. Decommissioning has environmental implications. After all what would happen if Exxon and other oil companies simply walk away and leave all the pipes and other infrastructure in the seabed. They would already have taken out the decommissioning costs. And so if they walk away without removing their infrastructure, they are not only leaving their junk behind – and environmental concern – but also running away with monies which they had charged to Guyana for decommissioning costs.
Even when they do decommission, Exxon recovers its costs while Guyana is left with the junk to dispose of. And Guyana has to buy anything which is no longer needed but for which there has not been full cost recovery.
Second Vice President Bharrat Jagdeo does not seem unduly worried about this terrible state of affairs. Indeed, his answer to the question, posed by the Kaieteur News reporter, was sort of offhand.
It raises serious concerns as to the quality of governance, which is being practised in our oil and gas sector. And it also raises concerns as to whether President Irfaan Ali should not have a different point person in the natural resource sector.
(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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