Oil funds should be divided into four roughly equal baskets

Jul 07, 2022 Letters

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Dear Editor,

Guyana will receive half the profit oil, ranging from a minimum of 12.5% of sales to considerably higher percentages, depending on the average price of oil, natural gas liquids and natural gas over the next seven to ten years. This is in addition to the 2% royalty on sales of oil; natural gas liquids; and natural gas sold by the operators.

Like in any business, the operators will first take out their operating expenses. Then, on a monthly basis, they will recover some of their capital expenses and exploration expenses but by stipulation in the agreement, they cannot expense and recover an amount greater than 75% of sales. This stipulation means that there will always be a pool of money, representing 25% of sales, that the parties have designated as “profit oil”, whether or not there is an actual profit. Luckily for all parties in this agreement, the price of oil has been so high this past year, there is a bonanza of profits for all of them.

In addition to the operators covering their monthly operating expenses to produce the oil and gas, they are allowed each month to recover a portion of their capital expenses which they invested in developing the infrastructure required to produce the oil; and to recover a portion of the exploration expenses they incurred to find the oil and determine where to position their production hardware. Until they recover those expenses, Guyana will continue to receive 12.5% of sales as “profit oil”. But when those expenses have been recovered, by the firms that paid them to start with, then Guyana’s share of a half of the profit could be much higher than 12.5% because the profit oil, instead of being limited to 25%, would now, with no more deductions for prior spending, be much higher, 30% or 40% or 50%, depending on the price of oil.

Editor, in a prior letter to you, I calculated that at an average price of oil of $68 per barrel over next 30 years; with an expected ultimate recovery of 10 billion barrels of oil, not counting sales of natural gas liquids or natural gas; operating expenses of $32 per barrel; and capital expenses averaging $8 per barrel, Guyana would receive US$150 billion over the economic life of the Stabroek block. Please note that I included the exploration expenses in the capital expense category because with a find of over 10 billion barrels, the exploration expenses are less than twenty cents per barrel of oil discovered. A total take for Guyana of US$150 billion out of total sales of US$680 billion is 22%, averaged over the economic life of the field.

I believe that these are conservative estimates. The price of oil has been over $100 per barrel for several months. It can free fall any time, I know. I have lived through many booms and busts and have the scars to prove it. But after my first bust, in 1982, I saw a bumper sticker here in Midland that read: “Dear God, please send us another oil boom and I promise not to p*ss it off this time.” I have kept the promise.

Oil is a cyclical commodity. So is natural gas. But now, it’s not only the price that can destroy producers. Environmental concerns, though temporarily partially forgotten because of the shortages, will confront producers when natural disasters linked to climate change and fossil fuel consumption force a choice. Even then, I believe that Guyana’s high quality Brent oil, close to major markets, with one of the lowest production cost in the world, tied to the navel of one of the largest oil companies with deep market penetration and powerful lobbying contacts, will continue to be in demand until the Stabroek block dries up.

Editor, I understand and I am sympathetic to the concerns that Guyana is not getting more money now for its oil. I spoke about the flaws in the PSA at length at my Moray House talk three years ago. In fact, I tried to console the audience with a riff based on that old primary school poem, “If”:
IF (July 2019 at Moray House)
If all the tax shenanigans were not included
If Guyana was not required to change its laws
to make any illegalities legal
If the signing bonus was not a pittance of the norm
If the fallacy of Venezuelan “protection” were not foisted
If there were ring fencing to bar extraneous expenses
If the royalty percentage resembled par
If your leaders did not su-su with the IOC’s
If there were not such lopsidedness in knowledge
What a great contract that could have bee.
Editor, the fact that the operators get to recover their initial capital outlay up front is not a concern in my mind. In all of the little businesses I was involved with, either as the operator or as an investor, the party that puts in the cash get their money back first.

I have been on both sides and it seems fair to me. Guyana will be receiving 12.5% of sales and 2% in royalty until the operators and investors recover their money. I wish it were more. In fact, I wish this whole deal was based entirely on royalty. The US government gets 15.5% royalty on oil and gas production in the Gulf of Mexico. The current talk about increasing royalty rates is mostly about on shore leases.

Guyana will receive a lot of oil money even now, and I suspect will have to stretch its manpower and management resources to successfully deploy the funds as fast as it will be coming in. My belief that the funds should be divided into four roughly equal baskets over the long term and used concurrently, is stronger than when I first proposed it three years ago.

1: LIVE – immediate improvement in societal living conditions
2: BUILD – infrastructure for the long term
3: SAVE – build the NRF for when the oil revenue drops
4: GIVE – cash transfers to all Guyanese living in Guyana.

The influx of vast sums of money into Guyana for oil that is produced and sold mostly offshore, will cause huge inflation locally, quite apart from worldwide inflationary pressures. Cash transfer will add to the inflationary pressure at the national level but will soften its impact to individuals overall, when they actually receive the cash. Looking at Guyana from the outside, I believe everything that can be done to prevent events such as those of last week should be done now.

Editor, a natural question is, when does Guyana start to receive a higher percentage of sales? I will take a shot at the answer but with several caveats.
At $68 per barrel, there will be $19 per barrel (75% of 68) less $32 for operating expenses) available for capital cost recovery. At a capital cost of $8 per barrel for 10 billion barrels, the total amount to be recovered is US$80 billion. So, dividing 80 billion by 19, it would take 4.2 billion barrels of oil to recover US$80 billion! That is roughly when 42% of the Expected Ultimate Recovery from the Stabroek Block is produced. At an average production rate of 1.25 million barrels per day, it would take nearly ten years. Of course at a higher price for oil it could be much shorter.

If the price of oil were to stay at US$100 per barrel, it would be less than seven years, if the operators can crank up production to 1.25 million barrels per day in the next four years! But note, if the operators increase production to 1.25 million barrels per day, without any new finds or technological improvements in oil recovery, the Stabroek block will be “dry” in about twenty five years.

Yours faithfully,
Tulsi Dyal Singh, MD

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