Bigger share of oil money now not a good thing

Jul 14, 2022 News

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…we can’t spend it all, it becomes inflationary – Jagdeo

By Gary Eleazar

Kaieteur News – Vice President Bharrat Jagdeo, who is spearheading the development of Guyana’s oil and gas industry believes that calls to halt the developments at the present in order for the country to realise a larger share of its oil revenues sooner, would not benefit the country.

He in fact argues that this could introduce added inflationary pressures to the country’s domestic economy. Jagdeo was at the time addressing guests at the annual Guyana Manufacturing and Services Association (GMSA) dinner, held Tuesday night at the Ramada Princess Hotel. He was asked whether capping other industries in Guyana would be a good idea “since we have all this money from oil.” To this end, the Vice President drew reference to calls from sections of society to not licence any new projects for development just yet. Esso Exploration and Production Guyana Limited along with their partners in the Stabroek Block currently operate two producing fields namely the Liza I and II locations being produced by the Liza Destiny and Unity Floating Production Storage and Offloading Vessels. Additionally, EEPGL—ExxonMobil Guyana—has already secured the relevant permissions to develop two more projects, the Payara and Yellowtail fields, to be produced using the Prosperity and One Guyana FPSO’s.

According to the Vice President, “so many people are saying, why you are going to licence, why would the government licence say any new FPSO, why don’t we cap the number there so that we can get a faster flow or larger sums of money into the sovereign wealth fund.”

To this end, Jagdeo noted that “if you cap that, you will pay back for the four FPSO faster and then the government share grows.” He argued nonetheless that in such a situation “…what does that do, and is that the best thing to do, because if the money comes in, we can’t spend it all.” As such, he posited “it comes inflationary. “ With this in mind, the Vice President said: “we  have to save greater portions of it, but what will that do, we will run out, we are trying to build a private sector now with the capacity to service this industry.”

According to Vice President Jagdeo, “if we don’t keep a steady stream of investments in the oil and gas sector to open up the reserves to prove it and to take it out as quickly as possible before net zero kicks in, and the demand goes down then we’ll run out of momentum.”

Qualifying his position further, the Vice President drew reference to the African Continent saying “look at what happened in Ghana, they had a spurt of activities, they end up producing a bit and now massive decline, so we have to continue to keep momentum there, and that is why we have to keep licencing new activities so that we can give our private sector enough time and room to grow and to be competitive.”

He said, such a move “is prolonging the life of the period and the opportunities for the next 10, 15 years for the private sector or else if you don’t think about that you run out of steam momentum by 2027, 2028. We do not want that to happen in this country.”

According to Jagdeo, “we have to be realistic too. If you look by the sector side by side, so the oil and gas industry will be a big growth pole for our country into the foreseeable future but if we don’t nurture this too, and we don’t have a nuance understanding of the industry.”

Under the Production Sharing Agreement (PSA) with EEPGL and their partners, the oil companies are able to recover up to 75 percent of the gross monthly of oil, in order to pay overhead expenses including the payments for the developments.

Several analysts have argued that the 75 percent arrangement lends to the lopsided arrangement. Coupled with the fact, the oil companies have already discovered in excess of 11 billion barrels of recoverable crude oil, there are now plans to have at least 10 FPSOs in place—one every year after 2027.

The argument is that with all of the development costs paid off it would mean less expense for the oil operations and as such more profit to be split, theoretically increasing Guyana’s share.

Director of Financial Analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), Tom Sanzillo, had recently expressed the view if the government fails to change the deal it would have failed the people of Guyana.

He said bluntly Guyana may never see its fair share of earnings from its oil blocks and as such pressed for government to open up its books in order for the people to be able to determine the state of affairs.
According to the IEEFA Financial Analyst, “We are not the only ones saying that this is a bad deal for Guyana” and reminded that stakeholders from around the world have been saying the same thing.  With this in mind, he noted the regular announcements made of new discoveries that are being seen as a positive thing. According to Sanzillo however, under the present arrangement every time he sees an announcement of a new discovery, to him, that just means the mountain of debt will pile up before Guyana can get more earnings from its oil fields and reminded that with US$75B to develop what is already planned, that would take until 2070 to pay back.
With this in mind, Sanzillo said, “Our concern is that Guyana will never see the revenues it was promised.”

 

 

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