Government can use its approval powers to extract more revenues from Exxon

Dec 04, 2022 Letters

Dear Editor,

The Petroleum Sales Agreement (PSA) with Esso (or”Exxon”, as we prefer to say) has provoked much bellyaching. Its alleged abominations are the 2% royalty (ridiculously low, we often hear) and the waiver of corporate taxes (foolishly generous, we are also told).

This letter does not pick up those issues. Instead, it focuses on the cost oil/profit oil ratio of 75/25%. Guyanese by now understand that as cost oil reduces (that is, as the company gradually recoups its investment), the greater the profits to share, and the more money the government receives. In terms of numbers, as 75/25 trends to 70/30 to 60/40 and so on, the richer Guyana becomes.The country can therefore earn more revenues from a bigger cake (as is occurring presently with soaring oil prices) and/or from a bigger slice of the cake (increased profit oil).

The country’s well-intentioned renegotiation lobby has demanded a reset of this ratio to ensure Guyana can get more money earlier and faster—a bigger cut of the cake. But there is a route other than renegotiations to get more cake—and this is the proposal I here make. Government can space out approvals or permits (environmental and others) with the aim of decelerating the company’s expenditure on new developments relative to its income from oil sales. Worded differently, the slower the company is forced to spend on new developments, the faster it recovers its earlier investment, the larger profit oil grows, and the more dollars Guyana gets.

The strategy then is for government to cleverly leverage its approval powers to dictate the pace of Esso’s large expenditures. Of significance, no renegotiations are required, as the government already holds these powers. The previous government set the stage. Under the former EPA Director, the country leveraged its approval powers to compel Exxon to comply with environmental and insurance stipulations. This approach can be extended to cover other elements in the PSA.

As matters now stand, Exxon has four approved projects (Liza I and II, Payara, and Yellowtail), whose combined production will surpass 800,000 barrels per day by 2025. A fifth development at Uaru is mostly in the bag and will take output above one million barrels a day from 2026. Where are we with the cost oil/profit oil ratio?

A competent government needs to sit down now with Exxon to work out how these five projects and future projects will affect the growth of profit oil. A formula should be worked out to allow Guyana’s current 12.5% share of profit oil to grow and to grow fast. While this approach does not require renegotiations, it requires a government with the political will and technical skills to implement. In other words, not the PPP.

Likely, the “faster is better” or the “Drill, baby, drill” advocates will argue against a paced or spaced oil development strategy. They will claim that speed is warranted before the imperatives of climate change reduce fossil fuels consumption and deny us the full benefits of our oil in the ground. A major consideration, however, must also be for the country to optimize the benefits from its natural endowment. To achieve this objective, if renegotiations of the PSA are not likely, then a competent government must strategically use its powers to grant authorizations to trap more revenues.

Sincerely,

Sherwood Lowe