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Govt. must say if Liza 1 expenses paid off – Patterson
Kaieteur News – In the absence of a key provision in the Production Sharing Agreement (PSA) Guyana has with oil giant ExxonMobil, the company is allowed to deduct expenses from oil projects that are yet to commence operation.
That clause – ‘ring fencing provision’ – serves as a shield and prevents burdensome expenses from being lumped onto one project, thereby shortening profits received.
Guyana has been warned by International Energy Institutes in the past that the country may never see the promised annual revenues from its oil sector, as the “one-sided” oil contract gives ExxonMobil and its partners the benefit, leaving Guyana and its people out of their fair share of the wealth.
The contract allows Exxon to deduct 75 percent of the resources each month to cover expenses to develop oil and gas projects. The 25 percent is then shared evenly (50/50) between the government of Guyana and the oil company.
MP David Patterson during his contribution to Budget 2023 Debates (Parliament of Guyana image)
Shadow Minister of Natural Resources, David Patterson during his contribution to the Budget Debates on Thursday said government’s profits should now increase as the cost to develop the first oil field should be have already been paid off.
Patterson said, “Of concern to us in the Opposition is the announcement that Guyana is expected to receive 17 lifts in 2023. Sir, in 2018, Exxon presented to the government of Guyana, the cash flow analysis which stated that the cost for the production of the (Floating Production Storage and Offloading vessel) FPSO and other associated costs for Liza One was pegged at US$1.2 billion and after this cost would have been recovered, Guyana’s share of the profit oil would be 50/50, based on producing 120,000 per day, at US$70 per barrel.”
Notably, the former Minister of Public Infrastructure under the Coalition government pointed out that the oil company has now boosted oil production to 140,000 barrels per day at the Liza One development, all while the average price per barrel has increased by 16 percent.
He said that ExxonMobil projected that the expenses at Liza One would have been paid off in four years after start-up in 2019.
“They are producing at 16 percent more, which obviously at a higher baseline that they were projecting, (so) we are supposed to now, I expected by now we would have been in the cost recovery 50/50 stage,” Patterson said.
The Opposition Member of Parliament (MP) pointed out that the subject Minister failed to
Article 11 of the 2016 Production Sharing Agreement defines the terms of cost recovery during production activities
update the nation on whether Guyana managed to pay off those debts to start production in that field. Similarly, he argued there was no word on the cost recovery audit being conducted.
Paterson believes that the Liza One expense should be paid off, however “If this is not the case as it is now sir, the government should inform the House on the status of oil recovery and cost oil for Liza One and when sir are we expected to commence full equitable share on this project.”
The Institute for Energy Economics and Financial Analysis (IEEFA) in a report titled ‘Lack of Ring-Fencing Provision Means Guyana Won’t Realize Oil Gains Before 2030s, if at All – Loophole Allows ExxonMobil-Led Development Team To Use Profits To Pay for More Oil Exploration in Guyana’ details that Guyana’s failure to implement a “ring fence” provision has provided Exxon an opportunity to reduce the country’s share of profits.
According to the document, “Among the contract’s weak provisions Guyana never imposed a ‘ring fence’, which means that the oil companies can charge the government for costs incurred for new development and pay for it out of the revenues from Liza Phase One, an oil field that commenced production in December 2019. A strong ring fence provision would have allowed ExxonMobil to charge only costs related to Liza Phase One against revenues received from oil from that field.”
To date, ExxonMobil has received approval for four projects in the Stabroek Block, including Liza One and Two, Payara and the Yellowtail development. Two other projects are pending government approval. In addition, the company also made several other discoveries, along with dry holes, of which the costs are being charged against the oil produced at the Liza One well.
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