Oil shares: 52% and 48% – misleading

Feb 17, 2023 Letters

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Dear Editor,

I refer to your article dated 2-12-2023 and captioned, ‘Exxon official tries to disguise “sh*tty” 2016 Stabroek Block deal as sweet for Guyanese’.

In that article it is reported that Mr. Routledge said, “Guyanese are benefitting more than the investors… that 50 percent of the profit goes to the country and 50 percent to the investors… (And)…that …a two percent royalty which comes out of the investors’ share of the profits (is added to the Guyana share, confirming thereby that)…52 percent goes to the country.”

Editor, this profit distribution between Guyana and EEPGL is a strange calculation; and I cannot believe that this is a clause in the PSA. To get 52 percent for Guyana, I will present the calculations below. First, after EEPGL extract 75 percent of total revenue (TR) as cost (cost = 0.75TR), a fake profit (FP) calculation (to be defined later) is obtained; that is:  Fake Profit = TR – Cost = TR- 0.75 TR = 0.25 TR, which is shared 50 percent for Guyana and 50 percent for EEPGL. This yields 12.5% for Guyana and 12.5% for EEPGL. Second, the calculation of the 2% royalty, as stated by Mr. Routledge, is taken from the profit share of EEPGL and given to Guyana. Therefore, the 2% of EEPGL profit share (12.5%) is 0.25 and this is added to the 12.5 % to yield for Guyana 12.75 %, while EEPGL receives 12.25%, the sum of which adds to 25 % (Table 1).  Now 12.75 of 25 is 51 % and 12.25 of 25 is 49 percent.

In order to obtain the 52% that Mr. Routledge identified as Guyana’s share while EEPGL share was 48%, EEPGL did the rounding magic trick of converting 12.75 % to 13% for Guyana and adjusting downwards EEPPGL share from 12.25 % to 12 %. Consequently, 13 of 25 is 52 % and 12 of 25 is 48 %. Obviously, this calculation inflates Guyana share, while it presents the false narrative that EEPGL is being penalized and therefore getting less than Guyana. But this is misleading, for Guyana’s share will be much smaller than what is reported because Guyana has to provide fake tax receipts to the EEPGL; and most likely, money from the depleted Natural Resource Fund (NRF) will have to be paid over to the Consolidated Fund, reducing further Guyana’s share. It is therefore incumbent upon the Government of Guyana to publish the value of the fake tax receipts that it gives to EEPGL. Incidentally, it should be noted that it has been reported in the press that Guyana’s share is 14.5% which is different than the share reported by Mr. Routledge.

Meanwhile, the idea that the royalty is being calculated out of the fake profit share is troubling. I contend that this is wrong, for royalty is not a tax as in a profit tax; but it is the patrimony of the country; and it must be based on the total revenue of the company that is linked to the distribution of the barrels of oil between EEPGL and Guyana. For example, if Guyana share is 25% of total revenue and EEPGL’s share is 75% of total revenue, this implies that for every one barrel of oil Guyana receives, EEPGL receives 3 barrels of oil.  Undoubtedly, this approach of accounting for every barrel of oil in real time will enhance full transparency and accountability, as it is best accounting metric for dealing with quantifiable natural resources, including gold, bauxite, magnesium, diamond and other minerals that are included in Guyana’s patrimony. In contrast, the current method employed in the oil sector is devoid of this transparent and accountable metric; in fact, the current accounting methodology emphasizes cost as the observable metric that is 100% controlled by EEPGL; and poor Guyana is bypassed and has to wait until the accounting data are presented to the Government. The last three years of accounting information are still to be made public; but Mr. Rutledge, I am sure, can release the financial reports so that the Guyanese people can applaud the 52 percent paid to Guyana.

Another troubling feature of the PSA is that a fake profit is always guaranteed, given that total cost is equal to 75 % of total revenue; and the remaining 25 % of total revenue (TR) is automatically set as fake profit. In the real world, however, profit can also be zero (total revenue equal to total cost), or it can be negative (total revenue is less than total cost), officially called losses. Consequently, this arrangement in the PSA that cost is based on a hypothetical number (75 percent) that is linked to total revenue (TR) is an absurdity; for in the real world, the profit calculation must be based on actual cost data. In fact, in reporting annual financial data to shareholders, bankers, and the government for tax purposes, the income and expense statement, balance sheet, and cash flow statement are based on actual financial data.

But by using the fake PSA profit method, the real cost of a barrel of Guyana’s high-quality oil is unknown to Guyanese, but certainly known to EEPGL. I would therefore contend that the current methodology in which any cost above 75 % of total revenue is transferred to the next year, and that the current metric employed to calculate profit in the PSA is not only misleading; but it could only be described as fake profits.

It is generally accepted that oil exploration, development, extraction/production and marketing is a capital-intensive operation in which fixed cost accounts for a significant share of total cost. For example, a floating, production, storage and offloading (FPSO) vessel is an example of a fixed cost item that accounts for billions of investment dollars. However, in the current PSA, no fixed costs are identified; but total cost is tied to total revenue, and is specified as: Total cost = 75% of total revenue. This cost structure, however, is misleading, because it does not identify the average cost for a barrel of oil or the total fixed cost in the project. In contrast, using the proposed alternative cost specification in which the average cost for a barrel of oil, the fixed project costs, and the royalty rate are recognized, the benefit of this approach is that the breakeven output level can be identified, where profit is equal to zero; and thereafter, the correct profit level would be revealed.  In particular, if the Liza well or any of the other wells has 300 million barrels of oil, and the breakeven level is 50 million barrels of oil, this implies that profit oil is 250 million barrels of oil (300- 50 million barrels) which can be split into equal shares (125 million barrels each) for EEPGL and Guyana. Not surprisingly, the current PSA profit specification does not address this important breakeven benchmark; and therefore, the current PSA would only generate fake profits. Hence, the government must use the breakeven analysis to obtain the correct profit level that is due to Guyana.

Editor, obtaining a realistic and attractive return on an investment in the business world is the primary signal that incentivizes the investor to continue investing in a business venture. Recognizing that EEPGL has invested US$ 30 billion in the oil project in Guyana, one can conclude that the shareholders in EEPGL must be more than pleased with the returns they are making on their investment. However, with 75 percent of total revenue being captured as cost, and only 12 percent being netted as profit share to distribute between the three owners of EEPGL (Exxon Mobil 45%; Hess 30%; and CNOOC 25%), this is not an attractive investment, since of the 12 % profit share, Exxon Mobil will receive 5.4 %; Hess 3.6%; and CNOOC 3 %. In other words, this is a serious mismatching of investment funds and returns; and Guyana cannot be held accountable for this poor investment outcome, since it receives much less than 12.75 percent, given that it has to pay from its oil share, the loss of the income to fishermen; the transfer of income from the Natural Resource Fund to the Consolidated Fund for fake tax payments that should have been paid by EEPGL; pay for oil spill insurance, environmental damage, and decommissioning cost; and the added cost due to no ring fencing.

In conclusion, it is clear that Guyana must employ counter-measures to protect Guyana’s patrimony; otherwise, the EEPGL oil extraction machinery will continue to accelerate its profit game, and Guyana will continue to be excluded from obtaining its correct oil share. Wake up Guyana, and do not become in your own back yard, a Packoo!

Sincerely,

Dr. C. Kenrick Hunte

Professor and Former Ambassador

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• Dr. C. Kenrick Hunte, EEPGL, Guyana, Mr. Routledge, Stabroek Block

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