Govt. overrides “sanctity of Exxon contract” with major adjustments in oil licences, permits, new legislation

Feb 26, 2023 News

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Kaieteur News – When it comes to the renegotiation of the 2016 Stabroek Block Production Sharing Agreement (PSA), the People’s Progressive Party Civic (PPP/C) Government has categorically stated that it will not go this route.

President Irfaan Ali, Vice President Bharrat Jagdeo, and other senior members of the administration have said that while they agree the contract is terribly lopsided, it is what they inherited and they will abide by it due to its respect for the sanctity of contracts.

The Irfaan Ali-led administration has also said that it would seek other ways of clawing back value.

Indeed, the government has used other mechanisms to override the sanctity of the lopsided deal. The most significant deviation in this regard pertains to the Local Content Act 2021.

That legislation affords the Guyana Government, the power to not only ensure citizens have a greater role to play in the procurement and employment cycles in the sector but also investigate and penalize those who try to fool the government with creative forms of non-compliance.

The law makes it clear that oil companies and their subcontractors must prioritize the use of locals and where necessary, provide training to upskill Guyanese. The law also demands the use of Guyanese in 40 categories of work which include transportation, accounting, and legal services needed here, and catering. These categories are also poised to be expanded significantly in 2023.

The government has also demanded more on the environmental front. In this regard, the PPP/C Administration has asked for there to be greater insurance coverage that goes beyond the mere self-insurance in the contract.

According to the 2016 deal, ExxonMobil’s subsidiary, Esso Exploration and Production Guyana Limited (EEPGL) is allowed to self-insure. This practice allows EEPGL to keep a fund to cover losses instead of purchasing an insurance policy.

Guyana has demanded much more on this front. In fact, the environmental permits for ExxonMobil’s Liza Phase One, Liza Phase Two, Payara and Yellowtail Projects all state that the oil companies are required to cover all costs in the event of an oil spill. The companies have provided an insurance policy that is to the tune of US$600M per occurrence. They also have to provide a parent guarantee that ensures indemnification of the State for all liabilities under the permit granted.

Government is currently in discussions with ExxonMobil and its partners for financial assurance for the entire Stabroek Block. Approximately US$2B is at the centre of those discussions.

The environmental regulatory provisions were further boosted with the imposition of a flaring fee totalling US$50 per tonne of carbon dioxide equivalent (CO2e) emitted, up from an initial US$30.

Government has also demanded that there be a capping stack in place too. This is a piece of equipment that is used to cap a well blow out and prevent further damage that may have been caused. Exxon is required to have one in the country and maintain a subscription for another.

Notably, the 2016 PSA is silent on provisions to safeguard the measurement of oil. This loophole was closed with key provisions inserted into the Payara and Yellowtail production licences.

The production licences note that EEPGL must measure and weigh the volume, quality and composition of all petroleum won and saved from the Production Area, using the measurement appliances and procedures in accordance with good international oilfield practices and from time to time, approved by the Minister.

The licensee is also expected to provide the Minister, with reasonable written notice of the conducting of measurements, and an opportunity to attend or to have one or more representatives attend the measurements on his behalf.

Significantly, EEPGL is required to provide to the Minister, reasonable and written notice and the opportunity to be present, either in person, or through a representative(s) whenever a piece of equipment or an appliance for measuring or weighing crude oil or gas is being calibrated, re-calibrated, tested, compared, measured or weighed against a standard.

Any such calibration, re-calibration, testing, comparison, measurement or weighing shall be conducted in accordance with accepted methods and procedures consistent with good international oilfield practices and as previously approved in writing by the minister.

It also categorically states that the licensee shall not make any alteration in the method or methods of the measurements without the prior consent in writing from the Minister.

Though this is not catered for in the 2016 PSA as well, government still demanded to have “consistent, daily twenty-four hour ongoing ‘real-time’ access to production and injection activity outputs, reports or statements, in respect of Yellowtail development production, including such particulars in such form and manner as the Minister may from time to time direct.

Government has also demanded more on decommissioning arrangements too. It is an international best practice that oil and gas companies return the seabed to its original state after setting up various contraptions to extract oil. The process is one that involves permanently removing some or all installations from the seabed and securing wells.

Companies are primarily responsible for decommissioning and provide funds in a trust in advance so that those funds are available when decommissioning occurs. Such trusts are created by a decommissioning security agreement (DSA), a contract between two (or more) parties that obliges a party to create a trust in favour of another party (or parties) for the future cost of decommissioning. The trust will either hold cash or security and, usually, will be administered by an independent trustee.

Guyana’s PSA with Exxon does not state that such a trust should be established. In fact, Exxon is allowed to hold onto those funds until that time arrives. The government in the Yellowtail licence, instituted provisions to plug this loophole by implementing a Stabroek Block Decommissioning Security Agreement (SBDSA).

EEPGL is also required to facilitate, on an annual basis, an independent audit of its Drilling and Production Operations, including waste management, and compliance conducted by a Chief Inspector.

For a total of three consecutive years, the licensee is required to pay to an account held and controlled by the Government the sum of US$400,000 to be used by the Government for the preparation of the audit scope and the procurement of third-party auditors to supplement the Chief Inspector’s resources and develop institutional capacity for the ongoing conduct of audits. This is also a new requirement that is not part of the 2016 PSA.

Accordingly, the government stated that Yellowtail licence “does not limit nor in any manner restrict the right and authority of the State to impose taxes or enact and enforce legislative, regulatory or other statutory instruments in respect of specific or general aspects of petroleum operations and activities or otherwise.”

From the foregoing, it is clear that the Guyana Government has been able to work its way around the tentacles of the 2016 PSA to garner more value.

Many industry stakeholders now ask—why the same is not possible for royalties for each project?

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• licences, new legislation, permits, Stabroek block production sharing agreement (PSA), the People’s Progressive Party /Civic (PPP/C)

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