Prof. Hunte says… Exxon’s contract disguises true cost of producing a barrel of oil

Mar 10, 2023 News

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Kaieteur News – Guyana’s Production Sharing Agreement (PSA) with ExxonMobil Guyana and their partners in the Stabroek Block, is structured in such a way that it in fact disguises, the true cost to produce a barrel of oil from its fields.

Under the PSA, the operator is allowed to recover up to 75 percent of all oil produced daily—minus what is used as part of the operations—to be used as cost recovery, meant to retire initial spendings, as well as the costs associated with the daily operations. The remaining 25 percent is then divided evenly and classified as profits while two percent of all oil produced and sold is paid to the state as royalty. In the absence of a ‘Ring Fencing’ provision however, coupled with the manner with which the entities report financial information to the public, the true cost to produce a barrel has been veiled.

The assertion was made pellucid recently by Professor C. Kenrick Hunte, in a recent public missive where he observed that since oil has been extracted and exported from Guyana, there has been no financial statements provided to the public by Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana. He further charges that more particularly, no financial data on the average cost of a barrel of oil has been publicized, given that this is an important non-renewable resource in Guyana’s patrimony.

It should be noted however that while EEPGL and their partners, Hess Guyana Exploration Limited and China National Offshore Company (CNOOC) Petroleum Guyana Limited do file annual statements with the Commercial Deeds Registry, these filings are devoid of detailed breakdowns of the expenses, such as the cost of producing a barrel of oil.

According to Professor Hunte, with that information not being in the public domain, “this is a serious concern for the Guyanese people because the best that we can infer about the cost of a barrel of oil is based on a false profit calculation that links total cost with total revenue (TR), such that total cost (TC) is equal to 75 percent of total revenue.

Using this equation, according to Professor Hunte, the 75 percent cost of production of a barrel of oil, will over time continue to be reflected as increasing, since the cost of production is not being isolated to a particular producing oil, such as the Liza I development, Liza II or imminently Payara and Yellowtail.

He has since posited that this “elevated cost will continue to climb, anytime the price of a barrel of oil increases.”

Conversely, “when the price declines, the average cost per barrel of oil will decline; but this typically does not occur, given the increasing demand for gasoline, oil shortages due to the current war, and the actions of major producers, including the 13 countries that are members of the Organization of the Petroleum Exporting Countries (OPEC).”

To this end, Professor Hunte lamented EEPGL’s methodology for its financial reporting as “palpably unacceptable because it is at variance with the cost categories identified by other oil-producing countries.”

He was adamant that the production cost for a barrel of oil by several countries, do not include the price of a barrel of oil in the cost function, as it is employed in Guyana.

Instead, “in these countries, the cost function only considers gross taxes, capital spending, production costs, administrative and transport costs.”

According to Professor Hunte, countries such as Saudi Arabia, followed by Iran and Iraq are the lowest cost producers, with the cost per barrel of oil ranging between US$8.98 to US$10.57 while in contrast, Venezuela, Brazil and the UK are the high-cost producers with costs per barrel ranging between US$27.62 to US$44.33.

Accordingly, he disclosed that while cost data for 2020 and 2021 for these countries are not available, a comparison will show that “Guyana is unmistakably a high-cost producer at US$52.86 per barrel in 2021.”

He used the occasion to reiterate that, Guyana’s cost per barrel is even higher than the cost in the UK of US$44.33 per barrel, he said.

Professor Hunte has since posited that since Guyana is advertised as a low-cost producer, given that it has sweet crude oil that is in high demand, together with only two percent royalty, “this relatively high-cost outcome for a barrel of oil in Guyana is indeed surprising.”

Consequently, he exhorts that “Government must fix this inequity imposed by EEPGL; and exclude total revenue from the cost function; otherwise, the cost of barrel of oil produced by EEPGL will continue to increase as the price of a barrel of oil increases.”

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• barrel, ExxonMobil, oil, Production Sharing Agreement (PSA), Professor C. Kenrick Hunte

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