Exxon’s contract puts higher profits for Guyana further out of reach

Mar 11, 2023 News

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….as cost of production actually higher than 75% cap reported on – Dr. Adams

Kaieteur News – Reaffirming the disguised nature with which the Production Sharing Agreement (PSA) allows for the reporting of the cost of production, for each of the hundreds of thousands of barrels produced, each day in the Stabroek Block, Former Head of the Environmental Protection Agency (EPA), Dr. Vincent Adams, believes the true cost is actually higher than the 75 percent cap being reported on.

As such, taking into account the roll over aspect of the debts—above the 75 percent cap in the contract—will essentially ensure that any higher profits for Guyana from its producing fields will be placed further out of reach.

He was at the time adding his voice to sentiments raised by Professor Kenrick Hunte, who in a recent public missive, posited that because the production cost for each barrel was being reported based on the total revenue of oil produced, it was in fact misleading.

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 spending, 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.

Former EPA Head, Dr. Adams in weighing in, posited that the cost per barrel, based on how the arrangement is structured, would mean it would be as high as 95 percent.

Expounding further, he noted that analysts continue to cite the 75 percent cost oil cap, as a real or actual number, when in fact it is not. He was adamant it is only an artificial number used for calculating profit oil to guarantee Guyana gets its 12.5 percent.

“The only thing we know for sure is that for this calculation, Exxon is reporting that it is costing at least 75 percent,” but the real “kicker is that anything over and above that 75 percent—which we don’t know—carries over into the next month, and the next month and compounding on and on.”

As such, he lamented “the bottom line is that we are just wasting time trying to calculate the unit cost of production, if we don’t know the actual cost….The 75 percent is not a real cost number and being misused.”

To this end, he reiterated, “that is why I keep saying that with no ring fencing, plus the monthly carryover, cost of money, uncertain oil prices, and no Exxon transparency, there is no telling when we will ever get to higher profit oil to increase our take.”

Professor Hunte in his recent take on the PSA and its nature of disguising the true cost of producing a single barrel had 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 charged that 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, Professor Hunte surmised that 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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• C. Kenrick Hunte, Dr. Vincent Adams, Former Head of the EPA, Professor, Stabroek Block

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