Let Us Celebrate Exxon’s Discovery of the Oil Off Shore; and Although differing, Thank Dr. Hunte for his Tables Comparing Costs

Mar 12, 2023 Letters

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Dear Editor,

Wherever we are in our raging intense debates which have followed the discovery of oil off our shores, the quick start-up and rapid ramp up of production – that discovery is something to wonder and marvel about.  To be able to peer down one and a half miles to the bottom of the ocean and a further mile and a half into and through the rocks, and to be able to delineate the various reservoirs of oil and gas – this amazing frontline of technology, reached by us, humankind, in less than 200 years of accumulated experiences of trial and error, and theorizing should be considered a modern miracle.  At the end of the 1990’s, only Exxon was at that level and willing to take that plunge.  Whatever our position in the debate, Exxon’s discovery is something we should celebrate. Let us celebrate and in so doing, challenge ourselves to aim to reach equivalent high levels in what each of us does.

Although I differ with his interpretations, let us thank Dr. Hunte for the two tables in his letter in Kaieteur News of Thursday, March 19, 2023 entitled, “The average cost per barrel of oil produced by Exxon is questionable, unacceptable”. Such large investments pose a big question in the recovery of the capitalized (exploration and production wells, and FPSO) costs.  Generally, anyone investing would like to recover and pay back the capital costs as quickly as possible, and may want to allocate all net revenue to capital recovery and nothing to profits.  But we Guyana, granting the licence want some money too, from the very beginning.

Our (Guyana) Profit Share Agreement which the PNC Administration received and accepted pre-1992, from the relevant UN and Commonwealth expert groups, and which we PPP/C continued, puts a pre-agreed limit on the capital recovery at any time.  The licencee could submit as total costs, no more than a certain percentage of his gross earnings, whatever the price of oil, as cost oil – whether the price be high or low, in addition to the “off-the-top” Royalty of 2%, Guyana in this agreement receives as a minimum, 12.5 % of the current selling price as “profit share”.

Dr. Hunte’s Table 1, shows this. In 2020, oil price averaged $40/bbl. Cost of oil was set at $30/bbl so there was $10 bbl to share and we Guyana would have received $5 bbl (in addition to royalty); and in 2023 when oil prices average $70:48 per bbl, cost of oil was set at $52:86 per bbl and Guyana would have received about $8:81 as profit share.

Keeping in mind the above approach, the ACBO (average cost per barrel of oil) in the Table is an “accounting cost”. Even so, over the lifetime of the location, the average accounting cost should be much the same as the average “true” “realized cost”. It is a matter of the timing of the capital recovery.

A number of things should be noted here:

(i) The “cost oil” percentage limit may be varied from Agreement to Agreement roughly in accordance with the physical challenges of the location.

(ii) All costs including capital recovery costs are to be established by way of independently audited accounts.

(iii) All remaining capital costs are carried forward within the “cost oil” limit until eventually recovered.

(iv) Eventually when all capital has been recovered, depending on the price of oil and running costs, Guyana could be receiving more that 30% of the price of oil when the price is high, whilst being protected by no less than 12.5% when prices are low. Note that country income is doubly affected by changes in oil price, both the price and the fraction of the price moving up or down together.

Dr. Hunte’s Table 2 provides very useful data which I have not seen presented before and should reduce both the intensity and the width of our intense debates.  First, looking at the furthest column of the “Total cost per bbl”, we see a very wide range of total costs, from $8.98 for Saudi Arabia to $ 44.33 for the UK.  There have been suggestions that long-term average total production costs offshore Guyana may be between US $25 to 35 per bbl.  So production of oil off our shores, in competition in our world, is middling.  And in 30 years as we approach a likely, very quickly reduced use of oil Saudi Arabia and Iran could probably fight it out at $10/bbl but production off our shores would have long dropped out.

Our government, Exxon and indeed all of us should have in mind this possibility of limited life, to perhaps no more than 30 years.  “Pump baby, pump, as we hurry to prepare for life after oil, just as we begin our life with oil” is a very reasonable policy in our current circumstances.

Secondly, if we look at the first column in Table 2, “Gross Taxes”, we see zero taxes at the top and at the bottom. At the top, for the highest total cost producer listed, the UK, it is a good guess that the UK wants to keep their oil production going: and no doubt, in any era of heightened competition every producing country will find it hard not to reduce all taxes all the way down to zero. There are no taxes to be had when production is shut down, and there are, in addition, great consequential losses in jobs and great disruptions. At the bottom of the table, the two lowest cost producers are listed as taking zero in taxes – a good guess is that they look to profits for their countries’ earnings.

Although, I differ greatly with Dr. Hunte, seeing no problem in the numbers, only common practice, let us thank him for providing these Tables which should put a proper context that should limit the intensity and width of our debates.

Samuel A. A. Hinds

Former Minister Responsible for the GGMC

Ambassador to the USA and the OAS

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• Exxon, Guyana, Oil Off Shore, PNC Administration, Profit Share Agreement

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