Inequity in the Uaru project

May 16, 2023 Letters

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Dear Editor,

Kaieteur News – Reference is made to your article dated 5-13-2023 and captioned, ‘After approving fifth oil project, Govt. now asks Exxon to study what it will do with excess gas’ in which it was stated that the Uaru project will cost US$12.7 billion; produce 812 million barrels of oil; have a production life of 20 years; will produce 250,000 barrels of oil per day; and will start production in 2027.

What caught my attention in this article was the fact that the production life of the project of 20 years was highly misleading and horribly wrong; and here is the proof: Since Uaru has an inventory of 812 million barrels of oil; and since 250,000 barrels of oil will be produced daily, this implies that the oil will be fully extracted in 3,248 days or 8.899 years, assuming 365 days per year. More significant is the fact that if EEPGL employs  the debottlenecking technology(https://onepetro.org/OGF/article-abstract/3/03/57/205372/Debottlenecking-Existing-Offshore-Production?redirectedFrom=fulltext))  as was done recently; and raise the daily production to 360,000 per day, then the life of the Uaru project with higher risks will be only 6.18 years, and not 20 years!  Moreover, reflecting on the comments (KN: 5/14/2023) made by ExxonMobil Corporation’s Senior Vice President and Chief Financial Officer (CFO), Kathy Mikells who said’ … that the oil giant is sparing no effort in maximising value from Guyana on all fronts, as quickly as possible. …’. I was again disappointed that the people of Guyana, in broad daylight, were being taken advantage of, given the small share of the total revenue (14.5%) that Guyana will receive from a non-renewable resource that will be exhausted in or before 2034. Consequently, the Government of Guyana should explain how this poor project evaluation was accepted.

Meanwhile, Table 1 below has an estimate of what would be the share of revenue that Guyana will receive, assuming a price of US$70.00 per barrel.

 

 

 

 

 

The gross value of the oil in Uaru is US$56.84 Billion from which Guyana will only receive US$8.24 Billion, while EEPGL captures US$48.6 Billion. In other words, for every US$1.00 that Guyana receives for its oil, EEPGL receives US$5.90. This is the inequity and unfairness, for out of Guyana’s share of US$ 8.24 Billion, Guyana has to:

1. Pay the taxes of EEPGL; GRA needs to publish the value of the tax receipts given to EEPGL; transparency is needed, for other governments will know of the taxes Guyana never received, while participating in a fraud and corruption: Shame, Guyana, Shame!
2. Pay the insurance and environmental protection costs; thank you Judge Sandil Kisson and all the Guyanese who brought the environmental matter to our Legal system;
3. Pay the real-time auditing expenses;
4. Allocate money for clean-up cost at decommissioning; public monitoring will be necessary;
5. Disburse money to fishermen for the loss in income; and
6. Set aside money for future generations; political control must be balanced by civil society input.

Interestingly, if Guyana was a private company that owned the 820 billion barrels of oil, the Guyana ownership in EEPGL, which is currently zero, would have been greater than zero and a significant shareholder in the Company. As a result, the distribution of the returns would have been better; and there would have been no information problems, as is currently the case. For example, Guyanese do not know the true cost of a barrel of oil.

Another concern is related to the total project costs of US$12.7 billion.  While no breakdown of how this project cost has been determined, it can be inferred that the average capital spending for a barrel of oil is US$ 15.64 (US$12.7 billion /812 million barrels of oil).   Comparing this capital spending of US$15.64 per barrel of oil with other countries, this level of spending is the third largest amount. Only Brazil and the UK have higher costs (Table 2).

 

 

 

 

 

 

Furthermore, acknowledging that there is no information on the average cost of a barrel of oil in the Uaru project, it can be inferred from the Production Sharing Agreement (PSA) that the conjectured total cost (TC) is 75 percent of total revenue: TC = 0.75 PQ, where P is the price of a barrel of oil, and Q is the number of barrels of oil.  Therefore, the speculated average cost of a barrel of oil (ACBO= 0.75PQ/Q) is equal to 0.75P.  If the price of a barrel of oil is US$70.00, this implies that the cost of a barrel of oil is US$52.50 which is more than the cost of a barrel of oil in all the countries listed above in Table 2, where the highest cost is US$44.33 per barrel in the UK.

It should also be pointed out that to calculate the average cost of a barrel of oil that is based on formula ACBO = 0.75P is a false method that inflates costs and understates profit whenever the price of a barrel of oil increases. For example, if the price of barrel of oil increases to US$80.00 or to US$100.00 per barrel, the speculated average cost of a barrel of oil will automatically increase to US$60.00 and US$75.00, respectively. But there is no justification for this increase in the cost of a barrel of oil, as the oil price change has nothing to do with the total operating cost of EEPGL. Alternatively, when the price of a barrel of oil falls, both the revenue and cost of a barrel of oil will decline. And if EEPGL incurs a loss (total revenue is less than total expenses), EEPGL has no trouble as all losses are charged to the revenue of the next month. Consequently, inflated costs, understated profits and the transfer of losses are all elements that drive the inequity arrangements and these elements must be dismantled

Editor, in conclusion, permit me to choose another statement from Kathy Mikells in which she stated that ‘… that the company’s approach has resulted in tremendous financial success…’  Equally significant is the statement by John Hess (KN 5-14-2023) who said, ‘Successful execution of our strategy (at EEPGL) has uniquely positioned our company to deliver significant value to shareholders for years to come…’.   While noting that these senior executives have said nothing about Guyana, I would like to add a Guyanese proverb which states:

‘If oil ah float, watah deh ah battam’, meaning that ‘A little evidence can tell the whole story’. Thank you Kathy Mikells, and John Hess for opening the door for us to see the cake EEPGL will receive as against our crumbs; for out of every 100 barrels of oil extracted from our patrimony, EEPGL captures 85.5 barrels, while poor Guyana, the owner of the resource, receives 14.5 barrels. Inequity?

Sincerely,
Dr. C Kenrick Hunte
Professor and Former Ambassador

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