Exxon worst oil deal should be replaced with new model contract – OGGN

Aug 28, 2023 News

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Kaieteur News – Independent international experts that have reviewed Guyana’s oil contract with US oil giant ExxonMobil have concluded that the contract is perhaps one of the worst deals known to the industry.

This has become more evident as Guyana embarks on its fourth anniversary since it commenced production activities in December 2019, according to the Oil and Gas Governance Network (OGGN), a non-partisan organization that has been advocating for Guyanese to get the significant benefits from their oil resources.

In a recent missive, the body proposed that the Production Sharing Agreement (PSA) type contract be replaced with a Gross Split Model (GSM) which would allow for a more equitable oil contract delivering a fairer share of Guyana’s patrimony to its people.

The organization said, “It has become clear that the Government of Guyana does not come close to having the capacity to adequately monitor the Stabroek Block PSA given the failure to audit on time the oil field development costs claimed by Exxon and its partners.”

As a result, the group pointed out that billions of dollars due to the nation are lost year after year.

To this end, OGGN has proposed an alternative model oil contract which it argues should apply to all new oil blocks and ultimately also supersede the Stabroek Block PSA.

According to the network, the GSM is an extraction sharing or concession model that is simple, straightforward, and fully transparent.

It said that under the GSM, Guyana would get a fixed number of barrels from the oil extracted in the field, while the oil companies would also benefit from a portion of the oil produced to cover for oil field development and extraction costs as well as a fair return on investment.

Through this model, OGGN believes each Guyanese will be able to understand what the country gets in return for the sale of its oil and gas resources.

The network reasoned that the GSM model would eradicate the need for complex arithmetic, and rigorous oversight procedures required to validate expense claims in a PSA model agreement.

“For instance, there is no need to verify whether a first-class plane ticket to the US was warranted; or the accommodation costs for spouses and relatives in Georgetown were justified, or if a lavish company party can be claimed as legitimate oil field development costs,” the network said.

It stressed, “The army of local auditors and accounting specialists, who painstakingly review complex cost recovery claims made by Exxon and its Stabroek Block partners, becomes obsolete, thereby making audit delays a thing of the past. This is important as labour shortages are becoming a growing problem in Guyana’s booming oil economy. This was exemplified by the head of the Guyana Revenue Authority (GRA), who recently reported a massive shortage of qualified auditing experts.”

Pointing to yet another benefit of this arrangement, the group reminded that any discrepancies found during the auditing process may require costly litigation in the courts. All legal fees must be borne by Guyana.

While there will be no need to conduct cost oil audits, OGGN was keen to note that with a GSM contract, authorities would be required to accurately monitor oil extraction on-site. It pointed out that oil meters must be properly calibrated to function well to get a precise count of the number of barrels of oil extracted.

According to the group, “Guyana’s share of the total barrels of oil extracted will be determined on a real-time and daily basis. The domestic pool of skilled technicians and engineers can easily fulfill these monitoring responsibilities.”

OGGN was keen to point out that GSM oil contracts are well-known in the industry, listing Indonesia as a prime example. The group explained that the GSM contract mandates that out of every 100 barrels of oil extracted, the government takes 57 barrels and the oil company takes 43 barrels.

For Guyana, OGGN proposes that the government claims 55 barrels while the remaining 45 barrels go to the oil companies. This proposal would allow for Guyana’s current take to more than triple.

In fact, the body pointed out that this would align with the recommended share for the country.

It highlighted, “In 2020, Global Witness proposed a new contract model, which when computed, amounts to Guyana’s share to be comprised of 10% royalty and 25% taxes with a 50/50 profit share. Similarly, IHS Markit’s model computes to Guyana receiving 10% royalty and 10% taxes with a 50/50 profit share.”

“Both of these approaches are within the ballpark of the 55 barrels for Guyana as recommended by OGGN,” the group added.

As a first step, OGGN proposed that the Government of Guyana engage the Government of Indonesia to learn from their experience and to have their experts work with locals to implement a GSM oil contract in Guyana.

 

 

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• Guyana Revenue Authority, Independent international experts, OGGN representatives, the Production Sharing Agreement

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