Latest update February 6th, 2025 7:27 AM
Lack of ring-fencing provisions in new model contract carries risk for more abuses by Exxon
Kaieteur News – The absence of ring-fencing provisions in new model contracts has raised concerns, particularly regarding how ExxonMobil may choose to fund its operations in the recently awarded oil block (S8) with Stabroek Block production revenues.
Ring-fencing, in the oil and gas industry, ensures that projects are self-sustaining, that the revenues made at one project are used only for expenses related to that project. In its absence, a company can utilise revenues from one project to finance those costs related to a completely different project.
While there has been persistent advocacy for ExxonMobil’s projects to be ring-fenced, the reality is that five Stabroek block oil developments in Guyana, approved by the government, lack this crucial financial insulation. As a consequence, ExxonMobil and its partners in the Stabroek consortium have the leeway to claim cost recovery expenses that might not be directly related to the projects they are pursuing.
This means that expenses incurred in drilling wells not utilised in these developments, constructing new operational centers, or developments that have not even started yet, can be charged to ongoing production. The result is a situation that has caught the attention of many, including Vice President, Dr. Bharrat Jagdeo, who has publicly criticized this practice as illegal. Remarkably, these concerns have been voiced repeatedly by Kaieteur News over the years, but neither of the administrations in power since the discovery of oil offshore Guyana has taken concrete action on this issue.
Vice President, Dr. Bharrat Jagdeo
The complexity deepens with the allocation of the new oil block, S8, to ExxonMobil and its co-venturers, after Guyana’s first offshore licensing round. The new model agreements do not have ringfencing provisions. Jagdeo had said the government chose to leave out the provision because the blocks are smaller and are not likely to have a multitude of developments in one license area. It seems Jagdeo did not consider that unscrupulous oil companies may attempt to recover expenses across blocks.
While Exxon is the operator of the Stabroek Block, it also operates the Canje Block and has operated the Kaieteur Block. Information coming out of the audit of its 2018-2020 expenses indicates an attempt to recover Kaieteur and Canje expenses from Stabroek Block production. There is now a genuine risk that, just as with Kaieteur and Canje, ExxonMobil could use the proceeds from Stabroek Block production to fund its operations in the new block.
The conclusion of the ongoing audit of ExxonMobil’s 2018-2020 costs, particularly the disagreement over the inclusion of Kaieteur and Canje costs as recoverable expenses, has the potential to resolve this issue. The outcome of the audit could set a pivotal precedent on the matter of ringfencing. Further, while the government, as noted by Jagdeo, has made the blocks smaller and therefore chose to omit ringfencing provisions in the model contract, the observed practices by ExxonMobil suggest that explicit protective measures may be required. The concern of stakeholders is that without such provisions, there is nothing in black and white to shield Guyana from potential financial abuses.
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