‘Oil revenue will trickle in due to lack of ring-fencing provision’

‘Oil revenue will trickle in due to lack of ring-fencing provision’ – Int’l Analyst

Nov 07, 2023 ExxonMobil, News, Oil & Gas

Kaieteur News – The 2016 Production Sharing Agreement (PSA) that Guyana entered into with ExxonMobil lacks a crucial ring-fencing clause.

Tom Mitro, a Senior Fellow at Columbia University’s sustainable investment center

For those unfamiliar, ‘Ring-fencing’ simply means that each project would pay for itself, thereby allowing for greater profits to be split when development is paid off.

A recent Financial Times article highlighted that while Guyana’s government now has resources for essential areas like hospitals, housing, transportation, flood management infrastructure, and a sovereign wealth fund, it has raised concerns about the record profits generated by Exxon last year and Chevron’s acquisition of Hess’s 30% stake in the Stabroek Block – leading to renewed scrutiny of the contract terms.

Under the 2016 deal, bills from future developing projects continue to be added to the list of expenses for Exxon to recover. After deducting 75%, Guyana shares 50/50 of the remaining 25% with Exxon as profits, equating to 12.5% of the operation’s profits.

Tom Mitro, a Senior Fellow at Columbia University’s sustainable investment center and other experts argue that the production-sharing contract signed with Guyana in 2016 is unduly generous to Exxon, and some say it should be renegotiated.

Graham Kellas, an analyst at consultancy Wood Mackenzie

“It was an unusually sweet deal,” Mitro said. Mitro pointed to the absence of a “ring-fencing” clause. Revenues from already producing oil sites – such as the Liza field – are not ring-fenced but can be used to recover costs for exploration across other sites in the block.

Added to this, the article also quoted Graham Kellas, an analyst at consultancy Wood Mackenzie as saying, ring-fencing has drawbacks. Kellas said, “[Guyana] could get more money out of Liza quicker but they’ll get money out of the next development slower.”

The fiscal terms are “appropriate,” Kellas said. “The risks were extremely high. … In high-risk, high-cost, deepwater exploration anything could happen.” Meanwhile, Mitro argues that the risks were lower because Exxon had already discovered Liza when it signed the deal with Guyana. “From all the evidence, Exxon knew it was going to be a large discovery,” he said.

Also, the International Monetary Fund (IMF) expressed concern in 2019 that lack of ring-fencing could impact the projected flow of government oil revenues, especially when it comes to already producing oil sites.

Despite public pressure, Vice President Bharrat Jagdeo who has accepted the potential benefits of ring-fencing oil projects is hesitant to amend the existing deal with ExxonMobil and its partners. In contrast, Guyana’s sister country, Suriname, has included a ring-fencing provision in their oil contracts, allowing for more immediate benefits.

Furthermore, it is important to note that while the Stabroek Block generated a substantial US$9.8 billion last year, Guyana only received US$1.4 billion in profits and royalties, with Exxon taking US$7.4 billion to recover its investments. Also, the government’s Half-Year Report suggests that Guyana may earn lower revenue from the industry this year due to declining oil prices on the global market, resulting from reduced demand. Petroleum deposits for the year are now projected to total $1,629.3 million, US$2.4 million less than originally anticipated.