Measures Govt. can take to increase US$ Billions rfom oil without changing lopsided Exxon deal

Nov 19, 2023 ExxonMobil, News, Oil & Gas

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Kaieteur News – The People’s Progressive Party (PPP) on the road to National Elections in 2020 presented lofty plans to engage the oil companies in a renegotiation of the lopsided arrangement to allow Guyanese greater profits from its resources.

A few short years later, the party’s leaders all frown at the term, adamant that investor-confidence must be maintained.

While the government argues that it has taken measures to ensure “better contract management” and flaunts the enactment of a Local Content Legislation, there are more than a dozen other measures that can be taken to secure more revenue for the country without changing the terms of the 2016 Production Sharing Agreement (PSA), signed by the former Coalition government, with ExxonMobil and partners- Hess and CNOOC.

1. Cap interest rate on Exxon’s investment

Guyana currently does not invest financially into the development of the resources in the Stabroek Block. This means that ExxonMobil and its Co-Venturers have been funding the exploration and production activities, which Guyana will ultimately repay through cost oil each month (75 percent of the revenue earned).

As rightly pointed out by Vice President, Bharrat Jagdeo “Regardless of whether you make the financing in the form of a loan or equity you have to get a rate return. There is a cost of capital and that is how it is.”

Guyana was however warned by the International Monetary Fund (IMF) that the country could lose massive revenue by failing to cap the interest rates on the investments for its oil projects.

The IMF said it is an industry norm that the government of the day disallows interests from being recovered on loans. Even if this is allowed, the administration sets a cap or limit to prevent the full interest amount from being recovered. The IMF pointed out that Guyana not only allows the recovery of the interest but also sets no cap.

The country is still in the dark on the interest rate being charged by the oil companies to develop the Stabroek Block resources, despite repeated attempts for clarity from leaders.

2. Monitor supply boats, helicopters and other costs

Guyana currently pays in the vicinity of US$55,000 per day for the rental of supply boats to support Exxon’s operations. It was reported that ExxonMobil Guyana Limited can rent up to 24 of these vessels. As such, it would mean that the cost of renting each of these vessels amounts to just under US$20M. Multiplied by 24, it would mean Guyana pays almost US$480M annually for the rental of these boats. Neighbouring Suriname and Trinidad and Tobago are also engaged in offshore oil and gas activities that require such supply vessels.
Their costs on the other hand are markedly lower than that being paid by Guyana.
Those countries pay in the vicinity of US$12,000 per day for use of those vessels. As such, it would mean that the cost for renting each vessel annually amounts to some US$4.3M annually, a whopping US$15.6M less than what Guyana pays for each vessel.

It would be prudent for the government to take stock of those costs and ardently monitor same, as well as expenses for helicopters and other transport and equipment required for the daily operations of the company.

See more here: https://www.kaieteurnewsonline.com/2021/08/15/guyana-loses-us1m-daily-in-rental-for-24-supply-boats-for-exxon/

3. Ring-fence future projects

Bharrat Jagdeo while functioning as Leader of the Opposition, just over three years ago, said in an interview that the then A Partnership for National Unity + Alliance For Change (APNU+AFC) Coalition government “sold” the country to “foreigners” because that administration failed to include ring-fencing to shore up profits from the lopsided Exxon deal.

A ring-fencing provision would prevent oil companies from using revenue generated from one production field to offset costs in another. It would also mean that when a project cost is repaid, Guyana would enjoy 50 percent of the revenue generated there.

Government is now reluctant to implement a ring-fencing provision that can be included in the new licenses and permits for future projects by Exxon.

4. Control all contracts being issued in the oil industry

Guyana’s procurement laws mandate contracts above a specified threshold to be tendered through the National Procurement and Tender Administration Board (NPTAB) for the nation to be privy to the contractors who submitted bids, the cost and ultimately the name of the successful bidder.

On the other side of the spectrum, ExxonMobil has been expending billions of US-dollars without oversight by NPTAB. Even though the contracts are not being funded through the consolidated fund, it is Guyana that will repay those costs.

In normal circumstances, this would substantiate an added layer of oversight to ensure the country gets value for money. Guyana however allows Exxon to incur expenses without verifying the country is not being overcharged. It would then check the company’s bills during the audit process, after purchases have been made.

Controlling the award of contracts could ensure Guyana benefits from competitive prices, thereby increasing the country’s profits.

5. Conduct expert reviews of field development plans

A Field Development Plan (FDP) is one of the most critical documents governments assess before granting companies permission to move ahead with oil projects. In developing the FDP, an oil company such as ExxonMobil will be selective in what international principles it follows. It will also take note of the factors used to tally how much it will charge the country for the project. At the end of the day, the oil company presents the government with a FDP that secures the interest of its shareholders.

Given the importance of this document, numerous industry experts have said the government must ensure proper due diligence is done by way of experienced professionals.

Guyana had utilized Alison Merrilla Redford, a Canadian lawyer and former politician to review the FDPs for Exxon’s Payara and Yellowtail projects.

Redford has no well known track record of being a fierce defender of States on field development plans and industry experts still cannot comprehend why she was selected for such an important job. What surprised them as well is “Guyana’s wild rate of approval for Exxon’s projects” following Redford’s input. They noted that Redford reviewed both Payara and Yellowtail within 42 and 52 days respectively.

More than a dozen industry experts who have experience reviewing FDPs said emphatically, “No proper review is done with such break-neck speed.”

6. Seek more royalties and taxes on projects to be approved

Guyana’s meager two percent royalty being received on the sweet light crude from the Stabroek Block is widely known as the worst known to the industry. The oil companies are also exempted from paying any taxes. This tax holiday is also enjoyed by its subcontractors to support the oil and gas activities.

Activists have been clamoring for the royalty rate to be increased as well as taxes introduced in the new offshore projects. Already, Exxon has made 39 discoveries in the Stabroek Block; to date, five projects have been sanctioned by the state. The government can engage the operator for more royalty and taxes by utilizing the provisions outlined in the PSA.

7. Secure oil projects with parent company guarantee in the event of a spill

Guyana’s leaders have been ducking from addressing the real economic devastation that can be caused by an oil spill. To date, Guyana is yet to secure full protection from the parent companies against a likely spill that can potentially set Guyana back years financially.

8. Scrutinize expenses thoroughly

The scale of ExxonMobil’s operations is several times the annual budget of this country. This also means that there is more room for abuse, as has been exposed in two audits conducted to date.

A thorough review of the company’s expenses could reveal even more damning findings uncovered by the auditors. Government had awarded a four month contract to VHE Consulting which is a registered partnership between Ramdihal & Haynes Inc; Eclisar Financial; and Vitality Accounting & Consultancy Inc. with support by International firms- SGS and Martindale Consultants- to review Exxon’s US$7.3 billion expenses racked up between 2018 and 2020.

Financial Analyst and Certified Accountant, Floyd Haynes had indicated that the recent audit was not a forensic audit or a witch hunt.

He explained, “A forensic audit is done with the aim of identifying fraud and embezzlement with the goal of gathering evidence to be used in a court.” Contrarily, a cost recovery audit was conducted pursuant to the parameters of the 2016 PSA with Exxon.

At that time, Haynes pointed out, “The goal is to verify the accuracy or rather the legitimacy and validity of costs claimed… There is a huge difference so I wanted to clear that up.”

This therefore underscores the need for a more in-depth analysis of the company’s expenses to be conducted.

9. Place independent meters on FPSOs

Guyana recently commenced oil production at a third Floating Production Storage and Offloading vessel (FPSO) in the absence of independent meters to verify the production rates being reported by ExxonMobil Guyana Limited.

The Publisher of Kaieteur News, Mr. Glenn Lall had expressed the view in a recent commentary that as government focuses its attention elsewhere, Guyana could be losing hundreds of thousands of barrels of oil daily due to its failure to independently verify the production rates.

This simple step does not require changes to the Stabroek Block agreement nor technical language in the production licenses but can ensure Guyana benefits more from its resources.

10. Implement financial sanctions for abuse of Guyana’s resources

Even though the two audits conducted of ExxonMobil’s expenses to date have uncovered brazen acts of abuse, the company will not be facing any penalty. The Alliance For Change (AFC) party has called for there to be financial penalties for these acts by the operator.

11. Monitor FPSO and drill ship leasing costs

Guyana’s oil is being used to pay for the rental of drill ships and the lease of the FPSOs; however those costs are not being monitored by the state, instead Guyana is accepting those US-multimillion dollar expenses.

Stringent monitoring of these costs can result in Guyana benefitting from more of its oil revenue.

12. Reduce cost oil

Guyana’s 2016 PSA allow the operator of the Stabroek Block to deduct a majority of the monthly earnings towards cost recovery. Each month, Exxon is allowed to recover 75 percent of the revenues earned to cover its investments.

Tom Mitro, a former director of the University of Houston’s Global Energy, Development and Sustainability program in a Forbes Magazine Energy report last year said the country is losing primarily through the deductions being made by the operator and not necessarily in the profit sharing aspect of the deal.

The Opposition, particularly the AFC had called for the fiscal terms of the new PSA to govern new oil projects in the Stabroek Block. This includes the capping of cost recovery at 65 percent.

13. Fine Exxon for dumping of toxic produced water

Another measure that can be taken by government to increase the revenue streams to Guyana from the sector is by implementing a fine for the dumping of produced water into the ocean.

Produced water is a liquid that is extracted during oil production activities. It contains dissolved mineral salts, or may be mixed with organic compounds such as acids, waxes, and mineral oils.  It is also usually very high in temperature, and can be deadly to marine organisms.

Due to its toxicity, this substance is best re-injected into the wells, though this may be a costly exercise.

Government allows Exxon to dump the produced water into the ocean after it is treated. Concerns have been raised regarding the monitoring of these discharges into the ocean and verification processes to ensure the specified requirements are met. A hefty fine can be imposed on the operator to ensure this waste is re-injected into the wells.

• Enforce strict relinquishment provisions

ExxonMobil has been given the approval of government to keep 20 percent of the Stabroek Block for a year, since its operation was reportedly hampered by the COVID-19 Pandemic.

Despite calls by concerned stakeholders for the justification of the extension to be made public, the PPP remains tight-lipped.

Strict enforcement of the relinquishment provisions can allow Guyana to benefit greater from their resources as these relinquished portions can be put on auction.

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• changes, Contract, ExxonMobil, Government, oil, revenue

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