My theory of how the PSA works

Jul 16, 2024 Letters

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Dear Editor,

I have been carrying this theory in my head for some time now. The way this PSA (Production Sharing Agreement) works is very similar to the way Retained Earnings works in a shareholder-owned corporation – but with two exceptions which work to the disadvantage of Guyana. I shall explain these two exceptions later.

First, consider a company owned by 100 shareholders. They have designed a fancy shirt that is the rage among high-income earners. High-end stores couldn’t get enough of them. The company starts out with one factory. Initial equity $400,000 plus bank loan of $600,000. At the end of the first year, they made a profit of $300,000 after servicing the bank loan and paying all its operating and fixed expenses.

There was such a huge demand for this shirt. The Managing Board met and decided they will build a second factory. They decided they will pay $50,000 as dividends to the shareholders, and plough back $250,000 of their profits into the business to build the second factory. This is called Retained Earnings. In the second year, maybe, they will take another bank loan, in addition to the $250,000 RE.  Both factories prove to be very successful. Turned a profit of $500,000 after servicing their loans and paying all fixed and operating expenses in its second year of operation.

Demand for their name-brand shirts is still strong. They opened a third factory. Again, the Board decided to plough back $300,000 to build a third factory. And, so the cycle of expansion of the business goes on until they reach some optimal level, and they stop building more factories.

Note: The business is expanding rapidly – but it is mostly done on Retained Earnings.

Let’s look at Guyana’s PSA. First well, first oil in 2020. Sold hundreds of thousands of barrels. 75% of revenues by law is taken off the top to service, say, an initial $5 billion loan. It is called Cost Recovery. It is an incredibly huge block of revenue.  And it goes on for the life of the contract – 25 or more years. This is a very heavy blow for the Host country to absorb. Because it leaves very little for profit-share.

25% of revenue goes for profit-sharing – split evenly between oil companies and Guyana. The host country’s share is a mere 12.5/100 barrels.

Demand for crudes is strong. Average world market price has moved to a new threshold – from $55 in 2016 to $80 today. Exxon, managing partner (Hess and CNOOC behave like silent partners) builds a new well. Where does the money come from to build a second well?

75% CR will become the mainstay of funding the expansion for first, second . . . nth well. Maybe Exxon will plough back as much as 50% of CR (amounting to $5 billion or more) each year. This works exactly like the concept of Retained Earnings in the shirt factory illustration. With two exceptions: – (1) It is not called Retained Earnings; (2) Each time CR is ploughed back to expand the business, it is counted as fresh capital and is added on to the pile of outstanding capital outlays (Capex).

Huge CR at a rate of 75% of revenues. But when it is ploughed back to expand the business, it is technically Retained Earnings. So, why is it counted as fresh capex and added on to the outstanding pile of Capex?

Guyana suffers – is cheated – because it is not a shareholder of the three partnering companies, nor is it a partner; – and cannot benefit from the hundreds of billions of dollars profit generated by the expanding business – ramp-up from 460,000 bpd to 1.2 billion bpd.

My argument is that the stock of Capital Outlays (often called CAPEX) will never be paid down. As long as you are expanding – more oil wells/oil fields – and adding on fresh capital, it will never be paid down – maybe until all the oil reserves are fully depleted. The concept of forever adding fresh capex to outstanding Capex is called the absence of Ring Fencing.

How does this affect the share of revenues Guyana gets? As the profits get larger and larger in both the illustration of the shirt factory and the actual PSA (so-called partnership between Guyana and Exxon) – only the shareholders can participate in the profits. Guyana is not a shareholder. Guyana’s profit-share will remain fixed at 12.5 barrels + 2 barrels royalty =14.5 barrels, out of every 100 barrels produced. The Guyanese people have been told that Guyana’s share of revenues will rise from 14.5/100 to 20/100 to 30/100 . . .  to 50/100 barrels. A high school student will tell you that as long as you keep adding fresh capex to outstanding capex, Guyana share of profits will not rise. It is basic common sense.

My challenge to Guyana’s Department of Energy (Minister Vickram Bharat is the head of this Dept) is to release to the public a pro-forma amortization schedule showing how the Capex is paid down and how Guyana’s share of barrels will rise year-after-year. If the Dept of Energy will not do this, then it is safe to say that a neat financial trick has been embedded into the PSA intended to cheat Guyana of its fair share of revenues from the oil extraction business in which Guyana plays oil-country host. P.S. Note: A few days ago, I ran into a top representative of GoG in New York at a social event. The gentleman says he wrote and analyzed contracts in his previous job. He said the PSA provides for Ring-Fencing. He pulled out his phone and called a number – and began a conversation. I could hear the other person telling him, “No, PSA does not provide for Ring-Fencing, the new PSA does”.

I jokingly asked him, “Who is that, Mr. Jagdeo”? He said, “That is private”. Later, driving home, my colleague, Charles Sugrim added to the joke, “That must be the omnipresent Joel Bhagwandin”.  Bottom line of my story here: Guyana is losing billions of dollars on this Stabroek Block PSA because of the absence of Ring-Fencing. If Mr. Joel Bhagwandin wants to be helpful, he should publish the pro-forma amortization schedule. Prof. Kenrick Hunte has reconstructed the numbers (actual data is kept hidden from the public by the Dept. of Energy) and it showed that Guyana’s “take” for the years 2020 – 2023 remain fixed at 14.5 barrels out of every 100. By my analysis, it will remain 14.5/100 for maybe a dozen years or more.

Regards,

Mike Persaud

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• disadvantage, exceptions, Guyana, Mike Persaud, Production Sharing Agreement

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