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‘As oil prices plummet, so does profits for Guyana’- Jagdeo
…as Gov’t and Opposition refuse to ring-fence projects
Kaieteur News- The drop in oil prices, driven by an oversupply of the commodity, will delay Guyana’s ability to repay the costs associated with the development of its resources. This means that increased profits for the country will also take longer than anticipated.
Table showing Brent Crude oil prices between 2019 and 2025 (Source: Statista)
This explanation was provided by Vice President (VP) Bharrat Jagdeo on Thursday during his weekly press conference at Freedom House. He was at the time responding to a question from this newspaper on the impact of no ring-fencing.
Kaieteur News reminded the VP that he previously explained that the absence of this provision allows a faster recovery of costs, which would enable the country to receive a “bigger bone” in the future. With oil prices however declining, this publication asked Jagdeo, “Where does that leave Guyana? Would we still be able to pay off without ring-fencing?”
‘Ring-fencing’ simply means that each project would pay for itself. This would allow the country to receive a greater share of profits after costs are paid off. According to the Production Sharing Agreement (PSA) Guyana inked with ExxonMobil and its partners, Hess Corporation and CNOOC, 75 percent of the monthly revenue will be deducted to cover costs, while the remaining 25 percent will be split equally (50/50) between the parties to the contract. In this manner, a ring-fencing provision would have allowed Guyana to benefit from half of the revenue generated in a project, after the expenses are repaid.
In his response, Jagdeo highlighted that a major flaw in the 2016 PSA is that it lacked a ring-fencing provision. As such, the Chief Policymaker for the sector noted that the pace of repayment for new projects, added to the cost bank, would be dependent on the price of oil which is volatile.
To this end, Jagdeo said, “So, to the extent that the question you ask me, to the extent that oil prices come down, it would take longer to retire the cost bank and therefore, longer to achieve the 50/50 (profit split).”
The VP was keen to point out that while oil prices may be low for a period it is likely to increase for others.
“I argue that because the model was run on a $50 per barrel oil in the past, that some of the earlier models that we saw, there was a time frame for retiring the cost bank based on $50 at oil prices now way above that, that the cost bank will be retired faster, that is provided you don’t add new projects to it,” Jagdeo told reporters.
He added that while the current prices are lower than what they may have been about a month ago, it remains above the model price.
In October 2023, when Brent crude prices averaged US$91, Jagdeo told reporters that by not ring-fencing the projects, government was ‘giving up a small bone for bigger bones in the future’.
The Vice President explained, “We admitted that we are foregoing revenue now in exchange for massive future income, because its going into new projects that will increase production and so even with the same share of the 50/50 plus the two percent royalty that the future income, because of the bigger scale will be massive in Guyana’s case and we are deliberately foregoing that in this period for that purpose and then trying to grab this bone now could cause you to lose all the bones, the bigger bones too in the future.”
With oil prices now lower and expected to further decline, Guyana’s share of profits in the future will also reduce since the country would be receiving less for the sale of its oil.
Government has made it clear that it will not be implementing this provision, while the major political Opposition party remains undecided about this mechanism.
(‘As oil prices plummet, so does profits for Guyana’- Jagdeo)
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