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FM
Former Member

 

The previous six columns asked the question whether Guyana could escape the natural resource curse. We have looked at the issue from various dimensions. In particular, we have observed that initial conditions prevailing in Guyana must be taken into account when making such a prediction. The present structure of the production economy and limited economic research capacity in the public service were identified as initial conditions that must be surmounted if the country is to evade the curse. There are still a few crucial initial conditions we must explore; therefore, we will continue probing this crucial question in a fortnight.

Today let us examine the heightened debate about the amount of revenue Guyana will realize. The government’s side of the debate was presented by Minister Dominic Gaskin. He sought to shift the debate away from the percentages, rates and bonus to the expected aggregate inflow of revenues the government is likely to realize once production reaches 500,000 barrels per day. Mr Gaskin made a good point that Guyana does not have the capacity to exploit this natural resource. Therefore, a partner with finance capital is needed. He noted also that going back on the contract will send a message of uncertainty to foreign investors.

Ms Kimberly Brasington from the local affiliate of ExxonMobil echoed a similar perspective about reneging on the contract at this stage. While Mr Gaskin was more aggressive in his posture, Ms Brasington delivered a subtle threat. She made it clear that changing the contract now will turn investors away from Guyana. The threat is credible since this is the way world capitalists operate. They not only read the news and follow keenly the business and financial press, but also meet at country clubs and golf courses. If they want to disrupt your market access they will do just that.

Guyana’s nationalization in the 1970s resulted in failed industries, particularly bauxite, not because Guyanese talent could not manage those industries, but more because market access was disrupted. Venezuela did not turn out well after nationalizing ExxonMobil’s assets in 2007. The ultra-capitalist Forbes Magazine calls Chavez’s nationalization ‘theft’. In a 2014 article the magazine noted that Venezuela still owes ExxonMobil US$1.6 billion for the theft of assets. Last year the Washington Post speculated that ExxonMobil’s Guyana strategy might not only be about economics, but also to get back at the extreme left-wing government there. Guyana might want to consider this factor, particularly since a right-wing government willing to make peace with ExxonMobil could get back into power over there.

Minister Gaskin does not want us to consider the gross revenues because the percentages and the signing bonus are in favour of ExxonMobil. All the market analysts and the economic analyses I have seen indicate that Guyana’s fiscal intake is under 40%. In other words, after accounting for royalty and 50/50 profit share, Guyana gets about 37% of revenues over the lifetime of the project. The bonus is just too low. It is clear the Granger government did not do the research. Furthermore, no one is asking for an exorbitant bonus. When I calculated a reasonable bonus, I accounted for the fact that ExxonMobil has a specific cost of capital or discount rate. A bonus of around US$200 million would not have disrupted its cost of capital.

In addition, some kind of proportionality could have been negotiated on the government’s side when market price exceeds certain upper thresholds. If the price increases to US$70, US$80 or US$100 per barrel, Guyana still receives 50% of profit after accounting for unit or average total cost.

In spite of the fact that the Guyana Government agreed to a 50/50 profit share, I can’t get a sense of how long it will take for ExxonMobil to recoup its fixed costs of exploration, development and pre-contract expenses. I believe Annex C of the contract is written to confuse the general public. It allows for enough leakages so that it will be hard to pin down the average cost. Annex C classifies all costs as exploration costs, development costs, operating costs and the pre-contract expense of US$460.2 million.

There is no cut off period for when exploration, development and pre-contract costs are recovered. This is important from a time value of money perspective and for the long-term average operating cost. The latter will have a direct impact on the 50/50 profit share. Furthermore, it is surprising from a non-discounting valuation standpoint why ExxonMobil would want to spread out long into the future its pre-production expenses such as development costs, exploration costs and the pre-contract expense. This just adds uncertainty to what exactly is the average total cost, which using the lingo of Annex C is the average (or per barrel) cost of exploration, development, operating and pre-contract expenses.

We were reassured by Ms Brasington that ExxonMobil will be fair with respect to the average total cost. However, we have to be aware of the global corporate governance framework under which this giant multinational conducts its business. We examined the corporate governance philosophy a few columns ago. Reuters reported on March 7 that ExxonMobil’s operating margin – the difference between revenues and variable costs – is 5.1%, a number significantly lower than the industry’s average of 13.5%. In the same Reuters article, ExxonMobil is making a commitment to increasing its operating margin by 2025. The retirement bonus of top management is resting on this outcome.

ExxonMobil played its best strategy that allowed the global giant to win a contract in its favour. However, a contract is a contract and there is probably not much room now to get out of it without incurring the wrath of the global capitalists. The Guyana government has signed off on a contract without seeking more information through a more inclusive approach. The APNU+AFC government played a strategy with limited information, which no doubt was motivated by pure political calculations. A few of the foreign “oil experts” the APNU+AFC government brought in to make speeches just had absolutely nothing new to say. The result is Guyana will not obtain an optimal amount of revenues while the demand for these will be great.

This is why Mr Gaskin and others want us to focus on the gross revenues that will flow to central government, which will decide how to spend among competing interests. There are however a few estimates of what average operating cost is likely to be. The IMF did its calculations relying on an operating cost of US$20.4 per barrel. Hess disclosed a much lower average operating cost. Mr Christopher Ram disclosed to me an average total cost of about US$35 per barrel. His number includes the pre-production expenses as well as operating costs. However, I am still bothered that there is no clear indication of when these pre-production costs would be recouped.

In the next column, I will use these cost estimates to simulate scenarios of revenues flowing to central government. I will examine Mr Gaskin’s chicken feed thesis. Chicken feed money has to be determined in the context of the demand for the revenues, not just how much is expected to flow into the government’s bank account.

Copyright © 2017 Stabroek News. All rights reserved.

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Lubbuh bai, why you so obsessed with the kanta Economist TK?

Anyway, the Base have a few comments/questions;

Why are you making such a naive comment about this Capitalist cartel and changing contract terms?  It's a matter of principle, and amending any contract needs not be done in a shot-gun manner.  No businessman will want to put capital at risk if the Govt, after the project has been de-risked, decides it will amend the terms to take advantage of the higher probability of success.  It's a non-starter.

On recouping pre-contract costs - Do you know what Guyana got in return for picking this up?  I would assume the Exxon would recoup all their costs through the profit arrangement.

On recouping of Development costs - It's standard that any company wants to front-load their cost-recoup and get it out of the way.  That's why we have "bonus depreciation".  This does not hurt Guyana in the long term as the profit-share P&L will improve and Guyana will benefit from higher profits.  If you force them to spread it out, they will simply add more cost of capital.

TK...oops Lubbah - Do you know if there are what-if scenarios for $40 to $70 DPB?  BJ recently talked of this overly rosy picture being painted.  I believe he is actually correct.  Furthermore, is there any clause addressing if oil prices go to $90/$100 DPB?  Even the USG impose windfall tax in recognition of the tax breaks the USG gives oil Cos.  Do you know if the GoG has a similar contingency clause?

On the Venezuela angle, correct.  That is why Guyana needs to get the investment and oil flowing asap.  After this, the calculus will by on Marginal Costs. The current gov't in Venezuela is Guyana's Oil "best friend".

BTW, good article bai, but try to away from that Leftist rhetoric!

Labba, Isn't there a chicken feed shortage right now in Guyana?  A chicken farmer mentioned that to me recently.

 

FM
Last edited by Former Member
Baseman posted:

Lubbuh bai, why you so obsessed with the kanta Economist TK?

Anyway, the Base have a few comments/questions;

Why are you making such a naive comment about this Capitalist cartel and changing contract terms?  It's a matter of principle, and amending any contract needs not be done in a shot-gun manner.  No businessman will want to put capital at risk if the Govt, after the project has been de-risked, decides it will amend the terms to take advantage of the higher probability of success.  It's a non-starter.

On recouping pre-contract costs - Do you know what Guyana got in return for picking this up?  I would assume the Exxon would recoup all their costs through the profit arrangement.

On recouping of Development costs - It's standard that any company wants to front-load their cost-recoup and get it out of the way.  That's why we have "bonus depreciation".  This does not hurt Guyana in the long term as the profit-share P&L will improve and Guyana will benefit from higher profits.  If you force them to spread it out, they will simply add more cost of capital.

TK...oops Lubbah - Do you know if there are what-if scenarios for $40 to $70 DPB?  BJ recently talked of this overly rosy picture being painted.  I believe he is actually correct.  Furthermore, is there any clause addressing if oil prices go to $90/$100 DPB?  Even the USG impose windfall tax in recognition of the tax breaks the USG gives oil Cos.  Do you know if the GoG has a similar contingency clause?

On the Venezuela angle, correct.  That is why Guyana needs to get the investment and oil flowing asap.  After this, the calculus will by on Marginal Costs. The current gov't in Venezuela is Guyana's Oil "best friend".

BTW, good article bai, but try to away from that Leftist rhetoric!

Labba, Isn't there a chicken feed shortage right now in Guyana?  A chicken farmer mentioned that to me recently.

 

Me a canecutta. Read de Annex C na see if de man bad mouth Exxon foh nothing. De man seh how dem na clear when dem go get back de money. What if dem a claim back cyapital 10 15 year? Ehehe. Who get con dey? Ehehehe.

FM

Abie bai Mr TK wid non-fake/honour doctarate dey pon this chicken feed money dis week again.

====

The half-good oil contract may or may not bring chicken feed money

 

The previous column critically analysed the cost components of the production sharing agreement with ExxonMobil. We noted that the legal aspects did not cover all the possible cost scenarios, which is crucial for PSA-type contracts. In keeping with the theme of this series of essays, I argue the legal protection against cost uncertainty does not exist because the APNU+AFC government thought a contract was purely legal exercise. It is clear to me that the government negotiators did not appreciate how unit cost may vary over time and over barrels produced.

Minister Gaskin compared the expected oil revenues with existing commodity exports, particularly gold. He presented a wide range of possibilities, some of which were compared with exports from the gold sector. He argued that oil revenues around US$300 million a year is no chicken feed money.

I think the judgement of whether the contract delivers chicken feed money depends on the demand for the projected revenues. Almost all of Guyana’s existing infrastructure has to be rebuilt. Building roads and other infrastructure along the coastal plain is very expensive and often results in cost overruns. Climate change will make it necessary to move inland, hence new infrastructure. The infrastructure at the University of Guyana will need a complete do over if it is to become a serious regional university generating its own revenues. New housing schemes will have to be properly developed before humans are allowed to move in and there will need to be a reassessment of all the canals that were filled over in the past 70 years. From Ruimveldt to the Harbour Bridge, I can think of eight canals, some stretching deep into the backlands that were filled up. That is only one small area. Of course, the tinkered 1980 Burnham Constitution incentivises and institutionalises a certain amount of patronage waste that will occur. It is a Guyanese law of motion that is almost as certain as those of physics.

For context, therefore, let us take a look at the main export earners in 2016 and 2017, as well as remittances. Remittances are not exports; they are gifts in cash and kind. As we can see from Table 1, Gold exports – those of which we know – amount to over US$800 million in both 2016 and 2017. It is very likely that with the smuggled component, gold exports amount to over US$1 billion. Rice exports are closing in on US$200 million and bauxite is suggesting a downward trajectory. While sugar is on its steep decline, rum exports continue to expand. Outside of gold, remittances still represent the second largest source of foreign exchange for Guyana. Unlike gold, remittances represent foreign exchange and gifts that actually enter Guyana.

Table 1  Main exports and remittances – US$ millions

How much in terms of oil revenues would central government receive? This largely depends on the market price prevailing in any given year, the average or unit cost of production and the number of barrels produced. These three variables have to enter into the equation taking into consideration the features of the contract, which include the 2% royalty and the 50-50 per cent profit share. We are not sure how cost will vary over time and over barrels produced. This is also related to the important matter of ring fencing in which the cost of one block cannot be transferred over to another.

Nevertheless, we have to heap all the cost components into one number: an estimate of US$35 per barrel. This cost includes operating, exploration, development, decommissioning and others. Economic theory tells us that as production level increases unit cost should decline. Finance theory tells us that an investor would like to recoup capital expenses as soon as possible during the lifetime of the project. The contract does not account for these conceptual understandings; therefore, we have to just use one crude estimate of US$35 per barrel. It should be noted that the IMF report for the Minister of Finance uses a significantly lower average cost of just under US$21 per barrel. In a coming essay, we would look at expected revenues taking into account the lower IMF cost estimate. This column is already getting overloaded with information, so I will use the US$35 per barrel.

I think the US$35 could be more realistic since in the early years of the project the cost should be higher. I looked at the scenarios when market price is US$35 per barrel, US$50 per barrel, US$60 per barrel and US$70 per barrel. The probability exists that in any given year the price could be any range given above or otherwise. The production levels are 120,000 barrels, 200,000 barrels, 400,000 barrels and 500,000 barrels per day.

The possible revenues going to central government are presented in Table 2. If the price falls to US$35 per barrel, then Guyana earns the

royalty alone. The country will earn US$25.2 million at 120,000 barrels per day and US$105 million at top capacity (at least for now; Guyana could be producing over a million barrels by 2030). This is not a lot of money compared with the demand for revenues. The top end estimate does not exceed rice or remittances when the market price falls to US$35 per barrel. I guess this is better than nothing, but it might be more in the corner of chicken feed money given needs.

Table 2  Possible revenues flowing to central government – US$

However, once the price hits US$50 per barrel and production exceeds 200,000 barrels only gold will provide more revenue. One can see this as a lot of money. However, part of this new revenue will have to make up for lost revenues previously earned by sugar and bauxite, two industries in a long-term decline. The same US$50 per barrel and production of 500,000 barrels per day will bring in a whopping non-chicken feed amount of money of approximately US$1.2 billion in that year. This is about 1/3 of Guyana’s GDP. It is a lot of money and hopefully it will do a lot of good. I am pessimistic given the present political structure and class in Guyana. But I sincerely hope I am wrong.

Notable in Table 2 are the wide variations in revenue when price changes from US$35 to US$70 per barrel for any given level of production. At 120,000 barrels the revenue can be as little chicken feed money as US$25.2 million to medium chicken feed money of around US$655.2 million per year. At the top end production of 500,000, revenue could be chicken feed US$105 million or a spectacular non-chicken feed amount of US$2.73 billion.

The latter scenario shows why it was crucial for the contract to have some proportional increase in government revenues once price exceeds US$60 per barrel. In that way, higher revenue in good times can fund acute shortfall in bad times.

In closing, these numbers emphasise how important macroeconomic management as well as smart industrial policies will become after 2020.

 

Copyright © 2017 Stabroek News. All rights reserved.

 

FM

We do not disagree with what TK just presented.

TK is like a Christmas Blow Blow.

Remember that it was TK and Gerhard who were instrumental in the marriage of the AFC and PNC. Many have short memories.

Where are they today ? Like so many, they were used and abused by the PNC. I read at GNI in an unconfirmed report that Gerhard ran away to Germany and TK is still writing what if this and what if that.

PNC is like a story of the scorpion and the frog. KN had a very nice Peeping Tom article in this.

FM
Prashad posted:

The oil money coming in should go to paying off Guyana's foreign debt first to bring it to zero. Then they should create a self sustaining investment fund.

The bulk of the money will be spent in PNC strongholds. Sadly, Jagdeo used to run to Buxton and Linden as soon as they sneezed while he ignored the plight of his support base. PPP paid the price for it.

See what they did to the AFC at City Hall ? Signs of things to come.

Dat homeland idea will become more relevant as time goes by.

FM
Last edited by Former Member
yuji22 posted:

We do not disagree with what TK just presented.

TK is like a Christmas Blow Blow.

Remember that it was TK and Gerhard who were instrumental in the marriage of the AFC and PNC. Many have short memories.

Where are they today ? Like so many, they were used and abused by the PNC. I read at GNI in an unconfirmed report that Gerhard ran away to Germany and TK is still writing what if this and what if that.

PNC is like a story of the scorpion and the frog. KN had a very nice Peeping Tom article in this.

Ehehehe...balahoo bai...Yuh knockin we bai Mr TK. Everybody gat a right foh run Guyana and screw am up. Yuh bai dey leff am in paradise? It was sweet like soomotto and going to moon nah? Deem coolie bais start mix rum wid coke and rob dem mattie from Nov 2015? Hey hey hey...

FM
Labba posted:
yuji22 posted:

We do not disagree with what TK just presented.

TK is like a Christmas Blow Blow.

Remember that it was TK and Gerhard who were instrumental in the marriage of the AFC and PNC. Many have short memories.

Where are they today ? Like so many, they were used and abused by the PNC. I read at GNI in an unconfirmed report that Gerhard ran away to Germany and TK is still writing what if this and what if that.

PNC is like a story of the scorpion and the frog. KN had a very nice Peeping Tom article in this.

Ehehehe...balahoo bai...Yuh knockin we bai Mr TK. Everybody gat a right foh run Guyana and screw am up. Yuh bai dey leff am in paradise? It was sweet like soomotto and going to moon nah? Deem coolie bais start mix rum wid coke and rob dem mattie from Nov 2015? Hey hey hey...

When the PNC Part One left Guyana it was bankrupt.

There was blackout, no gas, line up for food. Kick down the door bandits was the norm. Indos had to get PNC cards for jobs.

No Kero, No gas, no toilet paper, no soap, no aloo, no sardines, no deal, you get the drift.

The economy was flat, no foreign currency. Military dictatorship, no freedom of the Press, journalists were jailed, Loud mouth Freddie should have disappeared under PNC part one.

The schools had no steps. There was no pure drinking water across Guyana. There was no hope. We Berbician had to line up for two days to cross we own Berbice river.

Every election was rigged. Burnham and Hoyte always did it again.

Man I can go on and on. Man how come you forgot so easily ?

Ask Chief, he had to hustle and sell smuggled goods to survive. Let me remind you Labba Rat, The PPP changed the landscape. Guyanese thrived under the PPP. 

Some Guyanese like you think that Government should also put food, rum and Labba Meat on the table to make people happy. Man Labba, are you socialist ? Na try to rub PNC kaka on de PPP and compare their term to the PPP.

In less than three years PNC part two is outdoing PNC part one.

BTW, TK will forever remain, if this and if that. If something had wings it would fly and hit TK on the head and put some brain in it so that he would stop Grasshopping.

At least we bai Gerhard ketch sense and ran away.

SMH.

FM
Last edited by Former Member
yuji22 posted:
Labba posted:
yuji22 posted:

We do not disagree with what TK just presented.

TK is like a Christmas Blow Blow.

Remember that it was TK and Gerhard who were instrumental in the marriage of the AFC and PNC. Many have short memories.

Where are they today ? Like so many, they were used and abused by the PNC. I read at GNI in an unconfirmed report that Gerhard ran away to Germany and TK is still writing what if this and what if that.

PNC is like a story of the scorpion and the frog. KN had a very nice Peeping Tom article in this.

Ehehehe...balahoo bai...Yuh knockin we bai Mr TK. Everybody gat a right foh run Guyana and screw am up. Yuh bai dey leff am in paradise? It was sweet like soomotto and going to moon nah? Deem coolie bais start mix rum wid coke and rob dem mattie from Nov 2015? Hey hey hey...

When the PNC Part One left Guyana it was bankrupt.

There was blackout, no gas, line up for food. Kick down the door bandits was the norm. Indos had to get PNC cards for jobs.

No Kero, No gas, no toilet paper, no soap, no aloo, no sardines, no deal, you get the drift.

The economy was flat, no foreign currency. Military dictatorship, no freedom of the Press, journalists were jailed, Loud mouth Freddie should have disappeared under PNC part one.

The schools had no steps. There was no pure drinking water across Guyana. There was no hope. We Berbician had to line up for two days to cross we own Berbice river.

Every election was rigged. Burnham and Hoyte always did it again.

Man I can go on and on. Man how come you forgot so easily ?

Ask Chief, he had to hustle and sell smuggled goods to survive. Let me remind you Labba Rat, The PPP changed the landscape. Guyanese thrived under the PPP. 

Some Guyanese like you think that Government should also put food, rum and Labba Meat on the table to make people happy. Man Labba, are you socialist ? Na try to rub PNC kaka on de PPP and compare their term to the PPP.

In less than three years PNC part two is outdoing PNC part one.

BTW, TK will forever remain, if this and if that. If something had wings it would fly and hit TK on the head and put some brain in it so that he would stop Grasshopping.

At least we bai Gerhard ketch sense and ran away.

SMH.

Balahoo Bai...how yuh busing down suh like dem fish market vendor. What happen bai? Cyat fish and banga price fall? Ehehehehe...Bai doan worry. Ayoo bai and Lard and Saviour go win. Dat is almost done deal. Worry bout de marnin after when dem start fling dem powah in peopkle face like yuh bai do to that good Hindu Dharmic man Arjoon and peopkle like O'Lall. Yuh know de cocktail brew when de uneducated get money and powah. Ehehehe...Why worry wid dat pot solt Mr TK. He is a dirty Indian remember. Ehehehe...

FM

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