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Guyana would have been receiving full 50% today from three oil projects

With ring-fencing…

– country already paid back Exxon project costs  

Kaieteur News – Since oil production activities commenced in Guyana, the operator of the Stabroek Block-ExxonMobil has deducted more than US$19 billion in revenue earned to cover its investments into the development activities across the massive 26,800 square kilometers block.

n the absence of a key provision known to the sector as ring-fencing, Exxon has spent the earnings from the operational projects for exploration works and to finance projects that are in the pipeline. Had Guyana ring-fenced each project, the country could have already paid off the costs for the three projects that are in operation today.

A ring-fencing provision allows for each project to pay for itself. It would also allow each party to benefit from 50 percent of the revenue from each project after the development costs have been repaid. The first project in the Stabroek Block, Liza One, is pegged at US$3.5B and Liza Two, US$6B. The third project, Payara, costs another US$9B. Together the three projects amount to US$18.5B.

Given that Exxon has already deducted US$19B in costs from Guyana’s oil, the three projects could have already been cleared had Guyana implemented a ring-fencing provision. This means the country could have already been positioned to benefit from 50 percent of all revenue generated at each of the projects. Despite repeated calls from stakeholders, local and abroad, for the government to ring-fence each Stabroek Block project, the administration has been reluctant to include such a requirement in the new Environmental Permits.

So far, five projects in the Stabroek Block have been approved without this critical governance mechanism. A sixth project application is before the Environmental Protection Agency (EPA) awaiting approval. Calls have been made for all future projects in the Stabroek Block to be ring-fenced, however these have since fallen on deaf ears.

In the meantime, Exxon has been utilising resources that should be in Guyana’s purse to finance the Stabroek Block activities. Vice President and chief policy maker for the sector, Bharrat Jagdeo had previously explained that Guyana is foregoing revenue now to gain massive profits in the future. He said, “We admitted that we are foregoing revenue now in exchange for massive future income because it’s 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.”

Even though the country is essentially acting as a co-investor in the offshore oil activities by funding the development projects, the country does not receive any additional benefits on its “foregone” profits.  While the VP is comfortable waiting on the revenue to come in later, the country is faced with the real risk of losing billions, since oil prices are likely to drop in the future as the world transitions to renewable energy.

Cost recovery

It was reported that during the period 2018 to 2020, Exxon racked up some US$7.3 billion in expenses for the petroleum activities in the Stabroek Block. Meanwhile, in 2021, the company spent another US$610 million, according to its financial statement. In its 2022 Annual Report, ExxonMobil indicated that US$7.4 billion was deducted to cover its investments in the Stabroek Block. Additionally, the Bank of Guyana (BoG) in its Half Year Report also revealed that some US$4B was already recovered during the first six months of 2023. This means that between 2018 and June 2023, ExxonMobil and partners recovered a whopping US$19B in costs.  Meanwhile, since oil production commenced, Guyana merely earned US$3,057,571,695.52 (inclusive of profit oil and royalty payments) as at September 20, 2023.

Source

Absent ring fencing, Guyana will be denied its rightful share of oil revenue

Ring fencing is an important concern that has engaged the attention of the Guyanese people; but Guyanese policymakers do not want to take any action to establish ring fencing in each of the oil projects that are currently extracting and exporting oil from Guyana. When there is no ring fencing, the people of Guyana are denied, in a timely manner, their rightful share of the oil revenue earned from current oil extraction operations. Without ring fencing, the money earned in a financially viable, oil extraction project can be disbursed to finance oil exploration and development activities in other unauthorized projects. For example, it is reported by the auditors that ExxonMobil Guyana Limited (EMGL) used oil revenue earned from Liza 1 and Liza 2 in the Stabroek block to conduct drilling operations in the Canje and Kaieteur blocks that were not approved under the existing Production Sharing Agreement (KN, Oct. 22. 2023). This action by EMGL inflated the cost charged to Liza 1 and 2, thereby reducing the profit share due to Guyana. The auditors also listed other unauthorized charges for unrelated costs for travel and health services to the Stabroek accounting statements (KN, 10-22-2023).

Another way a company can divert money away from sharing larger profits is to spend some of the money on community-based projects, including education and sports events, which will give the impression that the company is assisting in community outreach and development. However, this ‘acclaimed outreach’ is to buy political silence from the political establishment, while the recipients of the financial gift will undoubtedly come to the defense of the supposedly benevolent gift-givers. So, is this genuine community development being financed by the Company? No! The money is not coming from the company’s profit share, but most likely this disbursement will be charged under the 75 percent cost recovery and deducted from total revenue. Consequently, policymakers and recipients should not sing from the Company’s song book, for this is the classical ploy that divides people and hinders genuine development.

Meanwhile, the benefit of ring fencing is that it allows each project to: (1) Clearly identify the number of barrels of oil to be profitably extracted from each reservoir; (2) Define the average cost of a barrel of oil; 3) Derive a profit margin on every barrel of oil; and (4) Establish the breakeven level of oil output, where profits advance into positive territory, for a given price of a barrel of oil. As expected, some oil will remain in the reservoir after the commercially profitable quantity has been extracted; and this will result in the company closing that well and simultaneously moving to the next financially viable reservoir. This will be the extraction pathway of opening and closing reservoirs with the same distribution of 85.5 barrels out of every 100 barrels for EMGL and only 14.5 barrels for Guyana until the 11 billion barrels are extracted.  Guyana will have nothing more to receive beyond 14.5 barrels, if the ring fencing and breakeven extraction model is not included in a new PSA that is aimed at delivering fairness and equity for a non-renewable resource that Guyana owns.

Finally, it has been reported that Mr. Routledge, Company Manager, EMGL, is quoted as saying’… “The country is never in debt; that’s the beauty of a production sharing agreement, it’s the investors (that) take all that investment risk. We invest the capital and the cost recovery mechanism only pays back the dollars we have invested, (so) there is no financing component.” In response, it is contended that Mr. Routledge’s statement is misleading, for EMGL has not covered the full liability cost associated with a probable oil spill; and this is a possible debt that Guyana will have to pay, if an oil spill occurs. As a result, EMGL is not taking all the investment risk, since Guyana will be trapped with the clean-up cost and compensation payments to our many neighbours. And that 14.5 barrels out of 100 barrels will be insufficient to cover all the damages. Also, being classified as a high-income country, but unable to pay the debt will expose the false proclamation of Guyana being a rich, high-income country.

Furthermore, Guyana, as the sole owner of the resource, is defined in the PSA as the ‘Non-Owner Associate’. Placing Guyana in such a demeaning category is contemptuous, for to have no vote or authority in the extraction of something you own 100 percent signals that we have lost our sovereignty and this loss must be corrected by our policymakers. In another comment, Mr. Routledge is reported to have said that ‘We invest the capital and the cost recovery mechanism only pays back the dollars we have invested…’. This statement is also misleading, for any investor will tell you that a successful investment is one in which one must take out in the shortest possible time, more than what you have invested. And in this regard, I refer to a statement by Kathy Mikells, Senior Vice President and Chief Financial Officer, Exxon Mobil Corporation, who said, ‘… that the company’s approach has resulted in tremendous financial success…(and) …that the oil giant is sparing no effort in maximising value from Guyana on all fronts, as quickly as possible. …’.

Equally distressing is the statement by John Hess (KN 5-14-2023) who said, ‘Successful execution of our strategy (at EEPGL now EMGL) has uniquely positioned our company to deliver significant value to shareholders for years to come…’.  Given these statements by Kathy Mikells and Mr. Hess, it is therefore irrefutable that the comments by Mr. Routledge cannot supersede the declarations by his two seniors. Meanwhile, there is serious work to be done by our policymakers; for future generations will not hold you in high esteem when comparisons are made with those who laid the foundation for our freedom and for us to succeed.    

Sincerely,

Dr. C. Kenrick Hunte

Professor and Former Ambassador

Source:

Mitwah

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