-Jan Mangal tells Houston conference
Dr Jan Mangal
May 12 2019
Renegotiate, rescind, reimburse, then auction off so that Guyana reaps the maximum value from its oil blocks, is the advice that petroleum expert Dr Jan Mangal drilled into those who attended his presentation at the Guyana Petro-leum Summit in Houston, Texas on Thursday.
He also warned that if the contentious Exxon-Mobil deal is preserved as is and benefits do not accrue to people, the greater is the possibility of the economic and social devastation currently occurring in neighbouring Venezuela, happening here. In his presentation on the topic, ‘Regulatory & Risk: Securing Guyana’s future – The opportunities and the risks’, Mangal also proposed several solutions including applying new terms on a project-by-project basis so that both the companies and the country benefit. He also highlighted that the ‘unusually large’ Stabroek Block controlled by ExxonMobil could contain all of Guyana’s oil.
Emphasising that government’s focus needs to be on maximising the revenue from the oil sector, the former Petroleum Advisor to President David Granger said that government should push for a renegotiation of the current Production Sharing Agree-ment (PSA) with Exxon-Mobil. He said that it should simultaneously rescind questionable contracts and put them out to auction.
“Rescind some of the highly questionable awards of oil blocks, without making it a witch-hunt. Reimburse those involved for reasonable expenses and losses. Then auction the blocks properly so Guyana can get the real value,” Mangal said.
He believes that the 26,800 square kilometres Stabroek Block held by ExxonMobil’s local affiliate, Esso Exploration and Production Guyana Limited (EEPGL) and its partners, which is the largest offshore block in the country, holds most of the oil reserves and potential benefits should be analysed.
The petroleum expert echoed what most analysts, government and the opposition have said: that the discovery of substantial volumes of oil here – 15 finds by EEPGL to date – can be transformative to Guyana.
But he pointed out that the evidence is there to show that developing countries like Guyana rarely make a success of their natural resources. He said that the challenge with Guyana is to prove that oil can be exploited equitably and sustainably.
Using as an example, a comparison of the terms of ExxonMobil’s Liza Phase 1 project over a 20-year timespan, Mangal said that if government pushed for a 10 per cent instead of 2 per cent royalty, it could easily pocket US$2.6 billion more in revenue and the oil company can still make a huge profit.
“Re-negotiations are not about penalising the oil companies. Oil companies take risks with their huge investments and they need to be rewarded when there is success, like in Guyana,” he said.
“Possible win-win strategies for the Stabroek Block: run econometrics to understand the profitability for the oil companies. An option could be to maintain existing terms for the first project, Liza Phase 1, so the oil company is rewarded for the risk – a reward of about US$2.6 billion – and implement better terms on subsequent projects. Apply new terms on a project-by-project basis so as to maintain a reasonable level of profitability for the oil companies. The project-by-project basis is needed because the Stabroek Block is unusually large. All of Guyana’s oil might end up in that block,” he added.
He outlined a list of strategies Guyana can pursue to ensure it reaps the maximum benefits.
“Focus on maximising the oil revenue and focus on not squandering it. Recognise that the companies use haste for their advantage and be prepared to slow the pace of developments so as to catch-up. Leave the oil companies to do what they are good at. Streamline permitting, and streamline the movement of people and physical assets. Focus on generating the main income from the oil revenue and not from the operational aspects of the industry. Develop a clear legislative framework and strong institutional capacity. Take ownership of the subsurface data. Accelerate use of indigenous natural gas,” he declared.
The petroleum expert also spoke about how Guyana can influence public opinion in the United States and United Kingdom, while also utilising international non-governmental organisations (NGOs) that focus on natural resource governance and anticorruption, to ensure transparent processes.
“Raise visibility of issues through international press. Try to influence public opinion in the US and UK. Use international NGOs who focus on natural resource governance and anticorruption. Influence the large US investors in the oil companies who are more inclined to be concerned about environmental, social and governance issues. Influence the US politicians and prominent figures who are more likely to advocate for Guyana’s interests. Use leverage available via stock market influence on the oil companies. For example, a messy re-negotiation will hurt these companies more than Guyana. Force competition and eliminate the monopoly in Guyana’s offshore acreage. Encourage and accelerate a diverse selection of operators,” he added.
The 2016 PSA has come under withering attack since it was released at the end of 2017. It contained a 2 per cent royalty figure for Guyana on every barrel of oil which experts said should have been far higher since the deal was concluded post the major oil find in the Stabroek Block. It also catered for a US$18 million signing bonus which experts said should have been higher and which the government was silent about until it came under pressure to release the PSA.
EEPGL also retains control over hundreds of blocks that make up the Stabroek Block when the maximum figure should have been 60. A series of other issues have been pointed out in the PSA while it has been highlighted that Guyana did not have a single oil expert on its negotiating team.
Late last year, Head of the Department of Energy (DoE), Dr Mark Bynoe, was asked by this newspaper if, after his analysis of the contract, he believes that it should be renegotiated and if he feels the 2 per cent royalty is adequate given industry standards and the fact that the basin is derisked. Bynoe stressed that it was important to stick to the original agreement although contracts “evolve.”
Oil and Gas Advisor in the DoE, Matthew Wilks, whose key responsibility is in contract administration and management, agreed with Bynoe, saying that investors have their eyes on Guyana and will make decisions based on how the country approaches the contract.
“Investors watch what is happening with contracts and the whole Guyanese approach to the sanctity of contracts…If you start unilaterally trying to change contracts, you will frighten investors,” Wilks said.
He said too that model contracts are designed to reflect the economic and investment atmosphere at a present time. “Model contracts are model contracts. They are the basis for negotiations and model contracts are set in the context of the time in which they are introduced. So, a model contract that is used to try and attract good investment at the onset of the petroleum industry is very different from a model contract as the industry matures and very, very different from a very mature industry,” he had said.
‘Potential backlash’
But Mangal said that re-negotiation is not “tearing up the contract” and it is not an uncommon occurrence for countries to re-negotiate. “Countries commonly re-negotiate oil and gas contracts. The oil companies and their agents prefer for people to think it is taboo and impossible,” he said.
The petroleum expert warned that the longer such “unbalanced” deals remain, the more likely the possibility of the worst results.
“The longer an unfair/unbalanced deal lasts, the greater the potential backlash and damage. Look what happened next door in Venezuela. Its vast resources were hardly used to benefit all of its people, and this inequity likely contributed to the creation of a backlash in the form of [late former President Hugo] Chavez,” he said.
And while he would not name any specific company, Mangal highlighted the negative actions of a major oil company here.
“Use bullying and fear to intimidate. Make a re-negotiation seem taboo, ‘We are powerful and get our way all the time’. Use its vast sphere of influence to convince Guyana it is getting a good deal, and does not deserve better. Reduce international visibility of the realities and challenges in Guyana. Keep contractual agreements hidden for as long as possible. Provide overly optimistic projections to Wall Street and shareholders. Underplay the real risks. Use the three levels of influence: The first and easiest, convince the politicians that you will help them get re-elected and get some rich. The second level, convince the private sector to be quiet and unchallenging if they want to get contracts. Thirdly, placate and capture civil society by doling out grants. And lastly, if necessary, buy the voters by encouraging the government to provide direct disbursements,” he said.
He told attendees that he does not believe that Guyana can be relied upon to use its revenue effectively, be it US$300 million annually or the US$2.5 billion more he foresees in a renegotiated contract, even as he emphasised the need for a long-term plan for the sector.
“The Government of Guyana has always had low absorptive capacity, which means it struggles to spend money effectively for the benefit of its people. For decades, many large state capital projects have suffered from mismanagement and corruption.
“There is practically zero long-term strategic state planning in Guyana and this is a critical gap. The government will have to think outside the box and consider innovative solutions for disbursing oil revenue effectively. For example, well-regulated lending entities or banks could be allocated monies to disburse on different types of projects. Example, US$100 million on infrastructure projects, US$50 million on education…,” he said.
