April 26 ,2022
…tells Guyana to improve oil contract terms for higher profit instead
By Zena Henry
Kaieteur News – The International Monetary Fund (IMF) has advised Guyana to secure a higher share of profit oil through its model Production Sharing Agreement, rather than actively participating in the task of petroleum development through a national oil company.
Vice President Bharrat Jagdeo during his interview on Bloomberg Summit
In one of the institution’s 2019 documents providing technical support to the government, the Fund concluded that there is no strong business case to show that Guyana would receive more value from its oil endowments if it were to participate as a partner via a national oil company (NOC) in the development of the oil blocks.
The financial institution explained that while there are many oil producing countries that have state participation in petroleum operations, that route may not be one that Guyana should take. State participation in petroleum operations could be an instrument for governments to add to its share of profit within the upside of the project, but this participation would also mean that Guyana would be taking on additional risks by wanting to develop oil blocks.
Given the substantial regulatory powers, the government already has within the upstream (exploration, drilling, and extraction) aspect of oil development, the IMF said that, “It is not evident that participation is necessarily adding much more value.” This is because, if Guyana takes on a participating interest in a petroleum project, it would not only receive a share of the contractor’s production value, but it would also have to contribute to cost; including the blocks’ development phase, which is the most capital intensive aspect of oil project development.
Having a participating role in petroleum projects would also require Guyana to finance a fully-paid participating interest or the country could opt to enter into an arrangement that would see the block’s contractor financing government’s share of the development expense to be repaid with interest out of the government’s participation returns. The latter method, the IMF warned however, would delay benefits coming to Guyana for its participatory role.
To avoid these complications, the IMF noted that, “the government may be better off securing a higher government take from progressive profit oil share, rather than having state participation in a project.”
The IMF pointed out that there are non-monetary reasons why countries would opt to play a participating role in petroleum development since it offers a government “a seat at the table” for decision-making and further reduces difficulty in accessing important oil related information. The body noted, therefore, that should Guyana still prefer to have state participation, it could consider including “an optional state participation right in its Model PSA,” to allow the government to elect at the start of a project’s development whether it wants to participate, and the details of that participation.
The IMF noted that many countries manage their state participation through national oil companies, but this often raises governance and transparency challenges. Where Guyana is concerned, the financial institution reiterated that Guyana has no strong business case for a national oil company. “Therefore, should the government decide to have an optional state participation, this participating interest could be managed by a State Holding Company under the oversight of the Ministry of Finance.”
Guyana’s government is currently considering whether it would auction off the remainder of its offshore oil blocks or whether it would create a national oil company to engage in the management of the resource. Last week, during a Bloomberg interview, Vice President Bharrat Jagdeo said that the government was swamped with foreign investors interested in oil exploration offshore Guyana.
To that, he said “We’ve decided now that we want to either auction it [the remaining oil blocks] or we’re exploring now whether we can vest these in a national oil company but play a very passive role, as a passive investor, and get a strategic developer to work within the company to take shares and operate the company for us.”
The Vice President’s suggestion has started some rumblings in certain sectors as stakeholders are already asking questions about who this “strategic developer” would be, the benefits, and how this individual or company would be selected. Given government’s statements about significant benefits from oil wealth, questions are also being asked ask as to why Guyana would need a strategic investor to have shares and run the country’s national oil company.
Economist Ramon Gaskin is not impressed by the government’s recent statement and believes that the new oil company, with the strategic investor idea may be a recipe for trouble and “corruption”. He said that Guyana would instead do well to market its oil property and stay away from huge fees that would have to be paid to outsiders to manage the oil sector and its assets.
Another commentator opined that having a strategic investor in Guyana’s oil company would give that person or entity a permanent lien on all of Guyana’s oil resources. That means that the strategic investor would have the right to keep possession of property belonging to Guyana until it pays any potential debt that is owed. This is a recipe for cronyism and nepotism, it was suggested.