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Guyana Guyana's PSA with Exxon-
Hess-CNOOC a disgrace

- Damning report published about Guyana's oil earnings

By Kaieteur News

Petroleumworld 08 09 2021

A damning report has emerged about Guyana's Production Sharing Agreement with ExxonMobil, Hess and CNOOC. Commissioned by the Institute for Energy Economics and Financial Analysis (IEEFA) – a United States non-profit corporation – the report was authored by Tom Sanzillo, an American investment banker and financial analyst.

The July 2021 report paints a frightening picture of Guyana's gains from its oil reserve. Entitled, “Lack of Ring-Fencing Provision means Guyana won't realise Oil Gains before 2030s, if at all” – the report highlights how the contract leaves Guyana at the mercy of the oil companies.

Sanzillo's report dissects the oil contract and shows how it allows the oil companies to charge Guyana 100% for exploration in the Stabroek Block and make these charges against active blocks. He explains how the oil companies will end up receiving more than Guyana in the early years of production and details how the absence of ring fencing reduces the profits which Guyana earns. The author argues that in the short-term Guyana's oil earnings will be insufficient to cover its Budget deficit and in the long-term would unlikely provide robust revenues.

The report is a must-read for all Guyanese.

Executive Summary

Over the next five years, revenues from Guyana's newly discovered oil reserves being developed by an ExxonMobil-led development team will not be enough to cover Guyana's budget deficit, support new spending and build its wealth.

Over the longer term, a declining oil and gas sector is highly unlikely to provide Guyana with the robust revenues promised. This was the conclusion of the Institute for Energy Economics and Financial Analysis (IEEFA) first report that studied a 2016 agreement between Guyana and the ExxonMobil-led consortium, which also includes the China National Offshore Oil Company (CNOOC) and Hess Corp.

This paper focuses on one provision of the contract that allows the contractor to apply any exploration costs it incurs anywhere on the area under contract and to charge 100% of the costs immediately against the active wells.

Right now, this means that the contractor can explore for oil at the Tanager and Redtail sites,1,2 for example, and charge its expenses against Guyana's oil profits from the Liza 1 site.

Guyana's profit drawn from the Liza 1 site is reduced as a result of this loophole. Put another way, Guyana's profit during the 2021 fiscal year will be reduced to pay for oil and gas that may not be extracted until 2030 or later.

Since December 2019, when the Liza Phase One field commenced production, ExxonMobil and the Government of Guyana have announced at least six new oil discoveries on the Stabroek oil development site.

They have also announced at least four instances where drilling produced dry holes.

• The discoveries have been celebrated as evidence that future revenues will be robust. The dry holes were met with muted consternation. None of the announcements have been met with an accounting of the exploration costs and discussion of how they will be paid.

• Receipt of hundreds of millions, if not billions of dollars due to Guyana will be held back well into the 2030s because the government failed to protect itself from front-loaded costs in its oil and gas contract. The International Monetary Fund has issued a warning and IHS Markit, a global oil and gas services company, has concluded that Guyana is receiving a below-average take from the contract.

• The government of Guyana gave away important protections when it agreed in the contract to postpone payments of its profits to encourage more exploration of oil. It failed to include a “ring-fencing” provision. In effect, the lack of such a provision means the contractor is able to charge Guyana for the cost of new wells before they start producing oil.

• From December 2019 through April 2021, Guyana has received $344 million from oil production and royalties under the consortium contract. Under the current contract, IEEFA estimates that at $50 per barrel, Guyana could receive as much as $6 billion in 2028. • As events are unfolding, however, it is unlikely that Guyana would receive annual payments in the $6 billion range until well into the 2030s, if at all.

• The contract is front-loaded, which means the contractors receive more than Guyana in the early years of the contract.

• The absence of ring-fencing provisions acts as a subsidy. The cost of exploration for new sites is paid by reducing the annual profit to Guyana. The costs of new discoveries and dry holes should be made public.

• The absence of ring-fencing could be a legitimate incentive to encourage more exploration. This contract, however, has many other contract provisions that already favor the contractor. The ring fence provision is just another benefit for the contractor without a clear, transparent benefit for Guyana.

• Postponed payments may never be recovered. Finance Minister Ashni Singh acknowledged this year that the opportunity for Guyana to profit from oil extraction was finite due to competitive economic forces. Guyana's longterm scenario to secure robust profits is risky, and the risk is intensified by this contract provision.

This paper is the first in a series of reports to explore in detail the many ways that the oil share agreement limits the revenue coming to Guyana. Taken alone, the absence of a ring fence front loads the contract with expenses that must be paid before Guyana enjoys an abundant revenue flow. When combined with the other issues, IEEFA will show that the contract is harmful to Guyana's interests. The contract is front-loaded in favor of ExxonMobil, Hess and CNOOC. Declining oil and gas markets significantly increase the risk that in the long run Guyana's oil fields will not produce the revenues promised.

Lack of Ring-Fencing Provision Means Guyana Won't Realize Oil Gains Before 2030, if at All 3 The issues raised in this paper have not been resolved. Many of them will likely be repeated in the upcoming negotiations related to the proposed gas exploration project under discussion.

Read Full report: Lack of Ring-Fencing Provision Means Guyana Won't Realize Oil Gains Before 2030s, if at All

Story from Kaieteur News
08 08 2021

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