It has been eight years since large oil reserves were discovered off the shores of Guyana, but the nation has only reaped a measly 14.5% of total oil revenues since oil production or more accurately oil extraction started in 2019. The remaining 85.5% have been captured by foreign oil companies. In fact, the Stabroek Block Production Sharing Agreement (PSA) with Exxon and its partners Hess and CNOOC is severely flawed as it allows them to benefit massively, while Guyana receives crumbs for the sale of its oil and gas resources. Financial models of the International Monetary Fund (IMF) and the Global Witness Report published in 2017 and 2020, respectively, indicated that Guyana’s Stabroek Block PSA was one of the worst when compared to those of other oil-producing nations. Importantly, however, the modeling did not consider that Exxon and its partners would exploit the 75% cost recovery ceiling for many years to come.
With more than three years of active oil production under the belt, it has become evident that the Stabroek Block PSA is an outlier, being one of the worst oil contracts signed by a sovereign nation to date. Furthermore, it has become clear that the Government of Guyana does not come close to having the capacity to adequately monitor the Stabroek Block PSA given the failure to audit on time the oil field development costs claimed by Exxon and its partners. As a result, billions of dollars are lost to the nation, year by year. Given these facts, Guyana’s Oil & Gas Governance Network (OGGN), a non-partisan non-government organization, is proposing an alternative model oil contract that should apply to all new oil blocks and ultimately also supersede the Stabroek Block PSA.
OGGN’s proposed Gross Split Model (GSM) is an extraction sharing or concession model that is simple, straightforward, and fully transparent. Guyana will get a fixed share of each barrel of oil extracted from its territories. The rest remains with the oil companies to cover for oil field development and extraction costs and to provide a fair return on investment. Every Guyanese will be able to understand what the country gets in return for the sale of its oil and gas resources. A GSM contract does not require complex arithmetic, and no rigorous oversight procedures have to be put in place to validate expense claims. For instance, there is no need to verify whether a first-class plane ticket to the US was warranted; or the accommodation costs for spouses and relatives in Georgetown were justified, or if a lavish company party can be claimed as legitimate oil field development costs. With a GSM contract, all that is required is the accurate monitoring of oil extraction on-site.
In other words, the government has to make sure that the oil meters at the oil wells are properly calibrated and working well to get a precise count of the number of barrels of oil that are extracted. Guyana’s share of the total barrels of oil extracted will be determined on a real-time and daily basis. The domestic pool of skilled technicians and engineers can easily fulfill these monitoring responsibilities. Additionally, the need to audit the expenses of the oil companies can be eliminated. The army of local auditors and accounting specialists, who painstakingly review complex cost recovery claims made by Exxon and its Stabroek Block partners, becomes obsolete, thereby making audit delays a thing of the past. This is important as labour shortages are becoming a growing problem in Guyana’s booming oil economy. This was exemplified by the head of the Guyana Revenue Authority (GRA), who recently reported a massive shortage of qualified auditing experts.
Finally, any discrepancies found during the auditing process may require costly litigation in the courts. In fact, Exxon has already indicated that they intend to do so, if considered opportune. Gross split models (GSM) for oil contracts already have a precedent in the industry. For example, Indonesia’s PSA is based on a GSM and mandates that out of every 100 barrels of oil extracted, the government takes 57 barrels and the oil company takes 43 barrels. For Guyana, OGGN proposes that the government claim 55 barrels and 45 barrels go to the oil companies. With the proposed split of the oil extracted from Guyana’s oil fields, the nation will more than triple its take. A detailed reasoning for the proposed oil split is out of the scope of this letter, but it can be found on the OGGN home page using the following link: https://www.oggn.org/oggn-new-contract-model/
Is OGGN’s GSM for Guyana’s oil contracts reasonable and fair? In 2020, Global Witness proposed a new contract model, which when computed, amounts to Guyana’s share to be comprised of 10% royalty and 25% taxes with a 50/50 profit share. Similarly, IHS Markit’s model computes to Guyana receiving 10% royalty and 10% taxes with a 50/50 profit share. Both of these approaches are within the ballpark of the 55 barrels for Guyana as recommended by OGGN. Importantly, OGGN’s GSM is superior and fully transparent as there is no need to calculate royalties and profit shares. As a first step, OGGN proposes that the Government of Guyana seek to have a dialogue with the Government of Indonesia so as to learn from their experience and to have their experts work with ours to implement a GSM oil contract in Guyana. When Exxon announced its ground-breaking oil discoveries in 2015, Guyana, a nation of less than 800,000 people, lacked technical expertise in the oil industry, had limited oversight capacities, and underdeveloped institutions to cope with the consequences.
The Stabroek Block PSA signed in 2016, widely seen as lopsided in favour of the oil companies, is a reflection of Guyana’s unpreparedness for the dawn of the oil era. Since then, as many as 30 successful oil finds were reported by Exxon amounting to 11 billion barrels of oil equivalents, thereby largely de-risking the Stabroek Block. It is therefore only adequate to demand a more equitable oil contract that provides a fairer share of Guyana’s patrimony for its people.
Sincerely,
Kenrick Hunte
Alfred Bhulai
André Brändli
Darsh Khusial
Reuben Khusial
Mike Persaud
Joe Persaud
Ganga Ramdas
Charles Sugrim
On behalf of OGGN
(www.oggn.org/about), a 501(c)(3)
organization.
Article Originally Published At: https://www.stabroeknews.com/2023/08/26/opinion/letters/an-alternative-psa-model-such-as-the-gross-split-model-eliminates-contested-areas-in-current-contract/
