The notion of the STATE sharing the production of oil and gas with companies as part of a commercial enterprise was first developed in Bolivia in the 1950s. Today it is widely used in over 40 countries, so the Government of Guyana cannot claim that the unavailability of international experts to advise it was the reason for such a poor Petroleum Sharing Agreement (PSA).
Under the terms of PSA between Guyana and the three contractors (ESSO, the Chinese and HESS), the three contractors are providing the requisite upfront finance and technical skills in order to explore and produce oil and/or gas. The STATE, as owners of the exploitable resources, will take delivery of a portion of the production either in cash or in kind (real oil), according to section 15.6 of the Agreement.
The three contractors have been granted an exclusive right to explore and produce oil and gas within a defined area (generally known as the contract area).
Now that commercial discovery has been declared, the value of the oil at production will be distributed in three ways, but not necessarily evenly – one: to recoup production cost; two: to distribute to the three contractors (as ‘payment’ for their efforts); and finally, a distribution to the STATE on behalf of the people of Guyana (the real owners of the oil).
To compensate these three calls on the value of the production, we must recognise four key financial aspects of any PSA. These four key financial aspects are:
(a) ROYALTY: Firstly, the three contractors in all the more professionally executed PSAs around the world have paid to the STATE a royalty on gross production. In Guyana’s case, we are benefiting from two percent (2%) of all the production that was sold, less the fuel used to run the operation and all sorts of transportation of the product to the point of sale, as outlined in Article 15.6 of the Guyanese PSA. Thus we are earning less than 2%.
The royalty in Guyana’s case can be taken in cash, using a valuation methodology that is heavily in favour of the three contractors, or in kind (meaning real oil). The valuation model is controlled by the three contractors. It makes all the more sense now, recognising that we have lost out on the cash valuation methodology, that we accelerate the construction of an oil refinery, so we can take actual real oil and leverage added value for the STATE. Such a decision would create hundreds of new, well-paying jobs, and would contribute to the reduction of our fuel importation bills, thus saving some US$200 million annually in fuel imports.
(b) COST OIL: Following payment of any royalty, the three contractors, according to Article 11.2, are entitled up to 75% of the total monthly production to recover their costs (with any costs not recovered carried forward to the next period). Such production is known as cost oil.
(c) PROFIT OIL: The oil remaining after the royalty and cost oil are divided between the three contractors and the STATE on a 50/50 basis. It is often the case that the STATE’s share of profit oil increases as production increases, but unfortunately, the Trotman Negotiation Team dropped the ball on this one, even though they claimed they were Harvard trained.
(d) INCOME TAX: Finally, in normal situations, the three contractors would have been given a 5-year tax holiday and then be called upon to pay taxes. However, in Guyana’s case, according to Article 15.4, the Minister agrees to pay any tax assessed by the GRA on behalf of the three contractors, and that amount shall be considered as income of the three contractors and a loss of additional income for the STATE. There goes the 12.5%, and thus the STATE will get even less.
Naturally, because the STATE does not have operational control, it would want to negotiate a PSA that derives maximum financial inflows into the Treasury. Well, this is exactly what Trotman’s team DID NOT DO! You can hire the best international lawyers, but if the political administrators cannot skillfully frame their outcomes, then the international lawyers would be able to do only so much.
Unfortunately, on the foundation of this poorly structured contract from the people’s perspective, Guyana also does not have adequate influence over the work programme. The three contractors will decide when, how, where, what and why. This PSA illustrates what the three contractors wanted, and it inadequately addressed Guyana’s national economic consideration in a programmed manner.
In the final analysis, this Granger Government, and in particular Minister Trotman, has failed to adequately secure the rights and benefits for the local community. For example, enough oil-related jobs, enough training for local workers in oil-related skills, and other targeted projects for poor and the vulnerable. This PSA ensures that the oil will leave our shores and the people of Guyana will remain poorer. So much for the good life!
Sase Singh