The Petroleum Production Agreement signed between the Government and ESSO, CNOOC and HESS should be addressed holistically. Over the past year or so, all efforts were aimed at the financial benefits and significant short-changing from the contract. Whether the seemingly one-sided contract would be renegotiated, and a more favourable one be concluded, the people of Guyana will have to demand our “pound of flesh”.
It seems that many clauses in the contract were deliberate or we were outfoxed and outmaneuvered by the main player, Exxon. The more I studied this agreement, the more I realized that our country will be screwed. This contract is massively flawed and must be on the agenda for every Guyanese as we go to the polls.
Notwithstanding its flaws, I would like to touch on a few Articles in the contract which are not discussed publicly.
Article 7 – Annual Work Programme and Budget;
Article 9 – Records, Reports and Information; Confidentiality
Article 11 – Cost Recovery and Production Sharing;
Annex C – Accounting Procedure.
Article 7.1 says, “Within sixty (60) days after the Effective Date, the Contractor shall prepare and submit to the Minister in detail a work programme and budget, setting forth the Prospecting Operations,………..during the upcoming Calendar Year”.
The extraction of Oil and Gas is not simple. The complexity of these operations has to be taken seriously. Firstly, there is the primary, secondary and tertiary recovery process. The cost associated with each process that would bring the oil to the surface would include, but is not limited to, equipment and facilities maintenance, direct labour cost and associated overheads.
The detailed work programme submitted by the contractor will have to be analyzed and evaluated by competent personnel at the Ministry. This analysis will lay the groundwork for other reports to be submitted by the contractor, to the Ministry. Are Guyanese professionally and thoroughly trained in these areas? What plans are in-train to ensure that we comprehensively vet the work programme that will be submitted to the Ministry?
Do we have petroleum engineers who are trained to compute the estimated recovery?
These engineers used different models and complex mathematical formulas and techniques to determine the breakdown of hydrocarbon. We need to be fully prepared to evaluate the contractor work program. Are we?
Article 9.1 (a) “The Contractor shall, at all times while this Agreement is in force, maintain and submit to the Minister………..full and accurate reports, records, returns and accounts of Petroleum Operations in the Contract Area.”
9.1 (b) “All data, well logs, maps, magnetic tapes, cuts of cores and cutting samples and all other geological and geophysical information obtained by the Contractor in the course of carrying out Petroleum Operations hereunder and all geological, technical, financial and economic reports, studies and analyses generated in relation thereto…..shall be submitted to the Minister…”
This article stipulates the requirement of the Contractor to submit very comprehensive reports, logs, data, maps, and others (as specified above) of all work done. To prepare the personnel to evaluate these reports will require thorough training in the field of oil and gas production.
We are told that first oil is expected in 2020. This would mean that the first report is due in early 2021. Do we have in-train the personnel we need (geologists, petroleum engineers, accountants, economists, and other professionals) who are trained to not only analyze these reports, but to also evaluate these information against the budget report as is required in Article 7.1? Will these reports be submitted to the Minister and then be stored in some filing cabinet?
Article 11.2 says, “All Recoverable Contract Costs incurred by the Contractor shall,……… be recovered from the value, determined in accordance with Article 13, of a volume of Crude Oil and/or Natural Gas produced and sold from the Contract Area and limited in any month to an amount which equals seventy-five percent (75%) of the total production from the Contract Area for such Month excluding any Crude Oil and/or Natural Gas used in Petroleum Operations or which is lost.”
“Recoverable Contract Costs” means such costs as the Contractor is permitted to recover, as from the date they have been incurred, pursuant to the provisions of Annex C.
Articles 11.3 and 11.4 are frightening. As a matter of fact, most of this contract can be so broadly interpreted; Guyana may end up with a “big stick”.
The question which a logical mind one would ask is, “What makes up the Recoverable Contract Costs”? This contract guarantees that the Contractor will take in 75% of the aggregate value of Cost Oil produced each month as cost recovery. Article 11.3 states that in any month where the recoverable cost exceeds the aggregate value of cost oil, the contractor will recover these costs in subsequent month(s).
In determining Recoverable Contract Costs, we are directed to Section 2 of Annex C. The classification of cost includes Exploration Costs, Development Costs, Operating Costs, Service Costs, and General and Administrative Costs. The contractor, under this agreement shall recover all of these costs, limited to 75% of the monthly aggregate value of cost oil. There is no “ring fencing”, so whether the cost is associated with a “dry” well or not, the total cost of the contractor is aggregated and repaid from oil production. This should be a part of the renegotiation of this contract.
There is an Annual Overhead Charge of 5% of the annual Contract Costs. What this means is that there is an additional cost which we are required to pay, in addition to the exploration, development, operating, service and administrative costs. The sum total of these annual cost is computed, the contractor then computes 5% on top of these, and bills the Minister as Overhead Charge. This is simply ridiculous.
So from 1999 to the time the Petroleum Production License was granted, the people of Guyana were saddled with a surcharge of 5% of the annual cost, in addition to the annual interest cost. After the Production License is granted, there is a sliding scale of this overhead charge starting at 5% on the first $5 million to 1% in excess of the annual cost of $35 million.
Section 3 of Annex C is even more alarming. This section records the Costs that the Contractor will recover without first obtaining the approval of the Minister to incur those costs. The Contractor has been given a “blank” cheque to incur any and all cost, as they deem fit. The bill will then be sent to the Minister.
Can you imagine why American Airlines is charging a return airfare from Miami to Georgetown of over $1,200 whereas to fly from Miami to Trinidad is $300? Most of the passengers on the Guyana leg are workers of Exxon. These airfares become part of the cost of oil. How pathetic. The contractor will be responsible for keeping the books of accounts and will make monthly reports to the Minister. There is a long list of audit functions that is part of this agreement. Again I ask, are we training our countrymen to undertake these important functions?
We will wake up one morning and realize that the contract we signed has now become our dreaded enemy. I call upon the authorities to revisit this contract, and in the same token, prepare our countrymen to take on this tremendous responsibility that will soon dawn upon us.
Sincerely,
Charles Sugrim, CPA
