I refer to Dr. Tulsi Singh’s letter titled, “Guyana will receive a lot of oil revenues in the next 20 to 25 years” (SN March 1st). If a country’s budget is $US 1.5 billion and you receive rentier income of 1 billion dollars, yes of course that’s a lot of money for a nation of 750,000 people. The question remains: Are we receiving our fair share compared to what obtains universally? Should we settle for an unfair contract just because it looks like a lot of money? Dr. Singh has turned this discussion into a sort of math trick question. Let’s consider these numbers: price per barrel = $65; production cost = $35; royalty = 2%; cost recovery = 75%; profit-share = 50%.
Dr. Singh’s math: $65 – $35 (production cost) = $30. Guyana’s half of the profit would be $15 per barrel. Guyana’s total take would be $1.30 plus $15 = $16.30 per barrel. $16.30 represents 25.1% of the sale price. My math: Royalty per barrel = $1.30; contract provides for 75% cost recovery, or, 0.75 of 65 – 1.30 = 47.78. Profit to be shared would be (65 – 1.30 – 47.78) = 15.92. Guyana’s half of the profit of 15.92 = $7.96. Guyana’s total take becomes 7.96 + 1.30 = $9.26. This works out to 14.25% of Sale Price. This has become a math trick question. Singh’s math puts Guyana’s take as a percentage of sale price at 25.1%; mine puts it at 14.25%.
Note the flaws/errors
Singh uses production cost of $35. Is this really production cost or breakeven cost? Already factored into breakeven is that factor that represents rate of return to oil company. Does this cost remain fixed for any period? Who made up this number – can we rely on this number? Dr. Singh has not accounted for the absence of ring fencing. Most folks assume if capital cost is paid down in 5 to 10 years, after, Guyana’s share of revenues would rise substantially. Nothing in the contract indicates how fast or how long it will take to pay down capital cost. Meanwhile, capital cost remains a moving target with every new discovery and new well. It is my view that Guyana’s “take” will remain as low as 14.25% for at least another 20-years.
The government should ask for a pro-forma schedule (using the best assumptions of variables) so that Guyana can get a sense of the pay down rate and how long it takes to liquidate capital cost. I repeat my obsession with the 2% royalty. It is scandalous – no nation receives 2%. Even our neighbour, Surinam, gets a 6.25% royalty, in addition to profit-share and the oil company is also required to pay corporate income tax on profits. In Guyana Exxon pays 0% corporate income tax.
Sincerely,
Mike Persaud
