Every Man, Woman and Child in Guyana Must Become Oil-Minded – Column 147

Last week’s part 1 of this mini-series dealt mainly with the court case and subsequent renegotiation of the Churchill Falls Hydro project in the Canadian province of Newfoundland and Labrador. In that case, the Canadian Supreme Court rejected an application for an increase in the fixed charge for electricity supplied to Quebec Hydro in exchange for the provision of loan guarantees and the undertaking to purchase all the power produced from a hydro project. For continuity, I repeat two passages from the judgment that support a case for renegotiation of the Exxon 2016 PSA.

1. “The Court cannot change the content of the contract or require renegotiation,” emphasising that renegotiation must arise from the contract itself, as with the 2016 PSA.

2. “There is neither inequality nor vulnerability in their (Churchill/Quebec Hydro) relationship. Both parties to the contract were experienced, and they negotiated its clauses at length.” As we shall see, that was not the case with the 2016 PSA.

The failure in the court was not the end of the matter. The parties thereafter successfully renegotiated the Agreement – a case of losing the battle but winning the war!

The ExxonMobil PSA

The Exxon PSA and Churchill Falls agreement differ significantly in how their imbalances arose. In Churchill Falls, what became a significant advantage for HydroQuébec emerged gradually through market changes under a 65-year fixed price contract that was initially considered fair. In contrast, the PSA’s key provisions reflected fundamental disadvantages from the outset.

Exxon’s discovery of oil in 2015 coincided with heightened vulnerability arising from Venezuela’s claim over two-thirds of Guyana. The oil giant exploited this vulnerability by insisting on terms and concessions unknown in any historical post-discovery petroleum contract. The need and the urgency, coupled with Guyana’s lack of technical expertise, left the government at a disadvantage in what passed for negotiations, conducted mainly at Exxon’s headquarters on a visit by two technical officers from the Guyana Geology and Mines Commission against an army of Exxon’s experts. The GGMC’s report on those negotiations is on public record.

The PSA’s final terms reflect this imbalance. The royalty rate, set at just 2%, is among the lowest globally. Exxon can recover up to 75% of annual revenues as production costs, including a portion of capital and decommissioning costs, before profit-sharing begins, leaving Guyana with minimal immediate financial benefits.

The PSA also defies accounting principles and logic with no provision for ring-fencing, a standard feature in resource contracts. Without such provisions, Exxon has been claiming costs from future projects against existing operations, delaying Guyana’s share of profits and their true economic value. This creates a sustained cycle of deferred earnings, locking the government into a position of dependence on ExxonMobil’s accounting practices.

Perhaps most egregious of all is a provision requiring the government to pay ExxonMobil’s income taxes and to provide it with a certificate that it (the oil companies) has paid such taxes in Guyana.

The Bridging Deed and Procedural Failures

Beyond the financial terms, the PSA’s renewal process raises even more serious concerns about governance and compliance with the law. Under Guyana’s Petroleum (Exploration and Production) Act, companies must relinquish unexplored areas at the end of their license period, retaining only those blocks where discoveries have been made. This provision ensures that unexplored resources revert to state control, allowing the government to attract new investors and maintain competition. However, through a bridging deed, ExxonMobil could bypass this requirement, retaining control over the entire Stabroek Block for forty years and fifty-seven years in total.

The Clyde & Co. report, commissioned to review the PSA, revealed troubling details about the renewal process. According to the report, ExxonMobil was directly involved in drafting the Cabinet paper that justified the bridging deed. This extraordinary corporate influence raises fundamental questions about whether the government acted independently or ceded control to ExxonMobil in exchange for perceived short-term security.

Governance and Sovereignty

Beyond these economic and procedural flaws are deeper issues of governance and sovereignty. Article 32.1—Stability of Agreement freezes the terms of the Agreement effectively for forty-one years (2016 – 2057), nullifying Parliament’s authority over the oil sector. That clause prohibits any changes to fiscal terms or other conditions without ExxonMobil’s consent, thereby placing Exxon outside the reach of Guyana’s democratic institutions.

Guyana’s Constitution vests in Parliament the authority and the duty to legislate for the country’s peace, order and good government, without qualification or reservation. Yet, a minister appointed by the President consented to the Stability Clause, preventing Parliament from exercising its authority – undermining the country’s constitutional framework and raising fundamental questions about the constitutionality of such agreements.

What is particularly unprecedented and outlandish is that the full extent of this ouster and incapacitation lasts fifty-seven years, including the seventeen years under the Janet Jagan approved 1999 Agreement. And second, the incapacitation includes the all-powerful Executive President!

Addressing the flaws in the PSA requires more than renegotiating financial terms. It demands a broader effort to restore the integrity of Guyana’s resource governance framework. This includes revisiting the legality of the bridging deed, holding those involved in its approval accountable, and reaffirming the government’s commitment to transparency and compliance with the law.

Comparing Contexts and Outcomes

While both agreements highlight the risks of imbalanced resource contracts, their differences are stark. Churchill Falls became contentious due to inequities that grew over decades as Hydro-Québec’s fixed pricing arrangements became increasingly favourable to one party.

In contrast, Guyana’s PSA reflected significant disadvantages from the outset, with terms heavily favouring ExxonMobil and constraining Guyana’s ability to adapt or renegotiate.

Another critical difference lies in the governance frameworks. Newfoundland and Labrador lacked the legal tools to challenge Hydro-Québec effectively during the original term of the Churchill Falls agreement, relying instead on eventual expiration to renegotiate. In Guyana’s case, the Agreement in Article 31.2 anticipates and permits renegotiation.

Finally, the scale of resource control differs. The Churchill Falls contract involved a single, albeit massive, hydropower project. Exxon’s PSA governs an extensive offshore oil block with multiple discoveries and prospects over an area of more than 12% of Guyana’s territory. This gives ExxonMobil an enduring and enormous control far greater than Hydro-Québec’s over Churchill Falls’ electricity.

Next Tuesday’s column 148 will examine the lessons from Churchill and conclude with why that case offers much more than hope for the renegotiation of Exxon PSA 2016

Chris Ram