In a recent presentation by Mr. Glenn Lall, he asked the following question: What is the average cost of a barrel of oil? In reply, I will present some information on the cost of a barrel of oil, based on the combined 2023 Financial Statements of the consortium: EMGL, Hess and CNOOC. Additionally, a comparison will also be made with the cost recovery method that is included in the Production Sharing Agreement (PSA).
Published data by the Bank of Guyana show that the total number of barrels of oil (Q) sold in 2023 was 141,657,000 (Table 1).
| Table 1: Total Revenue, Total Cost and the Average Cost ; 141, 657,000 barrels of oil sold (Q) in 2023 | ||
| Categories | G$ | US$1.00 = G$208.50 |
| Total Cost (TC) after Taxes | $1,032,763,050,057.00 | $4,953,300,000.27 |
| Average cost per Barrel =TC/Q | $7,290.59 | $34.97 |
| Total Revenue | $2,360,691,727,566.00 | $11,322,262,482.33 |
| Average Price (P) per Barrel = TR/Q | $16,664.84 | $79.93 |
In the combined Financial Statement of the consortium, the Total Cost after taxes in 2023 was US$4.953 billion; and dividing this amount by the number of barrels of oil sold (Q) yields an average cost per barrel of US$34.97. In 2023, Total Revenue (TR) was US$11,322 262,264.00. Dividing Total Revenue (TR) by the number of barrels of oil sold (Q) yields the average price (P) of US$79.93 for a barrel of oil.
In keeping with the PSA Article 15.4 (a and b), it is stated that the Government of Guyana must pay the taxes of the consortium from its profit share to the Guyana Revenue Authority (GRA) and this will satisfy the tax liability for the consortium. Additionally, the GRA must issue a tax receipt to the consortium for the taxes paid by the Government so that they can present the tax receipt for tax purposes in other countries. While this is a fraudulent transaction, as no government pays the taxes for any company, it should be acknowledged that this tax amount must be deducted from the Total Cost in the project, as it comes from the profit that Guyana receives, reducing thereby the average cost of a barrel of oil. In 2023, the total taxes paid by the government for the consortium was US$1,471,384,630.78; and when this amount is deducted from total cost, the true cost of oil production in 2023 is US$3,481,915,369.50, yielding an average cost of US$24.58 per barrel of oil (Table 2), which is US$10.39 less than the original average cost of US$34.97 (Table 1).
| Table 2: Total Revenue, Total Cost and the Average Cost; 141, 657,000 barrels of oil sold (Q) in 2023 | ||
| Categories | G$ | US$1.00 = G$208.50 |
| Total Cost (TC) after Taxes | $1,032,763,050,057.00 | $4,953,300,000.27 |
| Income Tax Expense (IT) | $306,783,695,517.00 | $1,471,384,630.78 |
| Total Cost (TC) before Taxes (TCBT) = TC -IT | $725,979,354,540.00 | $3,481,915,369.50 |
| Average cost of a barrel of oil (TCBT)/Q | $ 5,124.91 | $24.58 |
In reviewing the cost methodology employed in the PSA, it is observed that the average cost of a barrel of oil is more costly than the method used to calculate the average cost in the financial statements. Furthermore, this PSA method, along with no ring-fencing, guarantees that profits are squeezed and channeled into the cost recovery account that is 75% of total revenue. Specifically, total cost recovery (TCR) is defined as: TCR = 75%TR = 75% (Price x Q). Therefore, the average cost of a barrel of oil (ACBO) is: ACBO = 75% (price x Q)/Q = 0.75 (Price). In Table 3 below, the total cost under the PSA method of producing 141,657,000 barrels of oil is not US$3.482 billion as recorded in the financial statements, but it is US$8.491 billion, some US$5.009 billion more, yielding an average cost per barrel of US$59.95, some US$35.37 more than the average cost of US$24.58 per barrel in the financial statements.
The implication of this result is that when the price of a barrel of oil is US$80.00 and the cost of a barrel of oil is US$59.95, the profit margin per barrel is only US$20.05 (that is, US$80.00 – US$59,95). In contrast, when the price is US$80.00 for a barrel of oil and the average cost of a barrel of oil, using the data in the financial statements, is US$24.58, the profit margin is US$ 55.42 (that is US$80.00 – US$24.58). Therefore, this result confirms that the PSA Is not really a Production Sharing Agreement; but instead, it is a Profit Squeezing Arrangement; for costs are inflated and with no ring-fencing as well as the Government paying the taxes for the Consortium, profits are minimized, and costs are maximized. Consequently, without ring-fencing, improved monitoring, and timely auditing; and without the end to government paying the consortium taxes, the Profit Squeeze will continue until the oil is exhausted or until renegotiations generate a fair distribution of the benefits for Guyana.
Regards,
Dr. C. Kenrick Hunte
Professor and Former Ambassador
