By Charles S. Ramson
Attorney at Law
Oil and Gas Consultant
ExxonMobil is not the enemy and should not be perceived or treated as such simply for seeking to and obtaining a very good deal in the contract re-negotiated with the Granger led government as agents of the Guyanese people since as a company its primary purpose is to maximize shareholder value. Taking that company principle understanding even further, the success of companies around the world and its consequential appeal to the vast majority of investors is determined not by its practice of benevolence or fairness but by its profitability and growth numbers.
On the other hand, the responsibility to secure a good deal on behalf of Guyana was always the sole domain of the government for which Granger as the current president is the leader and who will now forever be remembered as the president who lost trillions of dollars of future revenue for Guyana by agreeing to the terms contained in the contract with ExxonMobil.
The history of the extraction industry has shown that international mining companies love doing business with divided countries and have actually funded divisions in order to obtain the best deals, again, acts which have enhanced their profitability and growth numbers.
The single biggest mistake which President Granger made in relation to the failure to obtain a good deal for Guyana when re-negotiating with ExxonMobil was the refusal to accept the apolitical oil and gas position affirmed by Bharat Jagdeo, the leader of the PPP and opposition. If Granger would have accepted that principle of oil and gas being an apolitical issue, then a strong and united front could have been presented when re-negotiating with ExxonMobil so not only Guyana would have obtained a good deal but the vast majority of Guyanese people would have seen its political leaders working together in an effort to secure the best deal for Guyana. This did not happen and Guyana will now have to live with the terms of this contract for decades to come because of Granger’s myopic leadership.
This Part 2 is a continuation of Part 1 written last week where flaws 1 and 2 of the contract with ExxonMobil were discussed extensively.
Flaw 3: Absence of Decommissioning Terms
In 1999 when the original agreement was entered into even before any commercial quantities of oil was discovered, the importance of decommissioning was never even on the radar globally. The focus was on exploration and production and how to get more revenue (both from the company and country perspective) which is very similar to the Guyana situation at the moment.
Globally, that has now changed significantly especially for mature basins. Decommissioning involves the safe plugging and abandonment of the hole drilled in the earth’s surface from which oil and gas is extracted and the safe disposal of the equipment used in production. In offshore production (such as where Guyana’s will be located), the costs can range in the region of a few million dollars to over US$500m per oil and gas reservoir for which plugging and abandonment is one of the highest cost factors – representing about 60% of the total decommissioning cost.
In a UK Oil and Gas Authority report published in 2017, decommissioning costs in the UK continental shelf are best estimated to be about US$80B which will exceed the remaining net tax revenues from its oil and gas production. Given that production from the Stabroek Block is expected to be from an FPSO (floating production storage and offloading unit, which is a big ship modified to produce oil), the decommissioning costs will be relatively less but still very large when considering that the first development phase of Liza development will see 17 wells and the second phase will see another 35-40 wells.
The decommissioning costs for the Liza production alone will be in the hundreds of millions of US dollars at minimum. That cost can then run into billions if the other discoveries like Turbot and Ranger come on-stream. The absence of the decommissioning term in the contract will mean that ExxonMobil will write off any decommissioning costs as expenses and that will lessen significantly future revenue for Guyana or ExxonMobil will seek partial funding from the Guyana government to offset that cost as is being done in the UK.
Flaw 4: Absence of Government Participation
It is common for oil and gas contracts around the world regardless of whether it is a mature basin or a new player to include a term which gives the government the right to exercise the option to participate in the production in a similar way as any other partner but capped at a certain percentage.
How the option to exercise the participation term works in the oil and gas industry is that the oil companies bear all the cost and risk for exploration and appraisal and the government “backs in” for a percentage of commercial discovery through the vehicle of a National Oil Company.
In other words, the government’s stake is “carried” up to the point of commerciality when, if the option to participate in the venture is exercised, its pro-rated portion of the investment is deducted from the ensuing revenue. Government participation is important for three reasons. First, the government gets a share of the profits as a partner (just like the other partners in the Stabroek Block – Hess and CNOC Nexen) and therefore gets an additional stream of revenue. Second, it gives the government a seat at the table with the partners so it can participate in the decisions being made and protect Guyana’s interest there.
Third, Guyana’s stake in such a large production will continuously build Guyana’s capacity as a global leader in the industry. This flaw, therefore, robs Guyana of potentially billions of dollars and equally important, an opportunity to expand significantly Guyana’s leadership role and influence in the world.
Ego is the real enemy… not ExxonMobil.
See Part 1 here: http://newsroom.gy/2018/01/08/the-flaws-of-the-exxon-contract-guyana-has-lost-trillions-part-1/
