The Economy: The Production Sharing Agreement – Guyana’s Potential Earnings & Profit Sharing from Oil & Gas

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Introduction

On December 28, 2017, the Production Sharing Agreement (PSA) between the Government of Guyana (GoG) and ExxonMobil was finally released, as promised by the Administration. While the agreement does, in fact, has quite a number of weaknesses as pointed out by the International Monetary Fund (IMF), other analysts and the Political Opposition – with respect to Guyana’s share of the benefits therein; the contract is already legally binding. And, based on a particular clause of the said contract, it cannot be amended going forward (I stand corrected) but it is very unlikely that it will be renegotiated for the third time.

It is in this light that this article seeks to present an objective analysis of the profit-sharing arrangement, after all, it is not an entirely bad deal for Guyana. Albeit, Guyana could have secured a better deal nonetheless, but that would have depended on the technical skills and competence on the part of Guyana’s negotiating team.

According to a study done on the, ‘Trends in U.S Oil and Natural Gas Upstream Costs’ – published in March 2016 – by the U.S Department of Energy; it was found that “the full cycle project economics, after taking into account operating cost and the fiscal system under the late 2014 cost environment, most of the deep-water current and future projects are forecast to be uneconomic at oil prices below US$50/bbl.  However, from a forward development perspective, most of the U.S deepwater projects will go forward as a significant amount of capital has been invested and operators are vigorously renegotiating their respective contracts to secure the lower rates.”

Therefore, with that in mind and in all fairness to the oil companies – the operation is no doubt a high-risk operation and an extremely large capital investment and as such, the company is within its right to be compensated for the risks it undertook and its capital investment. Because truth be told, if it wasn’t for this oil company’s huge appetite for risk and investment, then Guyana’s crude would have been locked down forever offshore Guyana, and we would not have earned a cent. Hence, it is again emphasized that we need to move on objectively and ensure that the Administration manages the resources prudently and ensure the benefits are trickled down to the common man.

Profit Sharing Model:

Now, according to Article 11 of the PSA – of the total production of crude oil per calendar month, 75 % of the aggregate value of sale will be dedicated to recovery costs by the Oil Companies (hereinafter referred to as the contractor), while the remaining 25 % will be shared 50/50 between the GoG and the Contractor. So effectively, the 50 % profit sharing model is actually 12.5 % of the aggregate value of products being sold (half of 25%). Noting that recovery cost is referred to as cost oil and the remainder for profit sharing is referred to as profit oil.

Offshore operations, usually run between 24-27 days per month – therefore with production per day which was previously stated to be 100,000 barrels per day, we can estimate that the monthly production from a single field will be 2.7 million barrels of crude. From this, the Minister of Natural Resources disclosed that Guyana’s share of oil is 14,000 barrels per day, which gives rise to approximately 378,000 barrels per month.

The Minister further disclosed that Guyana will earn some US$1.0 million per day in royalties – noting that royalties will be computed on all Petroleum produced and sold less the quantities of Petroleum used for fuel, transportation and Petroleum operations –  this should amount to some US$324 million annually plus profit oil should be, on average US$226.8 million.

Therefore, we could safely presume that the annual oil revenue inclusive or royalties and profit oil should amount to approximately US$550.8 million in gross earnings. Guyana’s net earnings will have to factor in payment of the Contractor’s Corporate Tax, the cost to ship its share of oil  onshore (enshrined in the contract), and Guyana is yet to decide who will refine its oil, whether it would be Trinidad & Tobago, or the Contractor’s refinery and/or whether we would have a small scale-refinery. Therefore, these costs will have to be deducted from Guyana’s Gross oil earnings.

Notwithstanding, it should be noted that these computations are based on the IMF’s projection of US$50 per barrel in 2020. However, it is unlikely that this projection will remain constant given that; (1) there’s a clause that states that Guyana’s crude oil will be sold at the average market price per month. Bearing in mind that the price also depends on the quality of the crude. So if the price fluctuates between US$45 –US$50 for one month, then we will earn only the average for the month. That means we will be paid less than the world market price in reality and also based on the quality of the oil; and (2) in 2020 and beyond, global climate change policies are being pursued aggressively by many countries and these will have a bearing on oil prices – more or less on a downward trend.

Conclusion

Taken together, we could assume with reasonable certainty that Guyana’s net earnings should be anywhere in the region of US$350 – US$400 million, possibly more. With export earnings from gold of US$830 million as of the end of 2016, being the largest export earner so far; oil revenues will be the second largest and will be equivalent and/or more than the current export earnings from rice (US$178.8), sugar (US$73.4) and bauxite (US$92.1M) combined.

Important to note too – is that the oil revenues are not just to be seen as export earnings which would help to stabilize exchange rates and Guyana’s foreign reserves, but it is a direct Central Government revenue. This means that central government’s revenue which is currently some GY$177 billion will increase by a whopping GY$60 – GY$80 billion, reflecting an increase of 33 – 45 percent and represents 24 % to 32 % of the National Budget.

This means, that two years of oil revenues would be enough to re-engage the Amaila Hydro Power project for example, as part of a national green agenda. This will not only reduce the cost of energy for both householders and manufacturers – but will also indirectly increase the disposable income for the ordinary citizen – by significantly reducing the cost of electricity together with a sea of other economic benefits and opportunities that will potentially be created.

*The author of this column is the holder of a Master of Science Degree from a UK university in Business Management, with a specialism in Global Finance and Financial Markets.

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