The CGX vs Exxon Contracts – But don’t be distracted

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By Charles S. Ramson, Attorney at Law, Oil and Gas Consultant

 

The CGX contract release by the government was an attempt to show that all the oil contracts had similar terms. Though the two contracts should never be compared because one is pre-oil discovery (CGX was signed in 2013) and the other is post-oil discovery (the ExxonMobil renegotiated contract was signed in 2016), there are big differences in the terms of the CGX 2013 contract vs the ExxonMobil 2016 contract.

 

It cannot be emphasised enough that before April 2015 Guyana never knew if it had 1000 barrels or 3 billion barrels of oil. But by 2016 (oil having been discovered in April 2015) when the ExxonMobil contract was renegotiated, Granger’s government knew Guyana had about 3 billion barrels of oil and they also knew that the oil was of high-quality as well as a fair assessment of the lift cost so Granger’s government failed Guyanese and future generations of Guyanese by renegotiating a poor deal for Guyana. But even when we look at that poor deal Granger’s government obtained for Guyana, the CGX contract was still far better.

 

First, the big difference is almost 6 million acres. The CGX contract was for 900,000 acres while the ExxonMobil contract was for 6.6 million acres. This makes the ExxonMobil acreage under license one of the largest in the world. Second, the CGX contract is much more aggressive on the relinquishment of acreage relative to the ExxonMobil Contract. The CGX contract compels relinquishment of 15% of acreage (excluding discoveries) within the first 4 years while the ExxonMobil contract does not compel any relinquishment of acreage until about 7 years later.

 

This is hugely significant because any future discoveries by ExxonMobil in this massive area will be bound by the same contract terms unfavourable to Guyana. This is also hugely significant because this gives ExxonMobil control over a larger area for a longer period at a time when the clock on oil being the dominant source of energy is ticking. Third, the annual license fee for the acreage is cheaper per acre in the ExxonMobil contract relative to the CGX contract. The annual ExxonMobil license fee for about 6.6m acres is US$1M while the license fee for about 900,000 acres for CGX is US$100,000.

 

Forth, the production sharing on profit oil is more generous in the ExxonMobil contract when compared to the CGX contract. On the ExxonMobil contract, there is a 50/50 split on profit oil while on the CGX contract there is a 53/47 split on profit oil in favour of Guyana. This 6% swing may seem insignificant but this is 6% on just pure economic rents which mean that it can be as large as the oil price of the day and we have already seen that can range from about $30 to about $140 per barrel. The effect of 6% on a high oil price can be hundreds of millions of US dollars a year.

 

The release of the CGX contract is nothing but an attempt to distract the public from a bad re-negotiated deal. Let’s compare what benefits for Guyana Granger’s government renegotiated with ExxonMobil after knowing that Guyana had at minimum 3.2 billion barrels of oil which is equivalent to almost US$200B at $60 per barrel: 

 

1999 Exxon Contract – No oil discovery – Value $0  

2016 Exxon Contract – 3.2 billion barrel oil discovery – Value US$200B

Royalty 1%

Royalty 2%

Annual license fee US$240,000

Annual license fee US$1,000,000

Training for Guyanese US$100,000

Training for Guyanese US$300,000

signature bonus – $0

Signature Bonus US$18M

Annual Environmental Fee – $0

Annual Environmental Fee US$300,000

 

The context is also important. At the time when the 1999 Exxon contract was signed the oil price was around US$17 per barrel and the world had never experienced an oil price above US$100. Since then oil prices had seen heights of US$147 a barrel and averaged above US$100 a barrel so Exxon’s take despite our 50/50 split on profit oil will be far more than Guyana’s take.

 

Finally, the Leader of the Opposition B. Jagdeo made an extremely important point during his last press conference that Granger’s government has already said that companies who come after ExxonMobil should not expect to get such a generous deal and if that is so then why would it be important to even consider the CGX contract comparison? This author has called for all the contracts to be released especially the contract with Eco and Tullow for the Orinduik block signed in 2016 which will really show Guyana what favourable terms if any, the Granger government was able to secure since it was after our significant oil discovery. Don’t be distracted.      

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