Key part of oil revenue comes from production sharing, not royalty – Tullow

Excited about two oil discoveries offshore Guyana within the space of six weeks, the UK-based oil company Tullow is pressing ahead with its work, including plans to set up a base onshore here next year to manage its operations.

“We’re not at the point of saying this is definitely a commercial development. What I would say is that there is definitely potential for commercial development and that is something we will be chasing pretty hard next year and the year after as well,” said George Cazenove, Tullow’s head of communications.

But Tullow’s discoveries come with stinging criticisms of its Production Sharing Contract allowing for just a 1% royalty payment to Guyana, which it can then get back it if makes a claim.

The contract has been heavily criticized by the opposition and other stakeholders.

For Cazenove, it’s a fair question but one that is being viewed in isolation from the other benefits that will accrue to the country.

“We get asked this a lot about the royalty and I think I understand that the reason potentially is that Guyana is used to being a mining economy, where royalty is a big part of the contract that mining companies have with government,” Cazenove said in an interview with the News Room Thursday.

However, he said when it comes to oil and gas contracts, it’s important to see royalty as part of the overall “State take” within a contract.

“So, the contract we have government does include a royalty of 1%, which is well known about and is publicly declared in the contract.

Cazenove said Guyana has entered the petroleum industry from a really strong position because the contracts are public when in many economies that’s not the same.

On the Orinduik contract, there is a 50%-60% sharing range, starting with a 50/50 share on basic production, but once production hits 80,000, the share goes up to 60%.

Cazenove, therefore, argues that the matter of royalty should not be looked at in isolation from other gains.

“…the key part of the revenue for the government and people of Guyana comes from production sharing.

“And its key that when we think about contracts and we think about the State take – that the State takes from an oil and gas contract – then we think about the contract in the whole and not just the royalty aspect of it, which in this particular example is actually a very small part of the overall revenue,” he stated.

He added: “If people are looking at how government receives income from Exxon, from Tullow and from other oil and gas industry players they need to look at how the production is shared out between the government and the companies. That is where the bulk of the revenue comes from.”

Tullow hold s a 60 per cent stake on the Orinduik block, while French company Total holds a 25% stake for which it wants to farm in the national oil company of Qatar; Eco (Atlantic) holds the remaining 15% stake.

“Guyana is an industry hotspot; there is no question about that. It’s one of the most exciting places to be looking for oil and gas in the world,” Cazenove stated.

And so for Tullow Oil, there is no mistaking the high stakes environment it is working in.

“Globally over the past five years, there has been nowhere else like Guyana when it comes to the discovery of oil and gas. It has been a spectacular success.”

The company first struck oil in the Jethro-1 well in its Orinduik Block on August 12. Just over a month later, there was another discovery.

“Two discoveries out of two – that isn’t very regular in oil and gas exploration so we’re very excited about that.

“These were high-risk wells; they were what we call wildcat wells. So, they were one in four, one in three chance of success. So we’re very happy they’ve come through.”

The first discovery was important in establishing that indeed oil is in the basin covered under its license – and that comes with an estimate that it will be able to recover 100 million barrels of oil. The second discovery – at the Joe-1 well – while smaller, was also very important for the company.

“It was in the western part of the licence and it helps us understand more about the western side of the license, and potentially identify other oil deposits in that area,” said Cazenove.

But finding oil is not the end all; as with other finds, the company must now do additional work.

“What we’ll do now is we’ll now take the data we’ve got from those two wells and apply it to other data that we have from seismic work that we’ve done and map that data against each other see what else we can see around the rest of the licence that is of interest and that we should be exploring.

“That’s one thing.

“We’ll also spend some time next year thinking about how we might appraise these discoveries. And we appraise them with further wells to see how big the prospects are – how big the oil discovery might be – and whether it has potential for development as well.

“So, we’re very much in the beginning stage still of our exploration campaign.”

Meanwhile, the Repsol-operated Carapa-1 well on the Kanuku licence, for which Tullow holds a 37.5 per cent interest, is scheduled to commence drilling shortly and results could be in by the end of November.