10% royalty and lower cost recovery among new terms for oil blocks soon to be auctioned

With the highly anticipated bidding for oil blocks expected to commence soon, Vice President Dr. Bharrat Jagdeo on Thursday announced new fiscal terms as part of an updated model Production Sharing Agreement (PSA).

The Vice President during a media briefing at the Office of the President said a 10% royalty rate will head the new model agreement, up from the 2% granted to ExxonMobil for its ongoing exploration and production in the Stabroek Block.

The 75% cost recovery ceiling has been lowered to 65%. The sharing of profits after cost recovery will remain 50/50 between the government and the contractor. Additionally, a corporate tax of 10% will be instituted, where there was none before.

Dr. Jagdeo explained that while the old terms granted the government a 14.5% share at the start of production, the new terms will increase this to 27.5% along with a  corporate tax.

These terms will apply for the upcoming auction and will also be imposed on any current contracts outside of the Stabroek Block if a discovery is made and moves to production.

The government has not confirmed a date for the auction but some 14 blocks – 11 in the shallow and three in the deep – are up for auction.

In addition, Dr Jagdeo mentioned that the 2022 bidding round will allow foreign and local companies to bid, therefore increasing the number of competitors

“We decided to make the bid more competitive so we will allow locals and foreign companies to bid,” Jagdeo said.

He clarified that the qualifications to bid will be more stringent with the minimum technical and financial qualifications required to bid being much greater. Indivisual companies will not be awarded more than three blocks.

Bidders will also be required to pay a penalty fee of $30 million if they don’t make financial commitments to the block after it is awarded. This is an effort to ensure there is greater turnover.

“This is trying to solve a lot of the problems we have had with these where they just sit on the blocks and then they relinquish,” Dr Jagdeo said.

There are relinquishment clauses, which are typically included in contracts so that companies can relinquish a portion of the block when the renewable period is up, thereby allowing other companies to buy into the respective blocks.

The bidding round is expected to last for about five months after it is opened for bidding to start.