Debate, analysis of Guyana’s 2016, Production Sharing Agreement (PSA)

to require: 1) building equity, through petroleum finds; 2) producing from these finds at the lowest possible cost; and 3) keeping the compatibility of 1 and 2, with the highest likely profit margin.

In theory, if the global petroleum sector were truly competitive, one would expect the oil and gas markets to ensure routinely that: 1) countries with unfavourable petroleum resource geology, 2) relatively higher operational costs, and 3) relatively poor crude quality would have to offer the most favourable fiscal terms in order to encourage investors. And with the reverse configuration countries would offer the least favourable fiscal terms. Unfortunately, as I have shown repeatedly in this series, the petroleum market is not (competitive) efficient. Such an outcome cannot therefore be left to global market rules, as would happen in other businesses.

The above observations logically lead to recognition that, market solutions are not available. Worse, the above circumstance generates a fundamental dilemma: highly competitive global bidding for rights to explore and develop petroleum resources, cannot be expected to achieve the market objective of matching assessments of petroleum fields/resources to fiscal terms on offer by host governments.

Indeed, to the contrary, the hydrocarbons market is celebrated today for its many imperfections, unknowns and uncertainties. And, these ensure a key defining feature of competitive (efficient) markets availability of information is absent from the global hydrocarbons market. As a result, one can safely conclude that, until there is enough information to fuel stiff competition, market outcomes will not determine what can be borne by the Principal and Agent in oil contracts, and, therefore, the most likely profit.

Based on the above description, the key tasks facing the Guyana authorities (Principal) can be summarized as follows: First, to protect the state’s petroleum and other contingent wealth, both in its natural and improved states; second, to offer the Contractor (ExxonMobil and Partners) a fair return on their investments, when compared to similar environments and resource configuration; third, to protect the country against manipulation, speculation, and the systematic taking of abnormal profits; fourth, to foster entrepreneurial flexibility for the Contractor (Agent) and promote organisational and institutional flexibility; fifth, to encourage and reward cost efficiencies, as allowed by law. And finally, above all, to ensure the Principal is able at all times to promote competition and market efficiency, as the prime drivers of economic outcomes.

Conclusion

The points advanced in the above Section are captured in Schedule 1.