Com­bin­ing gov­ern­ment take and other ben­e­fits

Stabroek News Sunday - - NEWS -

In­tro­duc­tion

Today’s col­umn ex­pands on last week’s dis­cus­sion of the gov­ern­ment take, as it re­lates to Guyana’s 2016, Pro­duc­tion Shar­ing Agree­ment (PSA). The ker­nel of stan­dard def­i­ni­tions of this fis­cal met­ric shows it sim­ply means that, if the take is es­ti­mated at 50 per cent, then the to­tal of all rev­enues re­ceived by the Gov­ern­ment of Guyana (GoG) from the PSA is equal to one-half of the net cash flow gen­er­ated through the op­er­a­tions of ExxonMo­bil and its part­ners. These rev­enues can be mea­sured in dis­counted or undis­counted val­ues.

As in­di­cated last week, most of the en­ergy eco­nom­ics lit­er­a­ture is re­plete with ad­vice to read­ers that this fis­cal met­ric is a “mis­lead­ing in­di­ca­tor”. I have al­ready in­tro­duced last week, one of the rea­sons be­hind this warn­ing. Here I merely wish to add the fur­ther ob­ser­va­tion that this fis­cal met­ric is not prom­i­nent among the mea­sures pri­vate in­vestors in the petroleum sec­tor would uti­lize in or­der to guide their de­ci­sion­mak­ing. Their de­ci­sion-mak­ing would uti­lize stan­dard pri­vate sec­tor val­u­a­tion met­rics such as: Net Present Value (NPV); the In­ter­nal Rate of Re­turn (IRR) and the Prof­itabil­ity Ra­tio (PR), all of which were de­scribed in last week’s col­umn.

Read­ers can see the wis­dom of this ob­ser­va­tion, if they were to re­flect on the fol­low­ing com­monly cited il­lus­tra­tion. Gen­er­ally, petroleum in­vestors are more likely to in­vest in a coun­try which has a fis­cal regime, that pro­vides a gov­ern­ment take as high as 90 per cent, while si­mul­ta­ne­ously al­low­ing an IRR of 20 per cent for a given project, than one which pro­vides a much lower gov­ern­ment take (say 50 per cent), while al­low­ing a much lower IRR of 10 per cent, other fac­tors re­main­ing the same. From the profit mo­ti­vated pref­er­ence func­tion of the petroleum in­vestor the fo­cus is on com­par­a­tive profit op­por­tu­ni­ties avail­able for a given amount of in­vest­ment out­lay. The gov­ern­ment, how­ever, would have a dif­fer­ent pref­er­ence func­tion. One, which seeks to cap­ture its own po­lit­i­cal/so­cial/eco­nomic/geo-se­cu­rity im­per­a­tives, as re­al­is­ti­cally as it can.

Other gov­ern­ment ben­e­fits

On this par­tic­u­lar point, it should be em­pha­sized it has not been suf­fi­ciently ac­knowl­edged in the on­go­ing de­bate on Guyana’s 2016 PSA, that gov­ern­ment ben­e­fits (other than fis­cal re­ceipts) play a very sig­nif­i­cant role in the terms and con­di­tions of the fis­cal regime. Con­sider a few of the ma­jor ones: 1) Reg­u­lated lo­cal con­tent re­quire­ments (LCRs) bring sig­nif­i­cant ben­e­fits un­der the 2016 PSA; 2) Re­search and De­vel­op­ment (R&D) is also quite in­te­gral to the gov­ern­men­tal ben­e­fits the PSA pro­vides; 3) Tech­nol­ogy trans­fer is also fos­tered in the PSA, along with skills train­ing (on the job) and also through sup­port­ing op­por­tu­ni­ties for fur­ther ed­u­ca­tion.

Added to such mea­sure­able ben­e­fits are oth­ers, which are in­trin­sic to the ma­jor trans­for­ma­tion/ di­ver­si­fi­ca­tion, of­fered by Guyana’s petroleum pro­duc­tion and ex­port. With­out go­ing into de­tails these ‘other ben­e­fits’ pro­vide op­por­tu­ni­ties for the de­vel­op­ment of in­ter-in­dus­try and in­ter-sec­toral link­ages in the coun­try’s econ­omy. Ad­di­tion­ally, there are the in­come mul­ti­plier ef­fects of public and pri­vate spend­ing, pro­duc­ing and con­sum­ing of goods and ser­vices.

Suf­fi­cient to note, it can rea­son­ably be con­cluded, the gov­ern­ment take as it is tra­di­tion­ally de­fined, while of­fer­ing sig­nif­i­cant ben­e­fits from the fis­cal regime of the 2016 PSA, re­mains un­der-stated, as it does not also in­clude the other ben­e­fits re­ferred to in this Sec­tion.

Con­tract re­view

In last week’s col­umn, I had ad­verted to the No­bel Prize win­ning eco­nomic the­ory (2016) of “in­com­plete mar­kets”. The main pur­pose for in­tro­duc­ing that no­tion was to em­pha­size that, given the in­de­pen­dent pref­er­ence func­tions of the GoG (Owner) and Exxon and part­ners (Con­trac­tor), there re­mains a “ra­tio­nal choice” for both par­ties to seek the “rene­go­ti­a­tion” of the 2016 PSA, if the un­der­ly­ing con­di­tions of the con­tract change dras­ti­cally from that which ob­tained in 2016. Within a day of my mak­ing that pre­dic­tion the GoG, through the Min­is­ter of Nat­u­ral Re­sources was cited in the me­dia as claim­ing: “All terms of the ExxonMo­bil Petroleum Agree­ment will be up for re­view in four years” (Guyana Chron­i­cle).

It would also be re­called that, at the end of last year (De­cem­ber 29, 2017), at an Exxon press con­fer­ence, the public had been firmly ad­vised by the Con­trac­tor that: “the petroleum agree­ment that was signed with Guyana is glob­ally com­pet­i­tive for coun­tries at a sim­i­lar stage of ex­plo­ration”. And that in Fe­bru­ary 2018, Oil Now had quoted Min­is­ter of State, Joseph Har­mon declar­ing:

“The President has said it, that we have dealt with the ExxonMo­bil con­tract, and we are not go­ing back on it, we are not go­ing back on it as it was dealt with at Cabi­net and the President has pro­nounced on the mat­ter and that is the fi­nal pro­nounce­ment as far as we are con­cerned.”

I would ar­gue here that the un­der­ly­ing con­di­tions of the 2016 PSA are rapidly chang­ing. These changes are oc­cur­ring mainly in the area of risk re­duc­tion. This re­duc­tion is hap­pen­ing in all of its ma­jor di­men­sions (po­lit­i­cal, geo-strate­gic, geopo­lit­i­cal, en­vi­ron­men­tal and eco­nomic) of Guyana’s po­lit­i­cal econ­omy of oil and gas. Sec­ond, Guyana is on a steep learn­ing curve in the prepa­ra­tion for its do­mes­tic petroleum pro­duc­tion. Third, shared ex­pe­ri­ences with Exxon and its part­ners have been grow­ing day by day. And, fur­ther the par­ties to the PSA are get­ting to know each other bet­ter in an op­er­a­tional en­vi­ron­ment. On their own I think, these con­sid­er­a­tions are suf­fi­cient to urge move­ment in the di­rec­tion of a re­view of the 2016 PSA.

Pipe­line for con­tracts

It is of great sig­nif­i­cance also that ev­i­dence shows a grow­ing pipe­line of petroleum com­pa­nies want­ing to se­cure ex­plo­ration and pro­duc­tion con­tracts. There are per­haps over a dozen such com­pa­nies from coun­tries as di­verse as Chevron (United States), Petrobas (Brazil), To­tal (France) as well as an In­dia state-owned com­pany seek­ing ei­ther “direct en­gage­ments” with the GoG, or queu­ing up to take part in a se­lect bid­ding process for the auc­tion of blocs by the GoG if this emerges. Some of the other com­pa­nies whose names have sur­faced in­clude CGX, Tul­low Oil, An­darko, Ra­tio Oil, ON En­ergy and Nabi Oil & Gas Inc.

As stated last week, in or­der to be ac­cu­rate, the gov­ern­ment take should be mea­sured over the full life-cy­cle of the oil­field project.

How­ever, this life-cy­cle can take decades. For what it is worth, dur­ing the pe­riod 2009-2014, gov­ern­ment take world­wide has been es­ti­mated at 52 per cent (I. Marten, et al, Gov­ern­ment Take in Up­stream Oil and Gas, De­cem­ber 2015).

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