Se­crecy over oil pro­duc­tion costs not good for trans­parency

- Ram

Stabroek News Sunday - - NEWS -

While gov­ern­ment has said that it an­tic­i­pates re­ceiv­ing about US$300 mil­lion in 2020, when ExxonMo­bil is ex­pected to be­gin oil pro­duc­tion off­shore, the com­pany says it can­not dis­close its es­ti­mated pro­duc­tion and com­mod­ity costs per bar­rel or how many days of the year it will be pump­ing oil. “We typ­i­cally don’t share that in­for­ma­tion but we work closely with the gov­ern­ment on es­ti­mated costs and pro­duc­tion plans. Upon start-up, we’ll have a small ramp-up pe­riod to full pro­duc­tion. Apart from pe­ri­odic main­te­nance, we plan to op­er­ate at full ca­pac­ity,” Pub­lic and Gov­ern­ment Af­fairs Man­ager of ExxonMo­bil, Dee­dra Moe, said in re­sponse to ques­tions posed by Stabroek News. The com­pany’s ret­i­cence has led to civil so­ci­ety ac­tivist and char­tered ac­coun­tant Christo­pher Ram say­ing that keep­ing the in­for­ma­tion se­cret doesn’t auger well for gov­ern­ment in the area of trans­parency. Ram said that the pub­lic has to be aware of how gov­ern­ment and the com­pany are cal­cu­lat­ing rev­enue and pro­duc­tion costs, so that in the fu­ture there would be in­for­ma­tion for ref­er­ence and com­par­i­son. “The gov­ern­ment ought to make this in­for­ma­tion avail­able. If there is a sig­nif­i­cant di­ver­sion in fu­ture years, then we will be able to raise ques­tions on how that di­ver­sion would have arisen. All of this be­ing si­lent now leaves ev­ery­thing in the air,” he said. “It is the duty of the gov­ern­ment to make those en­quiries and share it. The Pri­vate Sec­tor Com­mis­sion would also need to know what is likely to hap­pen to make as­sess­ments on other sec­tors of the econ­omy and also plan ac­cord­ingly,” he added. A sim­i­lar po­si­tion has been taken by econ­o­mist Tar­ron Khem­raj, who has said that the com­pany can­not be blamed for look­ing out for its share­hold­ers’ in­ter­ests and there­fore the gov­ern­ment needs to do the same for its cit­i­zenry. “It is not in Exxon’s in­ter­est to re­lease data to Guyana. Exxon will never do that. This is why the Guyana gov­ern­ment needs se­ri­ous an­a­lysts to do fore­casts. Exxon’s in­ter­est is its share­hold­ers and the po­lit­i­cal plans Exxon bankrolls in the United States and [the] world. Guyana has to take care of its own in­ter­ests and try to find some kind of equi­lib­rium strat­egy as Exxon does what’s best for it­self and its po­lit­i­cal in­ter­ests. Since the Guyana gov­ern­ment failed to have any se­ri­ous reck­on­ing of the cost side of Exxon’s op­er­a­tions, we just have to take what we get, for now,” he said. The Pro­duc­tion Shar­ing Agree­ment (PSA) be­tween Guyana and ExxonMo­bil’s af­fil­i­ate ESSO Ex­plo­ration and Pro­duc­tion Guyana Lim­ited and part­ner CNOOC NEXEN Petroleum Guyana Lim­ited and Hess Guyana states that 75 per cent of the rev­enue earned by the com­pa­nies will be used to re­cover its in­vest­ment. This is es­ti­mated at US$5 bil­lion by the year 2020, when pro­duc­tion is set to be­gin at the Liza-1 well. The Liza-1 oil well de­vel­op­ment alone will cost ap­prox­i­mately US$4.4 bil­lion and the com­pany has al­ready racked up over US$900 mil­lion in re­cov­ery costs as at 2017, for which some US$460 mil­lion is at­trib­uted to pre­con­tract costs.

‘No cut off year’

Khem­raj has also ques­tioned why gov­ern­ment did not in­sist on hav­ing a cut off year for re­cov­er­ing pre-pro­duc­tion costs. “The con­tract does not spec­ify a cut-off year for re­cov­er­ing the pre-pro­duc­tion costs, such as ex­plo­ration, de­vel­op­ment and pre-con­tract ex­penses. Is the cut-off year 2024, 2025 or 2026? These costs will be added to the op­er­at­ing costs once pro­duc­tion starts to come up with an over­all av­er­age or unit cost of pro­duc­tion,” he stated. “Stu­dents of cost ac­count­ing and micro­eco­nomics would think of this as an av­er­age fixed and vari­able cost of pro­duc­tion. Since the time when these pre­pro­duc­tion costs are fully re­couped will de­ter­mine the 50/50 profit share for gov­ern­ment, it is sur­pris­ing the gov­ern­ment did not seek clearer lan­guage in the con­tract,” he added. Min­is­ter of Fi­nance Win­ston Jor­dan last week said that around US$300 mil­lion is ex­pected in the first year of oil pro­duc­tion from the Liza-1 well. “I would say around $300 mil­lion in a full year at 120 [120,000 bar­rels of oil equiv­a­lent per day],” Jor­dan said. “I for­get what the as­sump­tion of the oil price… is,” he added be­fore say­ing that he would be able to pro­vide the fig­ure at a later time. When he was con­tacted on Thurs­day, Jor­dan said that he was not in of­fice. Asked if he would sup­ply the in­for­ma­tion later in the day, he did not re­ply. Calls to his phone on Fri­day went unan­swered. Ram says that he has done his own tab­u­la­tions us­ing in­for­ma­tion gath­ered from re­search of sim­i­lar works glob­ally cou­pled with fig­ures sup­plied by Rep­sol. He said var­i­ous fore­cast com­mod­ity and pro­duc­tion costs were cal­cu­lated in his ma­trix but he was hop­ing

that the Fi­nance Min­is­ter in­cludes the fore­cast fig­ures when he presents the 2019 bud­get. “We hope when the min­is­ter in­cludes his medi­umterm pro­jec­tion, we will have some in­di­ca­tion as to what that rev­enue is, al­though we won’t know the ba­sis of how gov­ern­ment cal­cu­lated; in other words, the pro­jected cost of pro­duc­tion,” he said. “But we have worked out es­ti­mates if oil was to be at US$50, US$60, US$70 and $US80 per bar­rel with var­i­ous pro­duc­tion costs,” he said. Khem­raj’s fore­cast puts the coun­try at re­ceiv­ing sig­nif­i­cantly more. “At first look, the US$300 mil­lion ap­pears un­der­es­ti­mated or is based on a price per bar­rel be­low US$50. As a mat­ter of fact, for Guyana to get US$300 mil­lion, the world mar­ket price will have to be at around US$48 per bar­rel. Such a low price is pos­si­ble by 2020 if the Trump ad­min­is­tra­tion con­tin­ues with the trade war. By 2020, there should also be a cycli­cal slow­down of world de­mand as growth slows to take into ac­count the slow­ing Amer­i­can and global ex­pan­sion since 2009. How­ever, if price stays at US$60 per bar­rel and Exxon starts pro­duc­tion in March, 2020, pro­duc­ing 120,000 bar­rels per day and as­sum­ing full cost re­cov­ery - Guyana should re­alise around US$378 mil­lion (mi­nus mar­ket­ing fees) in the first year, in­clud­ing the 2% roy­alty. If Brent crude stays at to­day’s av­er­age of US$70 per bar­rel and as­sum­ing full cost re­cov­ery, Guyana should re­ceive around US$441 mil­lion (mi­nus mar­ket­ing fees) in 2020, in­clud­ing the 2% roy­alty,” he ex­plained. . “We should note that Guyana does not get paid in US dol­lars but in bar­rels of oil. Guyana will need to pay a mar­ket­ing fee to a com­pany to sell the oil so that the coun­try gets the US dol­lars. We should sub­tract about US$8 mil­lion to US$18 mil­lion per year in mar­ket­ing fees. This num­ber should be de­ducted from the two pos­si­bil­i­ties I gave above for price at US$60 and US$70 per bar­rel. A large part of the roy­alty will go to­wards pay­ing mar­ket­ing fees since that part is paid in US dol­lars. Guyana’s share of profit oil is in crude oil,” he added. Last year, Coun­try Man­ager of ExxonMo­bil Rod Hen­son had told the press that based on pro­jec­tions of com­mod­ity costs at an es­ti­mated US$50 per bar­rel, Guyana would earn about US$1.5 bil­lion af­ter five years and US$7 bil­lion af­ter 20 years. How­ever, he did not state what the ex­pected pro­duc­tion cost of a bar­rel of oil equiv­a­lent would be but re­minded that as per the con­tract, some 75% of over­all earn­ings would be set aside for cost re­cov­ery.

‘The good life’

Work­ing with its fore­cast of at least US$300 mil­lion in 2020, the Fi­nance Min­istry has said it plans to spend the money pru­dently as it hopes to give all cit­i­zens “the good life.” The Min­is­ter of Fi­nance, how­ever, was quick re­mind that the en­tire amount would not be avail­able to his min­istry as the funds would be de­posited into the Nat­u­ral Re­sources Fund (NRF) and within the con­fines of the fis­cal rules of that fund, would be dis­bursed to the Con­sol­i­dated Fund. “So it’s not avail­able to the gov­ern­ment yet; some of it would be­come avail­able based on the leg­is­la­tion which is passed and when that leg­is­la­tion is op­er­a­tionalised, then there are rules for with­drawal from the fund. So, at no time will US$300 mil­lion be avail­able for the gov­ern­ment to spend,” he said “It is fash­ioned in a way where we can take out money in the early days but as you ramp up to 500,000 or 700,000 bar­rels per day, you take less. It’s is hard to take one-third of US$300 mil­lion when you have needs for is US $500 mil­lion but one-third of a bil­lion is plenty; the per­cent­age will go down as you ramp up,” he added. Jor­dan also took aim at in­ter­na­tional an­a­lysts who have crit­i­cised Guyana’s ap­proach to the NRF, say­ing that this coun­try’s eco­nomic cir­cum­stances and lo­gis­tics are vastly dif­fer­ent from other mod­els. He specif­i­cally laced into Nat­u­ral Re­source Gov­er­nance In­sti­tute (NRGI) econ­o­mist and oil and gas con­sul­tant An­drew Bauer, say­ing that his rec­om­men­da­tions were not suited to this coun­try. “At the end of the day, we, as Guyanese, must try to fash­ion some­thing that is for us be­cause our cir­cum­stances are unique. If it is not unique, it is dif­fer­ent to all the dif­fer­ent places there are try­ing to tell you this hap­pened. No­body has come here based on what [we] Guyana, have [and said] ‘I think this is what or that is what you should do’. All you hear is, ‘this is be­ing done in Nor­way, oh this is be­ing done in Chile, oh this is be­ing done here and there.’ But this is Guyana, this is Guyana,” he stressed. “We only have three quar­ter mil­lion peo­ple and they are scat­tered in pock­ets [in] all parts of this coun­try but still ev­ery­body have to get the good life. So I have to build a whole road from here to a com­mu­nity that has only 1,000 peo­ple. Which other coun­try you know got this kind of story? To get the good life for ev­ery­body, we have to go into the cracks, the crevices, the ev­ery­thing, and get them and let them get the good life. So for me, it is dif­fi­cult to hear peo­ple talk­ing ‘Oh it hap­pen so in Nor­way, it hap­pen here so, it there so and so on.’ No­body telling you what hap­pened here,” he added.

Tar­ron Khem­raj

Christo­pher Ram

Anil Ku­mar Sukraj

Win­ston Jor­dan

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