Secrecy over oil production costs not good for transparency
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.
Anil Kumar Sukraj