The anticipated Oil Revenues and the Green Paper on the Natural Resource Fund

In our last two columns, we discussed three aspects of the 2017 Auditor General’s report, namely: overall opinion given on the country’s accounts which we felt was not supported by adequate audit evidence; the Executive Summary which did not appear to capture the essence of the report; and the Consolidated Financial Statements of the Government. One statement – Loans and Advances granted by the Government – appeared incomplete since, for example, loans to the Guyana Sugar Corporation and Guyana Power and Light were not included. The report is also badly in need of editing to ensure that findings are presented in concise manner; the report is free of grammatical errors; and technical terms such as “cheque orders” and “interdepartmental warrants” are properly explained or avoided altogether.

In the Executive Summary, it was stated that there were overpayments totalling $79.738 million to 79 contractors against measured works. However, it is not clear whether any mobilisation advances were deducted before arriving at the overpayments. A mobilisation advance is usually given for large contracts to enable contractors to acquire the necessary machinery and equipment and to mobilise them to the project work sites. The advance is recoverable over the life of the contract by way of deductions from each valuation certificate. Therefore, any attempt to match the value of physical works before they are completed, against payments made, will not give a true reflection of the extent of any overpayment, if any.

Today’s article discusses the oil revenues expected to flow in 2020; the feature address by the former Prime Minister of Trinidad and Tobago at the recent Guyana Manufacturing and Services Association’s annual presentation award dinner; and the Green Paper on the proposed Natural Resource Fund (NRF). At the time of writing, the Bill for the NRF has been published in the Official Gazette. This will be the subject of our next column.

The Minister of Finance is reported to have stated that in 2020, the Government is expected to receive US$300 million from ExxonMobil in respect of royalty and profits from the production and sale of crude oil. The Production Sharing Agreement provides for receipt by the Government of two percent royalty and 50 percent profit computed on a monthly basis after the deduction from the sale proceeds up to a maximum of 75 percent of costs. Costs in excess of the amount so deducted are to be carried forward to the following month. The agreement is silent on what happens to the unrecovered cost at the end of the project, that is, at the end of approximately 18 years when the oil resources will be completely exhausted.

Assuming that 120,000 barrels of crude per day are extracted and sold at US$50 per barrel and that 300 days are worked, the royalty for 2020 will be US$36 million. The difference of US$264 million, or US$7.33 per barrel, represents Guyana’s share of profits. Therefore, total share of profit will be US$528 million or US$14.67 per barrel. The total cost of production will be US$1.696 billion, of which the recoverable cost is US$1.272 billion or US$35.33 per barrel. This means that US$424 million, or US$11.78 per barrel, will be carried out forward to 2021. The actual production costs will therefore be US$47.11 per barrel, which represents a small margin of profit of US$2.89 per barrel.

Assuming the same level of production, costs and sales for 2021, the Government’s share of profits will be reduced to US$105 million, as shown below:

[Note: The figure of US$1.590 billion shown as 75% of production and related costs for 2021 is calculated as follows: 75% of US$2.120 billion (US$1.696 billion + US$424 million) = US$1.590 billion]

We, however, do not know the breakdown of the estimated operating expenditure and the recovery of the cost of investment. Media reports indicated that the investment in the Liza 1 well is US$4.4 billion. It would have been particularly helpful if these costs are disclosed so the estimated revenue that the Minister spoke of can be viewed in context. In addition, there is the liability to ExxonMobil of an estimated US$900 million in pre-contract costs. It is not clear how this amount will be repaid. Further, the volatility of oil prices in the last six weeks has seen a significant dip from US$76 per barrel (crude oil WTI) to US$56.46, a 26 percent drop. Further, with the Paris Accord on climate change in force, we are likely to see in the coming years a significant shift away from the use of fossil fuels towards renewable energy sources, such as