Why the need for ring fencing in the oil sector

CRG had previously clarified why there is a need for ring fencing in the oil sector, but the recent news in the press makes it necessary to provide a reminder as to why it is important. It is not a question of if it will add the most savings to the sector, but instead it must be thought of as one of the necessary components of the sector to ensure we safeguard its profitability for the nation.

As previously mentioned, each project must stand on its own strength and should not be subsidized by the profits of other projects. Activity-based costing (ABC accounting) has been established for this very reason. If Exxon was not recouping their operating costs, and the structure of the PSA was only revenue based then there would be no need for ABC accounting or ring fencing of each project.

Unfortunately, the reality of the PSA currently in place does not allow for us as a nation to neglect ring fencing. If the project is not profitable or does not have a positive net present value then those investment funds or the profits that would have been used to finance the project would be better spent on another investment.

The time value of money helps emphasize the importance of making the best use of the profit obtained from current projects in the sector.

Hopefully this helps clarify any doubts that members of parliament are having concerning the importance of ring fencing. Simply remember that in the current structure of the PSA the supplier doesn’t lose as much as the owner when ring fencing is not in place. We must ensure that the sector is structured in a financially robust manner that supports the maximization of our nation’s profits. Ring fencing is one of the necessary components to ensure that this occurs.

Sincerely,

Jamil Changlee

Chairman

The Cooperative Republicans of Guyana