Exxon’s uncapped delivery costs will significantly affect Guyana’s 2% royalty

Is there any clause in the ExxonMobil Agreement that is in Guyana’s favour?

In the eyes of the fledgling coalition Government, the “generous” two percent royalty and a 50/50 split of profit oil was one. But a closer look by local commentators shows that even this is a poisoned chalice. In his continued analysis of the ExxonMobil-Guyana agreement, Chartered Accountant, Nigel Hinds has found that even when it comes to the two percent royalty, Guyana will not get its fair share.

Hinds said that this is evident in Article 15.6 of the Agreement which deals with taxation and royalty.

That Section says: “The Contractor shall pay, at the Government’s election either in cash based on the value of the relevant petroleum as calculated pursuant to Article 13 or in kind, a royalty of two percent (2%) of all petroleum produced and sold, less the quantities of Petroleum used for fuel or transportation in petroleum operations, from all production licences subject to this agreement…”

Hinds explained: “What this section is telling you is that before Government gets its two percent from the gross production, ExxonMobil has the right to deduct first, the cost of fuel it used in transportation for the operations.”

“Think of it as if you have a contract with a farmer. You and farmer Jones agree that after the sale of x amount of plantains, you are entitled to two percent of the earnings. But before you get your two percent, he says to you that he must first take out his cost to transport the crops from Essequibo to Georgetown.” The Chartered Accountant continued: “Therefore, if the sale of the crops comes up to $100 and he says that the delivery or transportation cost is $40, then that leaves you with $60. You will now get two percent on that $60. The significance of this is that in your deal with the farmer, you have no agreed cap or limit to the delivery costs. So today it can be $40 and tomorrow it can be $50.”

Hinds added that in Guyana’s agreement with ExxonMobil there is no cap mentioned for the transportation or delivery costs.

The Chartered Accountant also went further to explain how Guyana would be shortchanged by the arrangement in Article 15.6. Hinds said: “We know by ExxonMobil’s projections that Guyana can expect 120,000 barrels of oil per day. At US$60 per barrel, the gross sale would be US$2.6B. If we take royalty immediately from this, Guyana stands to benefit US$52.6M.”

The Chartered Accountant continued: “But we are dealing with a peculiar situation here. Exxon has to take out their transportation costs first. Since the contract gives no idea of what that would or could look like, let’s assume its 10 percent of the gross sale price. That way, we would be left with US$2.4B. Apply the two percent royalty to that and Guyana would be taking home US$43.2M.”

Hinds added: “This is significant because Article 15.6 can see us losing US$5.3M, given the example I used.”

He said the fact that ExxonMobil has to deduct its transportation costs first, which is uncapped, leaves Guyana in a horrible position. Hinds insisted that the figures indicate, too, that with such deductions, the nation is not even benefiting from a flush two percent royalty. Even its 50/50 profit split would be affected. (Kaieteur News)