Eval­u­at­ing Open Oil’s Fi­nan­cial Model­ing of Guyana’s 2016 PSA – 8

Stabroek News Sunday - - LETTERS -

To­day’s col­umn con­cludes the dis­cus­sion of Open Oil’s model­ing ex­er­cise of Guyana’s 2016 Pro­duc­tion Shar­ing Agree­ment (PSA). I shall ad­dress the three top­ics last week’s col­umn in­di­cated, namely: in­for­ma­tion gaps; the treat­ment of Govern­ment Take; and na­tional ver­sus project-based model­ing.

In­for­ma­tion Gaps

Pre­vi­ous col­umns had ex­pressed con­cern about fi­nan­cial/eco­nomic mod­els, which are not forth­com­ing about the lim­i­ta­tions of data in­putted into them, par­tic­u­larly as re­gards their qual­ity and cov­er­age. How­ever, I do not wish to sin­gle out Open Oil’s model­ing ex­er­cise as a no­table of­fender. To the con­trary, un­der the header: “In­for­ma­tion Gap Anal­y­sis and Next Steps”, the model’s Re­port de­clares “there are sev­eral gaps of in­for­ma­tion that, if filled, would im­prove the eco­nomic model.”

The model iden­ti­fies five gaps. The first is Con­trac­tor es­ti­mates for ex­pen­di­tures on ex­plo­ration, cap­i­tal, and on­go­ing op­er­a­tions. This item is con­tro­ver­sial, par­tic­u­larly be­cause of Exxon’s re­cently an­nounced claims on its ex­plo­ration ex­pen­di­tures for cost re­cov­ery. The sec­ond gap listed is de­tailed es­ti­mates of petroleum re­serves (based on the So­ci­ety of Pro­fes­sional En­gi­neers Clas­si­fi­ca­tion sys­tem). As noted, the model’s base case utilises Liza 1, with a field size of 450 mil­lion bar­rels. It does ref­er­ence Liza Phase 2, and in­di­cates pre­cise re­serves data were not avail­able. Con­se­quently, the third in­for­ma­tion gap listed is a de­fin­i­tive fix on Con­trac­tor tim­ing of its im­ple­men­ta­tion, cost, and pro­duc­tion pro­file.

The fourth gap refers to lack of pre­cise data on the qual­ity and grade of Stabroek crude. This ab­sence caused the model to utilise “es­ti­mates for Brent bench­mark oil” when pric­ing Guyana’s crude. The fifth gap is the ab­sence of of­fi­cial project fi­nance de­tails, par­tic­u­larly debt and in­ter­est charges. The model Re­port notes: “there are cur­rently no project fi­nance costs es­ti­mated,” al­though these are re­cov­er­able un­der the PSA, and should make a dif­fer­ence to the project’s fi­nanc­ing (for ex­am­ple, the amount of loan cap­i­tal).

Al­though not iden­ti­fied specif­i­cally as an “in­for­ma­tion gap,” the project Re­port refers to on­go­ing de­bates in Guyana on the “fis­cal regime” of the 2016 PSA. It hints at al­ter­na­tives that would af­fect the model’s out­comes, par­tic­u­larly Govern­ment Take.

Govern­ment Take

Just prior to the pub­li­ca­tion of Open Oil’s model­ing ex­er­cise, my col­umns were dis­cussing Govern­ment Take and its lim­i­ta­tions as a mea­sure. I had di­rected read­ers to im­proved mea­sures that are on of­fer by en­ergy econ­o­mists. In cor­re­spon­dence, some read­ers are per­plexed by the im­plied equiv­a­lence in Open Oil’s state­ment: “Govern­ment Take, or what the IMF calls Av­er­age Ef­fec­tive Tax Rate stands at 52% of to­day’s (March 2018) Brent price and the de­vel­op­ment plan for 450 mil­lion bar­rels of oil.”

My treat­ment of Govern­ment Take had made sev­eral ob­ser­va­tions, in­clud­ing:

1) Govern­ment Take is typ­i­cally treated as the di­vi­sion of prof­its be­tween the Con­trac­tor and the Govern­ment

2) That take is the prod­uct of a ne­go­ti­ated out­come

3) It is, there­fore, “not an eco­nomic statis­tic, but a fis­cal met­ric”

4) It is also only a pre­lim­i­nary in­di­ca­tor and, there­fore, “com­par­ing the take of dif­fer­ent projects and/or coun­tries is a very dif­fi­cult and of­ten mis­lead­ing ex­er­cise”

5) En­ergy an­a­lysts subscribe to the view that Govern­ment Take mea­sures the per­cent­age of the project’s [Liza 1] net cash flow adjusted for any Govern­ment par­tic­i­pa­tion in the en­ter­prise, cal­cu­lated at dis­counted or undis­counted value.

The cited ar­ti­cles had re­ferred to sev­eral lim­i­ta­tions, which have been iden­ti­fied when Govern­ment Take is used as a performance in­di­ca­tor of the fis­cal regimes of PSAs. There­fore, I had in­di­cated pre­ferred mea­sures, like Ef­fec­tive Roy­alty Rate (ERR), which mea­sures Govern­ment take af­ter recog­nis­ing clearly de­fined ac­count­ing pe­ri­ods for the project.

I do not want to re­visit the ear­lier dis­cus­sion in full but the point I wish to stress here is Govern­ment Take and Con­trac­tor Take do not con­sti­tute a Zero Sum Game. I know or­di­nary Guyanese view one in­creas­ing only at the ex­tent of the other. This can and does take place. How­ever, Con­trac­tor in­cen­tives, if it boosts prof­its, can lead to both im­proved Govern­ment Take and Con­trac­tor Take! Open Oil’s ca­sual equiv­a­lence of Govern­ment Take with other im­proved mea­sures mis­leads non-mod­el­ers.

Na­tional ver­sus project-based model­ing

This is the last topic I shall ad­dress in the present com­men­tary/cri­tique on Open Oil’s fi­nan­cial model­ing ex­er­cise. Open Oil had de­clared in 2016 “the port­fo­lio of mod­els it was re­leas­ing are all at the project level.” It recog­nised that model­ing at the macro or na­tional level com­ple­ments this, par­tic­u­larly in the area of na­tional tax pol­icy and rev­enue yield. There is the firm con­vic­tion how­ever, that “project mod­el­ling in the open space is es­sen­tial to drive trans­parency for­ward.” In­deed, Open Oil deems the petroleum project as the “build­ing block of the trans­parency move­ment.”

The Author of the Guyana 2016 PSA mod­el­ling ex­er­cise has ad­vanced “Five rea­sons to model at the project level” (Novem­ber 2016). These in­clude, in­ter alia: the project is the core unit for build­ing trans­parency; the place where the facts and speci­fici­ties about the petroleum in­dus­try are lo­cated; and, as an ex­ten­sion where the known un­knowns and the un­known un­known man­i­fest them­selves. Ad­di­tion­ally, as ab­strac­tions, the project level and the petroleum sec­tor level are best un­der­stood at the project level, where the sec­tor as an ag­gre­ga­tion of projects re­veals it­self. More­over, project level anal­y­sis is por­trayed “as the gate­way to broad pub­lic lit­er­acy about the ex­trac­tive in­dus­tries”.

These are strong claims. I do not wish to en­gage them here, save and ex­cept to note that in very small economies like Guyana the per­ti­nent lev­els of ab­strac­tion do not only ex­ist at the mi­cro (project level) and macro (na­tional level). Big busi­nesses, like Exxon and its part­ners, when op­er­at­ing in mi­cro mar­kets also func­tion at what econ­o­mists term the “meso” level. As the Open Oil model ex­er­cise in­di­cates, Govern­ment Take from Liza 1 alone is likely to be larger than the cur­rent Na­tional Bud­get rev­enue! While, tech­ni­cally, one busi­ness, there­fore, Exxon is si­mul­ta­ne­ously one sec­tor that com­mands in­ter­me­di­ate grav­i­tas within the na­tional econ­omy.

Con­clu­sion

This eval­u­a­tion of Open Oil’s fi­nan­cial mod­el­ling of Guyana’s 2016 PSA, has taken more than dou­ble the amount of col­umns I had orig­i­nally en­vis­aged. I trust it was worth it for non-spe­cial­ists and non­mod­el­ers. Next week, I re­sume the se­ries on Guyana’s PSA, fis­cal regime.

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