Part 3 of Interview on Guyana ExxonMobil PSA
Question 1.
This blog begins with answers I provided to questions asked of me by a Guyanese reporter regarding the Guyana – ExxonMobil production sharing agreement (contract) and other issues pertaining to oil and gas development in Guyana. I responded to six specific questions, and share my answers with you as three separate blog posts: Part 1-, Part 2-, and Part 3- of Interview on Guyana ExxonMobil PSA. To the best of my knowledge, the newspaper has not yet published my answers.
I understand that you had written the government in relation to providing your services during the negotiation of the Guyana-ExxonMobil deal. Now that you have had the chance to peruse the document, is there any particular area that you would have ensured Guyana had a bigger take?
Answer to Question 1 (continued). Audit & Inspection Rights; Stability Clause
In 2015, I wrote the Guyana Government and offered to provide ‘Energy Transactions Legal Services Supporting Guyana’s Oil & Gas Development Program’. However, at that time, I was unaware that Guyana’s PSA with ExxonMobil and its partners would be modified.
After it became public, I reviewed the June 27, 2016 Petroleum Agreement between the Government of Guyana and the Contractor (ExxonMobil and its partners) – commonly known as the ExxonMobil PSA. While there is no particular area of the agreement where I would have ensured Guyana had a “bigger take”, there are specific provisions or issues that, in my opinion, need more attention and should be addressed. Specifically, cost recovery, local content, the Government’s audit and inspection rights, and the stability clause need more attention.
Audit & Inspection Rights. The Government’s rights to inspect and audit the Contractor’s accounts and records are somewhat constrained (Section 1.5, Annex C). In my opinion, it is not unreasonable for Guyana, the sovereign and owner of the hydrocarbon resources, to have the unrestrained right to inspect and audit the Contractor’s accounts and records. In the interest of good governance, the Government should ensure that all of its contracts (including the ExxonMobil PSA) preserve the Government’s unfettered right to inspect and audit its Contractor’s records and accounts. In the United States, any entity (Contractor) contracting with a local-, State-, or Federal- government agency is subject to that agency’s unrestricted right to inspect and audit the Contractor’s records and accounts. Guyana should adopt that standard.
Stability Clause. Stability clauses are common in petroleum contracts between International Oil Companies (IOCs) and developing countries. The ExxonMobil PSA contains a stability clause (Article 32), provisions of which purport to limit effectiveness of laws enacted by the Guyana Government, post PSA execution, if in the Contractor’s opinion, such new or changed law has a material and adverse effect on the Contractor’s economic benefits under the agreement. IOCs (like ExxonMobil) are obligated to return maximum shareholder value, which brings a focus on the short-term and quick returns. The Guyana Government has an obligation to effectively and sustainably develop the nation’s oil and gas resource, and all benefits flowing from its extraction, for the long-term and sustainable development of the country and its economy. Given competing strategic objectives, conflicts can arise between host governments and IOCs that must be resolved. While lawyers agree on the pacta sunt servanda principle that agreements must be kept, circumstances can change that require modification of a contract. Moreover, a sovereign has the right and obligation to act to change agreements that turn out to be not in the public interest. As written, the stability clause would potentially usurp sovereignty of the Guyanese State and should be discussed by the parties and modified as appropriate.
Question 2.
What in your opinion are a few major red flags in the ExxonMobil PSA with Guyana?
Answer: I see no ‘major red flags’ per se. Instead, please see my response to question 1.
Question 3.
With the announcement of the 10th discovery by ExxonMobil, how does this make you view the contract we signed on to with Exxon? (Editor’s note: at the time of the interview, ExxonMobil had recently announced its 10th discovery)
Answer: No differently than if it were just the fifth discovery.
Question 4.
What training do local lawyers need in order to properly address issues that may arise in the oil and gas sector, and could you provide an example to illustrate why such training would be necessary?
Answer:
In Guyana, as is the case in an oil and gas rich state like Texas, only a very small fraction of lawyers will practice in the oil and gas sector. Nevertheless, Guyanese lawyers, professionals, government officials, and business people who are current or prospective oil and gas industry participants need training in the fundamentals of the oil & gas business, and its operative laws and principles. As an example, because of the nature of the oil and gas business involving tenders and bids, it is susceptible to corrupting influences. Therefore, it is important for everyone who touches the industry to be familiar with the United States FCPA (Foreign Corrupt Practices Act) law and the severe consequences of running afoul of it, even if one is not a US citizen or resident.
Question 5.
What are some of the things Guyana must address in order to ensure transparency and accountability in the oil and gas sector?
Answer:
In order to ensure transparency and accountability in the oil and gas sector, Guyana must: 1.) adopt the principles of EITI as it is already doing, 2.) enact strong anti-corruption legislation, including provisions requiring all cabinet members and certain government officials to regularly report all income, investments, and gifts received, and 3.) provide stiff penalties including jail time for those violating the law or intentionally frustrating its intent. Based on media reports, Guyana is already doing some of this.
Question 6.
Guyana has signed on to a contract with ExxonMobil with a strict stabilization clause. For future reference, would you say we should keep this approach or do away with it?
Answer:
Please see my response to question 1. Going forward, stability clauses, if present in Guyana’s model petroleum contracts, should be drafted to ensure that the Government is able to freely perform (without the threat of litigation or punishment) its duty of making or changing laws to protect the interests of the Guyanese people and State.
Very informative.