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For Guyana, a local content policy framework will be meaningless unless crafted, implemented, and managed as a development strategy.

Five years after oil and gas discovery in Guyana, an up and running local content regime is long overdue for Guyana.

On September 30, 2020, ExxonMobil made its final investment decision to proceed with offshore Guyana Payara field development after receiving “government approval”. ExxonMobil is operator of the Stabroek, Kaieteur, and Canje Blocks offshore Guyana. According to ExxonMobil, the Payara development will cost $9 billion (US) to develop 600 million barrels of oil – the same amount of oil as Liza Phase 2, but costing $3 billion more. Of the $9 billion capital expenditure over the next 4 years, do native Guyanese companies have competence, capability, or performance to participate? If so, how much participation? The answers to these questions constitute the essence of a meaningful local content regime.

As a policy matter, the goal of a local content framework should be to ensure development of in-country skills and expertise in all aspects of the (a.) oil and gas, energy, and natural resources industries, and (b) ancillary industries and businesses arising therefrom, such that Guyanese citizens shall be adequately trained and shall competently and significantly participate in management, control, operation, and supplying of all entities doing business in Guyana. That is, the objective is to convert the short-term benefits of revenues from production of petroleum (and other natural resources) into long-term sustainable economic development that creates jobs, local expertise, and other industries that remain after the petroleum revenues diminish.

This writing discusses local content (“LC”) as applied to the oil & gas industry. However, in Guyana’s case and because of its vast mineral resources, a meaningful LC framework must also include the bauxite, gold, and other mineral sectors.

Why does local content matter? In the oil & gas business, the Reserves to Production (R/P) Ratio underscores the importance of effective LC policies. If we freeze Guyana’s reserves at 8.3 BBOE (billion barrels of oil equivalent) and assume average production of 750,000 BBL/D (beginning Jan. 2020), Guyana’s R/P Ratio is 30.3 years. Further, assuming average production of 1 million BBL/D (barrels per day), Guyana’s R/P Ratio is only 22.7 years. So, the policy planning question is: what happens when oil revenues cease in 20- to 30- years?

Over the next 2 or 3 decades, the international oil companies (IOCs) will spend tens of billions of dollars (US) developing Guyana’s vast petroleum (oil and gas) reserves. Under Guyana’s existing PSAs (production sharing agreements) with IOCs (including ExxonMobil and its partners), the IOC recovers all of its capital expenditure- and operating- cost as cost oil (i.e., from Guyana’s share of oil production) before Guyana is allowed to share in profit oil (i.e., whatever remains after the IOC recovers all of its costs). Without significant national industry participation in the capital expenditure value stream that develops Guyana’s petroleum reserves, Guyana is essentially paying for ExxonMobil’s entire now risk-free investment and in return the country gets an effective grossly disproportionate small share of its own petroleum resources. In the beginning the country owned 100 percent of its oil & gas resources. Over the course of resource exploitation, Guyana will likely receive less than 30 percent of what it started out with. This is why local content really matters, and Guyana has to get it right.

Defining Local Content

Local content is the extent to which output of the local oil and gas industry (and other natural resources industries) generate added benefits to the country’s economy, beyond direct contribution to GDP (gross domestic product) and government revenues, through its linkages to other domestic production centers and ancillary services.

At its core, the local content (“LC”) goal comprises of three prongs: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. Understanding the oil & gas industry value chain is critical to applying this framework for development of a local content regime that yields effective results.

What local content is NOT. While the presence of international oil companies (IOC’s) and their subcontractors in Guyana boosts the local economy through purchases of rents, goods, and services for general purposes (unrelated to tenders in the oil & gas value stream), such purchases do not constitute local content.

Purchasing food from Maggie’s (or Demico) and renting rooms at the Georgetown Marriott or Pegasus hotels undeniably add revenues to the local economy. However, such economic activity is not local content because there is no sustainable benefit from it … the benefits vanish when the IOCs leave or drastically scale down their operations. Moreover, let’s not forget that under the Guyana – ExxonMobil PSA (production sharing agreement) contract, the contractor will recover all of its costs from Guyana’s share of petroleum production (“cost oil”). Those costs include the aforementioned economic activities.

Additionally, meaningful local content is not a policy that merely favors the few well-connected Guyanese business- or political- elite getting into the oil & gas value stream and enriching themselves. Such an approach would result in further widening the wealth gap as the masses of Guyanese society are left out and see no tangible benefits from the resource development while everything around them becomes more expensive. That would be an absolute disaster and a repeat of what has happened to so many countries around the world that came into oil “wealth”. In any country, corporation (large or small), or government agency, people are the most valuable resource.

A country’s failure to develop its people resources results in that country’s failure as a nation because there can be no sustainable economic development without intentional investment in and development of all of its people resources. Here, Guyana has an opportunity to employ local content as a development strategy. It should not squander the opportunity.

The Oil & Gas Value Chain

Oil & Gas Industry Value Chain

Developing an effective local content regime for Guyana

An essential first step in the process requires examining each discrete sector of the oil & gas value chain against the 3-prong local content goal framework. The government may slice each sector into as many sub-segments as necessary to accomplish its goals. The oil & gas industry being new to Guyana, requires an objective appraisal of local resources and local capacity available for performance in the industry. After completing the gap analysis, policy makers will be equipped to set LC policy goals and specific performance targets.

A. The 3-Prong Local Content Goal Framework

At its core, the goal of local content comprises of three elements: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. As discussed below, these elements are interdependent and interact with each other to achieve the overarching sustainable economic development strategy.

(1) Employment of Locals. Employment of local Guyanese citizens, in all sectors of the oil & gas value chain, in all job categories and job grades from top to bottom, should be a primary objective of any local content framework. That is, Guyanese citizens must be adequately trained and significantly participate in management, control, and operation of all entities doing business in Guyana. The gaps in employment and employability, present at the start of in-country operations, must be eliminated through training and policies that set specific employment targets and quotas that foreign companies are required to meet. There should be neither reliance on, nor encouragement of, expatriate labour for the medium- or long- term. Significant investments in education and training are critical to achieving this goal.

(2) Local capacity and skills development. There are two components to local capacity and skills development: (a) people capacity, and (b) domestic industrial competence.

      (a) People Capacity. Significant and sustained investments in education and training of Guyanese citizens is critical for success. This must occur at all levels – from elementary school to university level. While some training and education efforts are already on-going, such efforts are limited and largely sponsored by the oil companies and their subcontractors – sending select Guyanese for training abroad.

It is absolutely necessary that the University of Guyana receives significant endowments and grants to improve its capacity, standard, and product quality to meet Guyana’s emerging needs. The Guyana Government has and must play a major role in preparing its people for success.

If done correctly, Guyana’s future is very bright, and it requires engineers, oil & gas accountants, financial analysts, quantitative analysts, HSE (health, safety, & environmental) specialists, computer programmers, mathematicians, geophysicists and petroleum geologists, chemists, welders, plant operators, business analysts, bankers, pilots, etc. Training and education should already be in progress and begins in the elementary schools. Government investment in, and curriculum realignment of, primary-, secondary-, trade-, and tertiary- schools, are necessary to address Guyana’s newly emerging business landscape.

Moreover, Guyana must engage its vast diaspora, a largely untapped natural resource. There it can acquire competent resources that will significantly close the existing gap in skilled human resources. Additionally, the Guyanese diaspora will be a source of training, mentor-ship, and capacity building to its Guyanese family.  

     (b) Domestic Industrial Competence. Collaboration with foreign entities and the passage of time are key to achieving domestic industrial competence in service of Guyana’s oil and gas industry. While existing Guyanese companies are eager to acquire contracts in the oil & gas services segment, they largely lack industrial competence, skill, and high quality performance required and necessary for the oil & gas industry. As such, a local content framework requiring a fixed level of local partnership, for foreign companies (e.g., 10- to 15-%) participating in Guyana, could be used as a mechanism to build domestic industrial competence over time. Building local industrial capacity is necessary and critical to sustaining Guyana’s economic development. With appropriate legislation, the Guyana Government can facilitate the latter. On the other hand, the Government must be deliberate in providing incentives that prevent cannibalization and depletion of local resources that currently support Guyana’s existing industries.

(3) National Industry Participation. Local procurement and direct supply participation by Guyanese companies in the oil & gas value chain are desired outcomes of an effective local content regime. The extent of participation will depend on the availability and competence of local suppliers, and how aggressive the Government is setting compliance targets for foreign companies.

Article 18 of the ExxonMobil PSA requires the Contractor to give preference to (i) the purchase of competitively priced Guyanese goods and materials that meet ExxonMobil’s quality, quantity, and deliverability standards, and (ii) employment of commercially competitive Guyanese sub-contractors that satisfy ExxonMobil’s financial and technical requirements. This is a good start. Clearly, there is a considerable learning curve for local resources to develop the required expertise, competence, capacity, and performance. Thus, it will take considerable time for Guyanese resources to fully participate directly in the oil and gas sector.

Joint ventures and other business collaborations, with foreign companies, are means by which local Guyanese entities can gain expertise and competence. The focus should be on small- and medium- sized Guyanese business entities (SMBE’s). SMBE’s will benefit most from capacity-building initiatives and have the greatest potential for business development, economic growth, and sustainable jobs creation.

Having a national oil company is another means by which the Government can ensure national industry participation. While this option is likely unpopular with IOCs, it could be the best option to safeguard Guyana’s interest.

B. Setting Reasonable Employment & Industry Participation Targets

Employment

A recent estimate puts the Guyana population at 750,204 (1CIA World Factbook, July 2020 Estimate). Of that population, about 45 percent (337,591) are 24 years old or younger, and 39.5 percent (296,180) are 25- to 54- years old. Of secondary school age children (12 – 18 years old), about 66.4 % (or 115,587) are enrolled in school (2 Compendium 4, Bureau of Statistics, Guyana, April 2017 citing 2012 Population & Housing Censuses). Detail of the same data reveals enrollment of 95.6 % for ages 10 – 14, and 78.8% and 52.4% for ages 15 and 16, respectively. Clearly, more must be done to improve enrollment and matriculation rates for the 15 plus group. Many have opined that lack of opportunities after high school is likely a contributing factor to the lower rates. However, that was yesterday’s news. Today’s reality is one immense opportunities for Guyanese youth. So, let’s get the job done right!

Employment Job Groups. Direct employment opportunities in the oil & gas value chain are available in four general categories: (1) Technical and engineering positions requiring a 4- or 5- year university degree, (2) Technician/ operator positions requiring a high school diploma plus 8-month to 2 year skills trades/ technical school training, depending on the specific job family, (3) Management positions requiring university degreed resources (e.g., in engineering, business, finance, management, accounting), and (4) Generally skilled positions requiring only a high school diploma and on the job training.

Employment Targets. Guyana has a very young, capable, and educationally-pliable population. So, building local capacity in this group should mainly require purposeful commitment, leadership, and investment in education and training. Using locally available Guyanese people resources and supplementing with skilled resources from Guyana’s diaspora, Guyana could easily achieve the oil & gas employment targets set forth below.  

Engineering & technical positions – 4 or 5 year university degree
Technician/ operator positions – high school plus 8- to 24- month trades training
Management positions – university degree or equivalent experience
Generally skilled positions – high school diploma

Local Industry Participation

Because the industry is new to Guyana, direct participation of local companies as suppliers of materials, equipment, and oil field services requires a very steep learning curve. It will take considerable time to build domestic industrial competence in Guyana’s oil and gas sector. As previously discussed, the Government can mandate (through legislation) certain minimum levels of partnership with local small and medium sized businesses.

Such policy would require foreign companies, supplying equipment, materials, or services in Guyana’s oil & gas sector, to partner with a local small or medium sized business enterprise. The latter is not unlike requirements United States federal-, state-, and local- government agencies impose on prime (or large) business contractors to facilitate competency development of Small Minority or Historically Disadvantaged Business Enterprises (SMDBE). The targets set forth below for local industry participation include a government mandated LC factor.

Local businesses as suppliers of oil & gas industry materials
Local industry participation in supplying oil & gas equipment
Local businesses as suppliers of oilfield services to Guyana’s oil & gas sector

C. Codifying, Managing, & Regulating LC Performance

Countries employing local content (LC) as a development strategy, typically begin by developing LC frameworks that comprise of policies, laws, and institutions to manage and regulate performance of the policies. In Guyana’s case, a meaningful LC framework must also include the bauxite, gold, and other mineral sectors.

According to a recent UNCTAD study of LC (3) in several countries, a weakness of many local content frameworks is the absence of an effective institutional mechanism or independent regulatory body to monitor and evaluate LC policy performance against goals, and make adjustments when necessary. Guyana must be careful and not make that mistake. Without effective monitoring and evaluation of LC performance against goals, and continuously engaging stakeholders, Guyana’s local content policy will unlikely achieve its goals.

Many countries adopted LC frameworks very late in their oil & gas journey, and the lack of progress (or even degradation) of their people and societies show it. There are several examples, both good and bad, that Guyana can learn from.

The Nigerian Content Development & Monitoring Board (NCDMB), and the ANP in Brazil are held out as good models for effective monitoring and evaluation of local content policy frameworks (3).

In this writing, the author outlines a general framework of what he believes local content in Guyana’s case should look like. Of course, there is much more to it than discussed in this introductory article. Nevertheless, we believe this is a good starting point and framing of this very important issue for the Guyanese people.

D. Conclusion & Takeaways

  • The goal of local content is tri-fold: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. In Guyana’s case, LC must be employed as a development strategy and encompass all of Guyana’s mineral resources – not just its oil and gas sector.
  • For Guyana’s LC regime to be effective, the Guyana Government must set up an effective institutional mechanism or create an independent regulatory body to monitor and evaluate LC policy performance against goals, and make adjustments when necessary.
  • An effective local content regime in Guyana will convert short-term benefits of revenues from Guyana’s petroleum and other natural resources production into long-term sustainable economic development through capacity building that creates jobs, local expertise, and other industries that remain after the petroleum revenues diminish.

In summary, Guyana’s Local Content Regime should ensure  development of in-country skills and expertise in all aspects of the (a) oil & gas-, energy-, and natural resources- industries, and (b) ancillary industries and businesses arising therefrom, such that:

(1) Local Guyanese citizens become adequately trained and competent, and significantly participate in management, control, and operation of all entities doing business in Guyana, and

(2) Small and medium sized local Guyanese businesses develop industrial competence and high quality supply capabilities, and become significant suppliers to the oil & gas and mining industries.      

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Stabroek’s Promise, Part II: Cash transfers of $5,000 (US) to each Guyanese household by 2025 are illusory and without factual foundation, and would constitute a non-refundable round-trip ticket from poverty to temporary gratification.

With low or no trust in Government competence and performance, many see direct cash transfers of oil revenues to Guyanese households as a means of ensuring all Guyanese realize some tangible benefit from Guyana’s new oil and gas sector. However, how much, to whom, when, and what form or manner, are details that require careful analysis and further discussion.

Recent news articles in Guyanese online news media (Demerara Waves, Sept. 29, 2019; Guyana Chronicle, Sept. 22, 2019; Kaieteur News, multiple dates) reported on well-known Guyanese political activist and economist Dr. Clive Thomas’ arguments in favor of direct cash transfers from Guyana’s oil revenues to Guyanese households. According to those reports, Dr. Thomas articulates the following:

  1. By 2025, Guyana’s oil production will “soar to about 1 million- to 2.5 million- barrels per day (bpd)”.
  2. Oil price in 2025 (and beyond) will be $70 (US) per barrel (bbl)
  3. At $70 per bbl, the Guyana government will be able to set aside at least $1 billion (US) annually for cash transfers to Guyana’s 210,000 households. Each household gets $5,000 (US).
  4. Transfers would/ should constitute 10% of after tax oil revenues.

This writing is not an attack on Professor Thomas who has been on the forefront of leading positive change in Guyana. Instead, this article examines the underlying assumptions of Dr. Thomas’ cash transfer proposal in the context of factual realities of Guyana’s oil and gas development and crude oil commodity prices.

By 2025, Guyana will produce 750,000 bpd of oil, not 1 million- to 2.5 million- bpd. Based on the Contractor’s (ExxonMobil and its partners) planned development of Guyana’s Stabroek Block, Guyana’s oil production capacity will reach 750,000 bpd by 2025. According to ExxonMobil (majority partner in and operator of the Stabroek Block):

  1. Beginning in 2020, Liza Phase I will produce up to 120,000 bpd of crude oil,
  2. In mid-2022, Liza Phase II will boost production by an additional 220,000 bpd
  3. By early 2023, Payara development comes online with an additional 180,000 bpd, and
  4. Turbot Area development comes online, in early 2025, with an incremental 230,000 bpd.

Together, these planned Stabroek Block developments combine for a 750,000 bpd crude oil production capacity by 2025. If things go according to plan, Guyana will likely see the 750,000 bpd production in 2025. On the other hand, if there is a significant downturn in major world economies during the next two years, demand for petroleum products could drop sharply for a prolonged period. The latter would result in sustained lower oil prices, and this could delay or scale back Payara and Turbot Area developments. In that scenario, Guyana’s 2025 oil production would be significantly less than 750,000 bpd.

Based on the foregoing discussion, Dr. Thomas’ 1 million- to 2.5 million- bpd production forecast lacks factual foundation and is grossly unrealistic.

Who knows where oil prices will be in 2025; $50, $30, $70 … any guesses? Crude oil is an international commodity traded in all major world commodity markets. World-wide supply and demand factors (including economic recessions, boom cycles, supply disruptions, etc.) and geopolitical events affect the price of crude oil. Moreover, most of the world’s oil supply comes from unstable regions of the world, and thus geopolitics is a significant contributor to oil price uncertainty (i.e., price volatility). Fig. 1 shows the spot price volatility of West Texas Intermediate (WTI) crude oil, from January 1986 to August 12, 2019. In our models, we use WTI as an index for Guyana’s light sweet crude that has similar physical properties.

Oil prices depend on many factors, and cannot be predicted with certainty
By 2025, Guyana’s Stabroek Block crude oil production capacity will be 750,000 bpd

Without providing any factual support, Dr. Thomas suggests (or perhaps hopes for) sustained oil prices of $70 per bbl in 2025 and beyond. Besides inherent inaccuracy of the $70 per bbl guess, forecasting an inflated crude oil price for planning or policy development purposes is reckless, dangerous, and intellectually dishonest. Crude oil comes with significant price risk, which must be quantified and accounted for by careful and sound technical analysis. Moreover, prudence requires a conservative approach when using oil price forecasts for planning or policy development purposes. For example, with WTI crude oil trading around $52 per bbl today, a responsible price forecast would reflect an expected value (of WTI) that is significantly less than today’s prices.

Cash transfer dividend of $1 billion (US) to Guyanese households by 2025 is technically infeasible. Come 2025, Guyana may not even receive $1 billion (US) in oil revenues, let alone have a $1 billion (US) dividend to transfer to Guyanese households. This is because, in 2025: (1) Guyana will likely produce no more than 750,000 bpd of oil (for reasons discussed previously in this writing), and (2) oil prices will likely be significantly less than $70 per barrel.

Our recent technical analysis of Guyana’s 2020 to 2040 Oil Revenue Outlook & Risk (for production from the Stabroek Block) shows that, in 2025, Guyana’s expected oil revenues are $1.9 billion (US). But, without mitigating price and cost recovery risks, Guyana may realize only $522 million (US) in actual oil revenues. As discussed in our September 17, 2019 article, Guyana’s 2025 revenue risk exposure is an astronomical $1.4 billion (US).

So, if cash transfers to households were 10% of $522 million (US) in actual revenues realized, $52 million (US) would be allocated for distribution to Guyana’s 210,000 households. This would amount to about $248 (US) per household. The billion dollar question is whether those $52 million (and the rest of the oil revenues) could be better invested, by a Guyana government, in needed projects (education & training, infrastructure, existing industry modernization and transformation, electricity from natural gas, etc.) that produce good and measurable returns with sustainable benefits that markedly improve the lives and economic outcomes of all Guyanese citizens.

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Stabroek’s Promise, Part I: Guyana is dreaming of an El Dorado of billions in oil revenues per year. But …. without a coherent energy strategy, the absence of resident Guyanese technical infrastructure, and runaway cost recovery, the Guyanese people will have to settle for mere millions.

Production of the first barrel of oil (from Liza Phase 1) in January 2020 will usher Guyana into an era of unprecedented economic opportunity. Oil and gas revenues, natural gas for local consumption (and export), and a meaningful local content regulatory framework will provide an opportunity for sustainable economic development of the country. If the opportunity is seized, it will be a positive game-changer for the Guyanese people, and indeed the Caribbean region.

Dream vs. Reality. With Guyana’s light sweet crude oil flowing on January 1, 2020, the Guyana government can expect about $207 million dollars (US) in oil revenues for 2020. However, because of commodity price risk (i.e., crude oil price uncertainty), Guyana might receive only $84 million (US) in oil revenues – a $123 million (US) revenue risk exposure (i.e., potential revenue loss). In the unlikely scenario of oil prices (WTI benchmark crude) remaining fixed at $50 per barrel, Guyana would earn $296 million (US) in oil revenues in 2020. The historical oil price chart, shown in Fig. 1, illustrates the inherent volatility of oil prices that are very sensitive to geopolitical events in addition to supply & demand factors.

Oil begins flowing from Liza Phase 1 at 120,000 bpd (barrels per day). On June 1, 2022, Liza Phase 2 brings an additional 220,000 bpd. With subsequent production additions from Payara and Turbot of 180,000- and 230,000- bpd, on 1/1/2023 and 1/1/2025, respectively, we arrive at 750,000 bpd in 2025. Fig. 2 displays the Stabroek Block 2020 – 2050 production forecast that is based on these initial inputs into our reservoir simulation models.

By 2025, when production reaches 750 thousand bpd , and the Government’s expected oil revenues approach $2 billion (US) for that year, the actual revenues realized could be only $522 million. Here, Guyana’s 2025 revenue risk exposure is an astronomical $1.4 billion. By now (2025), this potential loss or unrealized revenue is due to oil price risk and runaway cost recovery. Runaway cost recovery – because of uncertainty of the plethora of operating expenses the contractor can recover under the production sharing agreement (PSA) as cost recovery.

Table 1 summarizes Guyana’s 2020 to 2040 oil revenue outlook and revenue risk exposure for selected years during that time period. Fig. 3 depicts the same information, but in graphical format. Our analysis of these results indicate that:

  1. Relative to expected value, revenue risk exposure increases as production increases. Thus, higher production volumes bring absolute risk to Guyana’s revenues.
  2. Beyond 2025, cost recovery (comprising mostly of Opex) becomes a significant risk to Guyana’s revenues, and
  3. If these risks are not mitigated, Guyana could lose tens of billions of dollars in oil revenues by 2040.

Methodology. The results discussed in this article are derived from analysis of data produced by rigorous technical and economic modeling of PSA terms and conditions and Guyana’s Stabroek Block reservoirs, including the employment of proven Monte Carlo simulation techniques. We show the base model input assumptions in Table 3.

Commodity Price Risk. Because of its critical role in powering the planet, crude oil is an international commodity traded on all major world commodity markets. World-wide supply and demand factors (including economic recessions, boom cycles, etc.) and geopolitical events affect the price of crude oil. Moreover, most of the world’s oil supply comes from unstable regions of the world, and thus geopolitics is a significant contributor to oil price uncertainty (i.e., price volatility). Fig. 1 shows the spot price volatility of West Texas Intermediate (WTI) crude oil, from January 1986 to August 12, 2019. In our models, we use WTI as an index for Guyana’s light sweet crude that has similar physical properties.

Without resident Guyanese technical infrastructure to model, quantify, and manage the inherent oil price risk, Guyana will potentially lose tens of billions of dollars (US) in oil revenues.

Cost Recovery. Under the terms of the ExxonMobil PSA with the Guyana Government, the contractor (ExxonMobil and its partners) recovers all of its capital expenditure (CAPEX) and most of its operating expenses (OPEX) in Guyana. The PSA limits monthly cost recovery to 75 percent (%) of production revenues.

Because the Contractor recovers its OPEX from Guyana’s oil revenues, there is potential for runaway cost recovery that significantly eats away at Guyana’s revenues in perpetuity. And, this is what our modeling shows. For example, the 2035 base case ($50 per barrel oil price) shows Guyana having total oil revenues (including royalty) of $3.7 billion, while the Contractor’s total revenue including cost recovery is $4.94 billion – a 42.7% : 57.3% (Guyana: Contractor) split. See Table 4 for base case 2020 – 2035 projections of annual oil production revenues, royalty payments, and cost recovery for selected years.

Commodity Price Risk & Guyana’s Revenue Risk Exposure. Although cost recovery is a significant risk to Guyana’s oil revenues, oil price risk is a bigger risk factor that must be addressed. By 2035, Guyana could expect $32.6 billion (US) in cumulative oil revenues as its share of production (profit oil & royalty). But, with a $27.8 billion risk exposure, the country may realize only $5.7 billion for that 15-year period. By 2040, the risk exposure to cumulative revenues grows to $36 billion. Table 2 and Fig. 4 illustrate this problem.

To effectively address this issue, mitigate the risks, and prevent potentially enormous revenue shortfalls from production of the country’s hydrocarbon resources, it is imperative that Guyana:

  1. Develop and implement a coherent strategic energy plan to integrate, manage and optimize its energy resources (including oil & gas resources) and the benefits flowing therefrom, and
  2. Quickly put in place resident Guyanese technical infrastructure with the requisite human capital and tools necessary to effectively perform oil & gas business specific technical tasks and deliver good outcomes for the country. In effect, commission a local resource for energy and oil & gas planning, energy strategy, and quantitative analysis.

To this end, Guyana must engage its diaspora and acquire competent resources that will significantly close or eliminate the existing gap in skilled human resources.

Edwin M. Callender, Esq.

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Guyana’s other natural resource, its highly skilled diaspora, is largely untapped … and must be utilized to assist the country in building a brighter future for all Guyanese

Guyana has one of the highest rates of skilled migration in the world as a percentage of its population. The country has also one of the highest net out-migration flows of the entire Latin America and Caribbean region. For this reason, Guyana is the largest recipient of remittances in the region (relative to GDP), and has the largest percentage of households who receive remittances.  When oil starts flowing these remittances may no longer be needed, but the skills and expertise of these Guyanese will be desperately in demand.

The World Bank estimates that Guyana has approximately 500,000 citizens living abroad. This amounts to between 35 and 55 percent of Guyana’s nationals living in another country. Worse still is the fact that between 80 and 90 percent of Guyanese with a tertiary education (World Bank, 2007) reside outside the country. Since the early 1960’s most Guyanese have migrated after matriculating from the University of Guyana or after secondary school. The majority to the US, but many to Canada and the United Kingdom. The feeling in the past that there is not much in Guyana to develop your potential, and little work to indulge your skills, has led to the current status quo. So, like many former colonial countries, personal development stops after high school.

Guyanese work in virtually all professional fields throughout the industrialized world. This includes science and engineering, scientific research, computer programming, logistics, planning and strategy, law, finance, quantitative analytics, business, accounting, administration, auditing, medicine, economics, public relations, political science, language, sports, and the arts. There is an abundance of examples of Guyanese who have distinguished themselves in these fields. A good example is the current President of the American Heart Association, Dr. Ivor Benjamin. Recently, Guyanese economist Erwin Charles became Dean of Yale Business School at Yale University in New Haven, Connecticut. Guyanese are in every segment of the many industries that make up the industrial world.

Guyana’s Oil & Gas heritage is at stake. In the United States, Canada, the UK, and elsewhere in the developed world, members of the Guyanese diaspora are celebrated for their skills, expertise, and accomplishments as business people, entrepreneurs, engineers, scientists, and academics; and others for their inventiveness, creativity, and contributions to society and business outcomes. Therefore, it is somewhat a mystery that members of the Guyanese diaspora have not been called upon or consulted on the current oil and Gas discussions now taking place in Guyana. At this juncture in Guyana’s oil and gas industry development, the stakes could not be higher. The country’s oil & gas patrimony is at risk. World history provides many examples of countries that came into tremendous hydrocarbon wealth, and 30- to 40- years on, the general population is worse off economically than before discovery of oil & gas resources.

There are many creditable, experienced Guyanese diaspora professionals in the oil and gas, and energy industry. Guyanese are participating in the upstream-, midstream-, and downstream- oil and gas industry sectors as engineers, geologists, quantitative analysts, oil & gas attorneys, project developers, project managers, strategic planners, environmentalists, health and safety specialists, commodity risk managers, operations managers, and company executives. To have a fair chance of optimizing Guyana’s oil and gas opportunity for sustainable economic development of the country, Guyana must bring these resources home. There should be a Government Ministry dedicated to diaspora resource engagement, utilization, and repatriation.

Guyana’s 21st Century Challenges. In building a sustainable twenty-first century economy, Guyana faces many challenges. Utilization of the Guyanese diaspora will be essential to overcoming these challenges and moving Guyana successfully forward.

Foremost is managing sea level rise due to climate change and the resulting changes to rainfall patterns throughout the region. Building sustainable housing is another important challenge, as well as improving infrastructure to promote growth and private sector development.  

To ensure the requisite skills for Guyana’s new economy come from the Guyanese population, improving the quality and tenor of education at primary, secondary, and tertiary institutions is critical. In this regard, Guyana must quickly make significant progress towards access to education, and boosting primary school enrollment.

Improving the quality of health services will require many doctors and other healthcare professionals returning to home. Guyana is doing better in certain areas of health such as childhood immunizations, but worse in others such as child and maternal mortality. These numbers must be reversed. It will require recruiting members of the diaspora, and other means such as continued partnership with Cuba which has built a world class healthcare system.

Guyana’s major challenge of retaining its skilled population need not continue in the future. The country must establish outreach programs to seriously engage and recruit members of the diaspora. This can be effectively and efficiently done through a new Government Ministry dedicated to diaspora resource engagement, utilization, and repatriation. Because of the small size of our population, Guyana will quickly become a net importer of skilled professional labor, since the country is expected to reach full employment in a very short period of time. The Government should consider an immigrant visa program to handle skilled and unskilled immigrants … priority to CARICOM nationals.  The country can no longer tolerate one of the highest net emigration flows of the region, estimated at an annual emigration rate of 2 percent points a year (World Bank, 2007). Therefore, a carefully considered strategy that links the diaspora to their home country is essential for effectively developing our country with those that truly have the interest and patriotism at heart.

In conclusion, to optimize the opportunity of Guyana’s oil and gas resources for the sustainable economic development of the country, Guyana must purposely engage, utilize, and bring home members of the Guyanese diaspora who are skilled professionals in the oil & gas, and energy industry. Moreover, to effectively meet and overcome the challenges Guyana will encounter in building a modern economy, Guyana must engage and utilize the broader Guyanese diaspora. The Guyanese diaspora is not a threat to local Guyanese. Instead, we bring skills and resources not present in the local population, have the best interests of Guyana and Guyanese at heart, and want to see the country progress in an economically sustainable manner that benefits the entire Guyanese population. Without utilization of the Guyanese diaspora, expatriate skills will flow into the country to fill the skills and expertise gap created by the emerging oil & gas industry development. We have all seen that movie before … the end is as predictable as it is unpalatable and undesirable.  Guyana must establish outreach programs to seriously engage and recruit members of the diaspora. This can be effectively and efficiently done through a new Government Ministry dedicated to diaspora resource engagement, utilization, and repatriation.

Dennis A. Pieters

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Guyana’s Oil will bring much needed revenues, but it is its natural gas that will transform the country and be the true engine of Guyana’s economic and societal development …

To date, ExxonMobil and its partners estimate total recoverable hydrocarbon resources from the Stabroek Block at more than 5.5 billion barrels of oil equivalent (BOE). Resources contained in the Liza-, Liza Deep-, Payara-, Snoek- Turbot-, Ranger-, Pacora-, Longtail-, Hammerhead-, Pluma-, and Tilapia- reservoirs comprise of high quality light-sweet crude oil and significant amounts of associated natural gas. Additionally, the Haimara reservoir (announced in January 2019) is a natural gas reservoir containing high quality gas condensate. Natural gas is a clean-burning fuel, and Guyana has an abundance of it in its offshore petroleum reservoirs.

Guyana’s offshore hydrocarbon resource, in combination with the country’s abundance of other natural resources, presents the opportunity for transformative economic and societal development in Guyana and the broader Caribbean region.

Natural Gas will Energize, Stimulate, and Catalyze Economic Development. While ExxonMobil’s field development plan (FDP) for the Liza Phase 1 Project reinjects all of the extracted natural gas back into the reservoir, the Guyana Government should insist that Liza Phase 2 include an option to pipeline natural gas to shore.

Pipelining natural gas to shore will initiate a series of events culminating in an unprecedented era of sustainable economic development and opportunity for Guyana and its citizens. Building a natural gas pipeline and related infrastructure will stimulate the local economy by creating both short-term and long-term jobs. Training a workforce to perform those jobs through vocational training in the skilled trades is an essential need that could be met by both public and private educational institutions. Government Technical Institutes and the University of Guyana, in partnership with US technical colleges and others, can create relevant training programs to satisfy oil and gas industry workforce needs.

What is natural gas? Natural gas is composed primarily of methane gas (about 84 – 95%) and contains small amounts of other light hydrocarbons (ethane, propane, butanes, and pentanes) and nonhydrocarbon gases (like hydrogen sulphide, nitrogen, carbon dioxide, and helium). As extracted from a reservoir, the unprocessed natural gas is called wet natural gas. Before going to end users, wet natural gas is sent to a Natural Gas Processing Plant (NGPP) that removes any impurities and other hydrocarbons it contains. After processing, the purified natural gas is called dry natural gas. Other hydrocarbon products from the NGGP, collectively known as ‘natural gas liquids’ or NGLs, include ethane, propane, butanes, and natural gasoline. NGLs are valuable commodity products used in heating, fuels, and petrochemicals. Propane and butanes are sold in ‘liquefied petroleum gas’ (LPG) markets. Ethane, propane, butanes, and natural gasoline are sold as petrochemical plant feedstocks. Guyana’s NGLs can be exported or used in future Guyana-based add on industries like an LPG plant.

Facilities and Infrastructure. To facilitate the receipt, processing, transportation, distribution (e.g., to end users), and conversion of natural gas in Guyana, multiple job-creating infrastructure projects are needed. These projects include one or more ‘natural gas processing plant’, hydrocarbon storage facilities, gas transportation and distribution pipelines, gas-fired power plants, one or more ‘Liquefied Natural Gas’ (LNG) plant, modern port facilities, and electricity transmission and distribution grid upgrade and modernization. For all infrastructure projects and new facilities development in Guyana, the Government must mandate (direct) its contractors to: (a) maximize the utilization of Guyanese labor, and (b) train Guyanese to manage, operate, and staff the completed facilities.

The Guyana government has the onus to prudently develop and implement a long-term strategic plan for citing of industrial parks that are strategically placed to develop the country while maximizing environmental protection and facilitating commerce. To ensure economic viability of the projects, financing through public-private partnerships may be a prudent fiscal approach.

Natural Gas Processing Plant. While many have opined whether there should be a crude oil refinery in Guyana, the short answer to this multi-billion dollar (US) question is no, not now. An oil refinery is a very costly and complex undertaking, and I will address the question more fully in a future blog. Unlike the oil refinery question, a natural gas processing plant is a ‘no-brainer’ for Guyana.

A Guyana natural gas processing plant will produce dry natural gas and natural gas liquids (NGLs). Dry natural gas will supply domestic demand for: (a) direct consumption by industrial, commercial, and residential users; (b) electricity generation to power homes, businesses, and industry; and (c) Liquefied Natural Gas (LNG) production for export. Natural gas is also a raw material input for methanol and fertilizer manufacture. The valuable NGL byproducts will go primarily to export markets, and local and regional Liquefied Petroleum Gas (LPG) markets. Developing an LNG project for export markets requires securing one or more long-term (30 year or more) gas purchase contracts before starting the project. Hence, by its nature, an LNG project can take a long time to develop.

Natural Gas to Electricity. Electricity is the ultimate end-use energy source. Replacing inefficient, unreliable, high-polluting oil burning power plants with efficient combined-cycle natural gas fired power plants will catalyze industrialization and modernization of Guyana. With upgrade and modernization of Guyana’s electricity transmission and distribution grid, power plants fired by Guyana’s natural gas will deliver the energy that drives Guyana’s economic development. Availability of cheap, reliable, relatively clean natural gas will enable Guyana to build sufficient electric power capacity facilitating modernization, improved efficiency, and competitiveness of all of Guyana’s existing industries. The bauxite, sugar, rice, and other agri-businesses will benefit from Guyana’s energy revolution.

Moreover, building sufficient electric power capacity for energizing an aluminum smelter will transform Guyana’s bauxite industry from a producer of raw material (bauxite) to manufacturer of value-added aluminum metal. A Guyana aluminum smelter, producing aluminum locally, will spark local manufacturing and stimulate investment in and relocation of new industrial enterprises to Guyana. For example, manufacturing of automobile and airplane parts, building materials, and durable goods (like refrigerators, washers and dryers) could likely find a home in Guyana. Guyana’s location on the Atlantic coast of South America is very attractive for shipping finished products to the Caribbean and the Americas, and serving those markets. If these scenarios become reality, Guyana and its Caribbean neighbors will benefit from Guyana’s economic boom. Because of its small population, the demand for workers in the new Guyana will source skilled labor from other CARICOM states … and thereby, causing spillover economic benefits in those islands.

Guyana’s Energy Strategy. Because of its vast hydropower potential, initiating Guyana’s energy revolution with natural gas should be just a start. For successful outcomes, Guyana must employ a strategic, comprehensive, and integrated approach for developing and optimizing Guyana’s energy resources to realize maximum, sustainable economic and societal benefits for Guyana while minimizing election-cycle impacts. This is a Guyana government responsibility. As a critical tenet, Guyana must develop and implement long-term (30 yr., 20 yr.) and intermediate-term (5 yr., 10 yr.) Strategic Energy Plans that integrate crude oil, natural gas, electric power, LNG, hydropower, NGLs, and solar into a national economic development plan. As an unparalleled resource, Guyana has relevant oil & gas and energy expertise in the Guyanese diaspora who are willing and very able to assist Guyana. Instead of employing expatriates in this sphere, Guyana must engage its expertise resource from the Guyanese diaspora.

While I could continue writing on this subject forever, I will stop here and leave you with the following takeaways:

  • Bringing Guyana’s natural gas onshore for electricity generation, local consumption, and LNG production (for export) is Guyana’s opportunity for sustainable economic development and positive growth, and modernization of the society.
  • Natural gas is a relatively clean-burning fuel, and Guyana has lots of it in its offshore petroleum reservoirs.
  • Readily available, clean, and relatively cheap electricity (generated from Guyana’s natural gas) will catalyze industrialization, modernization, and positive economic development that will create many jobs for Guyanese.
  • Building natural gas pipelines and infrastructure projects for receiving, processing, transportation, distribution, and conversion of natural gas to electricity will be significant job creators that directly boost the economy.
  • New gas processing and power generation plants will create long-term jobs for skilled Guyanese.
  • Having one or more natural gas processing plants and an LNG plant creates new higher value petroleum products as exports to foreign markets bringing additional revenues to the country.
  • Building sufficient electricity generation capacity, from Guyana’s natural gas, to power a Guyana aluminum smelter will transform the bauxite industry from merely producing commodity bauxite to manufacturing value-added aluminum metal … and stimulating downstream manufacture of aluminum components and products.
  • The Guyana Government should insist that Liza Phase 2 include an option to pipeline natural gas to shore.
  • The Guyana government has the onus to prudently develop and implement a long-term strategic plan for citing of industrial parks that are strategically placed to develop the country while maximizing environmental protection and facilitating commerce.
  • For all infrastructure projects and new facilities development in Guyana, the Government must mandate (direct) its contractors to: (a) maximize the utilization of Guyanese labor, and (b) train Guyanese to manage, operate, and staff the completed facilities. A robust and well thought through local content law/ policy is essential to ensuring the benefits from Guyana’s oil and gas industry flow to the Guyanese society.


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Guyana’s Unfettered Right to inspect and audit its contractor’s records and accounts is critical to good governance, and the Government has the right and obligation to act to change agreements that turn out to be not in the public interest

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.

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Without Implementation of a Bold, Imaginative, and Meaningful Local Content Law in Guyana, benefits of the oil and gas sector will not accrue to the Guyanese society … and Guyanese could become second class citizens in their own country

Part 2 of Interview on Guyana ExxonMobil PSA

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.

Question 1.

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). Local Content..

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.

Local Content. Because the oil and gas industry is new to Guyana, local capacity is virtually nonexistent in all areas of the oil and gas business – equipment and material suppliers, oilfield support services, skilled trades, engineers and other technical professionals, etc.  According to a former head of the energy market development team at the USAID “Local content is the fastest, most sustainable way for the benefits of the oil and gas sector to accrue to a society”. Article 18 (Guyana Resources) and Article 19 (Employment and Training) of the ExxonMobil PSA, address local content. However, the agreement falls short on requiring employment quotas for Guyanese personnel, as customarily stipulated by host countries. The Guyana Government can accomplish this by implementing a bold, sensible and reasonable Local Content Law that supersedes local content provisions in the Government’s existing petroleum granting instruments (including the ExxonMobil PSA).  

Article 18 requires the Contractor to give preference to (i) the purchase of competitively priced Guyanese goods and materials that meet ExxonMobil’s quality, quantity, and deliverability standards, and (ii) employment of commercially competitive Guyanese sub-contractors that satisfy ExxonMobil’s financial and technical requirements. This is a good start. Clearly, there is a considerable learning curve for local resources to develop the required expertise, competence, capacity, and performance. Thus, it will take considerable time for Guyanese resources to fully participate directly in the oil and gas sector. Joint ventures and other business collaborations, with foreign companies, are means by which local Guyanese entities can gain expertise and competence. With appropriate legislation, the Guyana Government can facilitate the latter. On the other hand, the Government must be deliberate in providing incentives that prevent cannibalization and depletion of local resources that currently support Guyana’s existing industries.

Article 19 requires the Contractor to pay the Government a mere $300,000 (US) annually mostly for training of Guyanese personnel on the job and elsewhere in the petroleum industry and technical disciplines at overseas colleges, universities, and other institutions. Notably, the contractor will fully recover these payments as a component of its cost recovery. Unless relying on expatriate expertise in perpetuity, a lot more than $300,000 (US) annually will be needed to educate and train Guyanese for jobs in Guyana’s oil and gas industry.

Issue: While a very small percentage of the Guyanese workforce will participate directly in the petroleum sector, training at all levels is critical to ensuring Guyanese participate fully in the emerging energy economy and do not become second class citizens in their own country. The Government has a major role to play in preparing its citizens for success. If done correctly, Guyana’s future is very bright, and it requires engineers, oil & gas accountants, financial analysts, quantitative analysts, computer programmers, mathematicians, geophysicists and petroleum geologists, chemists, welders, plant operators, business analysts, bankers, pilots, etc. Training and education does not begin in 2020, but should already be in progress and begins in the elementary schools. Government investment in, and curriculum realignment of, primary-, secondary-, trade-, and tertiary- schools, are necessary to address Guyana’s newly emerging business landscape.

Without implementation of a bold, imaginative and meaningful Local Content Policy in Guyana, the benefits of the oil and gas sector will not accrue to the Guyanese society. Thus, Guyanese could become second class citizens in their own country if they will do not have the requisite education, training, skills, business acumen, and expertise to directly participate in the oil and gas sector and own that space. People will have to come from elsewhere to fill the gap. The Guyanese people cannot allow that to happen.

There is much more to be said about local content in Guyana, what it looks like in other countries, and how it should look in Guyana. I will delve more into this topic in upcoming blogs. Please stay tuned.

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Inadequate Ringfencing and Lax Oversight of contractor’s cost recovery will result in waste and conversion of Guyana’s oil and gas revenues …

Part 1 of Interview on Guyana ExxonMobil PSA

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.

Question 1.

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.

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.

Cost Recovery. Oil & Gas exploration is a very risky business. An exploration and production project consists of five phases – exploration, appraisal, development, production, and decommissioning. Exploration is very costly and the riskiest phase. Advances in exploration techniques, seismic technology, and data interpretation improved oil and gas exploration outcomes from about 10 percent to about 30 percent in recent decades, significantly reducing that risk. Deepwater exploration is the riskiest.  ExxonMobil’s 80 percent success rate in the Guyana basin is unprecedented. In new frontiers like Guyana, International Oil Companies (“IOCs”) take significant risk, employ large amounts capital and expertise, and the prospect of discovering a new resource basin is low. Arguably, ExxonMobil’s Stabroek Block success has de-risked the Guyana basin.

Under the ExxonMobil PSA, the contractor is allowed to recover its project cost as cost oil and/ or cost natural gas from oil and gas sales, capped at 75% of all revenues per month. Thereafter, the Government and Contractor share the profit oil 50/50. Notably, the contractor pays zero taxes on its take of production. Under the agreement, the contractor shall recover, as ‘Recoverable Costs’, all of its exploration-, development-, operating-, service-, G&A (general and administrative)-, and overhead- costs. Article 11.2 of the PSA provides that all Recoverable Contract Costs shall be recovered from oil and/ or natural gas produced and sold from the Contract Area (i.e., the Stabroek Block). Issue: Inadequate Ring Fencing. A proper ‘ring fence’ prevents revenues from oil and gas extraction being reduced by losses or costs from other activities unrelated to the producing field. Ring Fencing is especially important where the contract area is very large. This is indeed the case for the Stabroek Block that comprises of 26,806 square kilometers (or 10,350 square miles), a very large contract area. Clear language limiting recovery of exploration costs only from development fields in the Contract Area should be incorporated in the PSA. Otherwise, with prolific producing fields, the Contractor sees no real risk, and has little incentive to be prudent in its exploration efforts outside the producing or development fields … because it knows it can extract more of Guyana’s revenues as cost recovery. This is a major risk for Guyana. Moreover, it is imperative that the Government: (i) exercise significant oversight on the Contractor’s cost recovery regime, and (ii) impose upon and hold the Contractor to a strict fiduciary duty in developing, producing, and managing Guyana’s oil and gas reserves in its Contract Area.