Posted on

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.      

Posted on

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.

Posted on

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.

Posted on

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.

Posted on

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.