Granting Instruments – GuyanaOGEC Oil and Gas Blog …a GT Lime

September 17, 2019August 20, 2021

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:

Relative to expected value, revenue risk exposure increases as production increases. Thus, higher production volumes bring absolute risk to Guyana’s revenues.
Beyond 2025, cost recovery (comprising mostly of Opex) becomes a significant risk to Guyana’s revenues, and
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:

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
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.

March 16, 2019March 16, 2019

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 10^th 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.

March 5, 2019March 5, 2019

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

Question 1.

Answer to Question 1 (continued). Local Content..

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.

February 27, 2019March 1, 2019

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

Question 1.

Answer to Question 1.

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.