Today’s column wraps up my rather extended assessment of the impact of the general 2020 crisis (as I have previously defined this phenomenon) on Guyana’s baby oil and gas sector. In the previous columns, I have been focusing on the emerging production cost structure, likely cost-price relationship, Guyana’s global competitiveness, commercial and fiscal cost recovery prices, as well as potential Support (revenue) ) proposed Government, in our evolutionary upstream petroleum evolving structure.
In terms of the general crisis, its pandemic dimensions have stood out and already had such an adverse impact on the global petroleum sector that it has placed Guyana’s Chief Executive and Operations, ExxonMobil in the Stabroek Block, on the proverbial horn of a dilemma existential. As Greg Brewer writes in the Motley Fool recently (Nov. 20) he pointed out that dilemmas can be posed as follows: on the one hand, the risk that the painfully low 2020 oil prices will remain deep to 2021. And, on the other hand, the non-waiver requirement for ExxonMobil to increase its investments in order to grow productivity and maintain dividends.
As noted earlier ExxonMobil’s main strategic response to the dilemma appears to be 1) focus on producing high and low quality cost recovery, as in Guyana; and, 2) transform and rebrand itself into an energy company, not just a petroleum company. The latter is worth repeating for emphasis, as I use this opportunity here to remind readers that, similarly, Guyana needs to strategize its future development primarily around energy in the broadest sense and not focus solely on petroleum. This is because, much like its hydrocarbon potential, its renewable energy resources, I think challenges this potential to place pride.
Starting in the next section, for the remainder of today’s column, I will focus on concluding my evaluation of the prospective Government of Guyana Government (revenue). In pursuing this, I will address a few specific concerns by hand, which have been raised privately by readers.
More on prospective Government Taking
First, the impact of the overall revenue of the Guyana Production Sharing Agreement (PSA) as captured in Government) must be measured not only by the revenue it generates, but also by the extent to which ‘ The financial regime it embodies is simultaneously motivating and replacing – inducing actions by the Government of Guyana (GoG), as Owner and the international oil companies (IOCs) as Contractor. These two contracting Parties in the PSA hold, as one would expect, different aims and objectives.
And, despite the noise and nonsense of social media and print, this conditioned circumstance that basic energy economics rightly claims, when comparing PSAs with the presence or absence of certain fiscal levies, or indeed comparing fiscal levies by their size, is be logical. meaningless. I should add, unless the real goal is to mislead the ignorant. Usually, all reasonable non-state economic agents are aware that the absence of taxes is a profit motive. Equally, therefore, all reasonable governments should be aware that it must always seek to reconcile the mutual impact of all taxes.
As noticed last week, no PSA is perfect. And, based on this proviso, I think five unique derivative considerations invariably apply These are: first, PSAs as designed seek to incentivize hydrocarbon (E&D) exploration and development. In response to this, IOCs are being encouraged to pursue immediate profits and to postpone more risky areas. This could have happened in Guyana in circumstances where it might well turn out that the more dangerous areas will, over the long term, generate more profit! This is a valid result. Despite the sense of the chamber echoing noise and nonsense, basic petroleum risk reward theorems have invariably revealed that logic states, not criminal intent: the greater the level of risk, the greater the expected direct profit required to incentivize investors.
Secondly, because PSAs allow claims for certain accrued costs incurred in exploration and production (E&P), they tend to discourage the efforts of the Contractor, whose aim is to reduce costs! This is because, in the PSA, cost-efficiency gains are shared with government, based on the pre-agreed oil dividend! Unfortunately, logic again insists that if IOCs cannot fully benefit from their efforts to achieve cost efficiency, they can be motivated, compared to situations that allow for full benefit.
Thirdly, PSAs need not be said to create opportunities for IOCs to benefit from “unexpected profits”. This can happen if global crude oil prices appreciate, for whatever reason, well above their historic trend after the contract is signed.
Fourth, worldwide experience suggests that the cost of gold plating is a widespread practice among IOCs. This is undoubtedly a moral hazard. It signals a significant lack of openness by the parties to PSAs. I think this is largely due to information failure, which is mainly due to asymmetric flow of information.
Finally, Government Taking is treated as a cost by IOCs. As such, it certainly “defines a country’s competitiveness for internationally mobile E&D capital and shapes global oil prices”. Data reveals that, globally, between 2009 and 2014 the Government Government averaged 52 percent. This is within the similar range as Guyana. As noted above the advantages of Guyana’s global competitiveness are twofold; namely, the quality of its raw, light / medium sweet; and its low cost recovery price. And, these are supported by the global transition to cleaner forms of energy as we recently noted in the regulatory transition of maritime transport to low sulfur fuel.
Further, back in 2019, A, Bacci, Global Data’s upstream Analyst in response to the Department of Energy signaled its intention to raise Guyana’s PSA 2 percent royalty rate in its next licensing round due around now, warned that this could lead to it being done. significantly less attractive, based on a typical global range of between 2 and 15 percent. His modeling of Guyana at 2, 5, 10 and 15 percent supported this assertion.
Next week, I will continue this discussion by presenting the IDB’s recent measurement of the prospective Government of Guyana