In the previous three columns, I have been addressing the August 2020 IDB report, which estimates the potential Government of Guyana (revenue) accruing from its crude oil and gas year-old sector. So far, I have considered three topics. These are: 1) the financial regime mechanisms embedded in the Sharing Production Agreement (PSA) that the Government of Guyana has with ExxonMobil and its partners; 2) the applicable parameters of the model used by the IDB (IMF FARI model);, and 3) a brief elaboration of the key features of the FARI model. The third task was accomplished in my previous column.
I take this opportunity to add a closing comment to last week’s presentation of the FARI model. While I noted last week, the usefulness of the model for measuring revenue sharing between the major Parties in crude oil, government and contractor projects, it also has several other useful features. For example, it allows governments as well as other interested parties to track, monitor, review and, indeed, verify revenue performance; identifying funding gaps; anticipated revenue; performing comparative analyzes; and other such analytics.
Unfortunately, I have to rule out these options as my focus for today’s column is on reporting the main BID modeling results of Guyana’s PSA with Exxon Mobil and partners for the Stabroek Block operations.
Two comments are needed before proceeding further. The first of these is that I have submitted an IDB report with the primary intention of supporting my prospective Government evaluation of Guyana’s baby oil and gas sector. However, as things stand, the IDB report, as its main driver, is found to underestimate the likely estimate of the Government of Guyana (GoG) and related impacts. Thus, the Summary states: “In the paper we systematically … examine the financial order and the revenue forecast” Furthermore, the Introduction states: “Section 4 models and estimates Guyana’s share of the total revenue ”
Secondly, it is generally recognized that the longer a time is projected out the greater the level of risk involved. Guyana has had an astonishing crewing rate since 2015. It is, therefore, understandable that some may have come to the belief that decontaminating the country’s hydrocarbon means that the sector is no longer taking a risk! ExxonMobil’s recent disappointment with drilling in the Tanager reservoir is a complete reminder that risk remains. And, in particular, this risk remains in estimating government revenues over decades.
As noted above, Section 4.2 of the IDB Note reports the results of its modeling and estimated GoG share of total revenue. It begins with an analytical statement of the key problem that underlies this effort. In other words, given moving capital, a reasonable investor’s choice of where to locate capital across jurisdictions in the crude oil sector will be influenced by the Average Effective Tax Rate (AETR) or the Government taking . Indeed, the report asserts: “Taking Government is a vital tool for comparing fiscal regimes in abstraction, it amplifies the importance of key fiscal mechanisms”
The mechanisms identified in the report have previously been addressed in these columns; namely, if any, royalties, bonuses, profit sharing ratios, direct and indirect taxes and equity participation.
The IDB cites an estimated Goal Take of 51 percent. It is worth noting that this estimated ratio falls comfortably in line with the other four independently modeled and estimated, all of which I have previously reported. I will return to this topic next week where I will wrap my commentary on the IDB Note. Here, I emphasize the need to avoid the false views of an intentional suggestion that Guyana gets nothing and gives everything away in its oil deals. We can certainly get more and we truly deserve more. Serious intellectual dishonesty, however, is to argue for justice from a foundation of economic delusion, propagation noise and nonsense, along with plain iniquities.
The IDB avoids such obvious dishonesty and indeed states its preference for not participating in the local print and social media debates. Point-wise, he correctly observes that “The Guyana government’s share of total revenues is at the lower end for state revenue capture but presents one of the most attractive PSAs in the region.” This brings up the basic compromise that I have repeatedly highlighted in these columns. That is, the disincentive effect of higher tax rates for private investors versus securing revenue capture or more government resulting from higher tax rates. While lower tax rates or government take incentives could capture disappointing investor revenue.
As the schedule of the five projects reveals, by 2020 only the Liza 1 project will produce raw. The IDB further estimates that the government will take it last year at US $ 300 million. This total rises to US $ 0.9 billion by 2026 after cost recovery claims have been exhausted. The break even price is US $ 18.6 a barrel before closing costs are added. Revenue flow from Liza 1 over the life of the project is estimated at US $ 31.5 billion. GoG: “expected to net US $ 9.9 billion in revenue, while total operator income from production is US $ 8.8 billion over the life of the project”
Considering the five full projects that follow IDB projects GoG Take is US $ 49 billion by 2054. Readers should remember here that the model is circumscribed to the five projects altogether; no new projects are emerging. Furthermore, there is no significant improvement in PSA qualifying terms. As noted, these are pretty heroic assumptions given how far ahead these projections go.
In next week’s column, I wrapped up this effort to find the IDB’s report on the Guyana Oil Opportunity in terms of capturing probable GoG revenue and related economic characteristics.