MONTEGO BAY, Jamaica, August 9, 2021 - While the Guyanese public continue to boast the potential short term riches expected from the oil strikes offshore Guyana, a new report from the Institute of Energy Economics and Financial Analysis, says Guyana will not realize its oil gained wealth before 2030, if at all, due to the lack of a "ring fence' provision in its contract with ExxonMobil..
The report written by financial analyst, Tom Sanzillo, says “Receipt of hundreds of millions, if not billions of dollars due to Guyana will be held back well into the 2030s because the government failed to protect itself from front-loaded costs in its oil and gas contract.”
According to the report, “the International Monetary Fund has issued a warning and IHS Markit, a global oil and gas services company, has concluded that Guyana is receiving a below-average take from the contract.”
Sanzillo says ”the government of Guyana gave away important protections when it agreed in the contract to postpone payments of its profits to encourage more exploration of oil. It failed to include a “ring-fencing” provision. In effect, the lack of such a provision means the contractor is able to charge Guyana for the cost of new wells before they start producing oil.”
“From December 2019 through April 2021, Guyana has received $344 million from oil production and royalties under the consortium contract. Under the current contract, IEEFA estimates that at $50 per barrel, Guyana could receive as much as $6 billion in 2028,” the report says.
Sanzillo is maintaining that as events are unfolding, however, it is unlikely that Guyana would receive annual payments in the $6 billion range until well into the 2030s, if at all. He says “the contract is front-loaded, which means the contractors receive more than Guyana in the early years of the contract.”
He pointed out that “the absence of ring-fencing could be a legitimate incentive to encourage more exploration. This contract, however, has many other contract provisions that already favor the contractor. The ring fence provision is just another benefit for the contractor without a clear, transparent benefit for Guyana,” Sanzillo says.
The financial analyst cautioned however, that “postponed payments may never be recovered.
Under the contract, the contractor and Guyana share “profit oil” on the basis of a 50-50 split (The contractor further divides the contractors’ shares, allocating 45% to ExxonMobil, 30% to Hess and 25% to CNOOC). Payments are made monthly to Guyana. The country also receives a 2% royalty on gross production and sales.
The report explained that “recoverable costs include 100% of all exploration and development costs,10 pre-contract costs, operating expenses, estimated cost of future abandonment, interest and parent company expenses.”
“Annual recoverable costs are capped at 75% of revenues, and any balance in recoverable costs is carried over until the next month.11 Since recoverable costs include 100% of all development costs (initially $33 billion over the first five years), the project carries a substantial balance that accrues to the contractor through at least 2028,” Sanzillo concluded.