After gifting ExxonMobil “unusually sweet oil deal” Guyana now banking on ‘raveling’s’ for sustenance – Bloomberg report highlights

After gifting ExxonMobil “unusually sweet oil deal” Guyana now banking on ‘raveling’s’  for sustenance – Bloomberg report highlights

 Nov 30, 2022  News

Kaieteur News – Guyana intends to use its oil wealth to among other things, protect itself from the harsh effects of climate change. Local stakeholders have said that Guyana’s oil windfall could bring some insurance against adverse changes in the same way it is being utilised for infrastructural development.

This is despite the unusual oil deal the country has with Exxon subsidiary, Exploration and Production Guyana Limited (EEPGL), a Bloomberg report highlighted earlier this month. The report which focused on the role Guyana’s oil wealth will play against the climate dilemma was keen to note however, several unfavourable conditions involving the country’s oil contract with Exxon and environmental concerns among others.

The financial entity highlighted that while Guyana’s oil revenue has a 50-50 split with a 2 percent royalty paid to the government, industry analysts insist that Guyana would have provided “an unusually sweet deal for Exxon”. “It’s the most favourable (contract) I think I’ve ever seen in the industry, anywhere,” Tom Mitro, a senior fellow at Columbia University’s Center on Sustainable Investment told the agency. As a financial officer at Chevron for three decades, Bloomberg said that Mitro crafted deals with governments in several developing nations and later jumped to the other side of the table, consulting on behalf of developing countries, including Angola, in their dealings with fossil fuel companies.

Exxon defends its contract with Guyana, saying that it took on significant risks by gambling on a country with no history of oil production and very little energy infrastructure. “The terms of our petroleum agreement with the government of Guyana are common in the industry and competitive with other countries at a similar stage of resource discovery,” a spokesperson for Exxon told the firm. “But the terms with Guyana were drawn up after the discovery had been publicized as being unusually large,” and according to Mitro, Exxon was aware of the resources in Guyana. A roughly even split isn’t unheard of for high-risk operation with a shaky promise of payoff but when the probability of success is greater, the government generally gets a significantly larger share, often through increased royalties, Mitro reported. A Rystad consultant, Bloomberg said, also noted that global average for a government’s take in offshore projects is 75percent.

It was noted however that beyond the basic percentage splits, more surprising concessions are buried in the Exxon contract. “For example, the contract stipulates that any income taxes imposed on Exxon and its partners be paid for by the government. However, Guyana passes the companies a receipt for those taxes, which Exxon can use to earn a foreign tax credit in the United States.” And while Exxon has claimed that this is common practice, Mitro clarified that this was once true, “but now describes the practice as “highly unusual and beneficial to the companies.”

There are additional benefits to Exxon in the contract, Mitro continued. “The company is allowed to use current oil revenue to repay itself for future expenses for decommissioning and abandoning its wells. The company likely won’t incur those costs for decades. “I’ve never seen that, anywhere.”

Mitro added that the even the geographic size of Exxon’s lease—26,806 square kilometers (10,350 square miles) matters. “It’s about nine times larger than Exxon’s average international offshore lease,” Mitro has calculated, “and roughly 100 times larger than the average lease in the Gulf of Mexico. The Guyana contract includes an unusual provision allowing the company to immediately recover costs for additional exploratory work anywhere within that area. Exxon effectively pays itself back for those costs out of the oil that otherwise would go to the government.” Most production-sharing agreements covering large areas allow such deductions only within small, specified areas, Mitro said, “not everywhere under lease.”

On conclusion of annual spending, Guyana is provided a two-year time limit to audit the costs handed over by Exxon. Apart from local stakeholders expressing concern over the short time limit, they have also expressed reservation about government’s failure to audit within a timely manner as well as the type of audit conducted. This is especially the case since Vice President Bharrat Jagdeo, the lead official on the oil sector was adamant that Guyana does not have co-management status with the oil companies and cannot monitor cost in real-time. He urged therefore that Guyana’s power lies in the audits conducted to ensure that the costs presented are not bloated and Guyana in turn loses more than it should.

Last Sunday, Financial Analyst and Certified Accountant, Floyd Haynes clarified that the ongoing cost oil audit covering more than US$7B in bills to Guyana is not a forensic audit or a witch-hunt. He said that a forensic audit is done with the aim of identifying fraud and embezzlement with the goal of gathering evidence to be used in a court. He said the goal of the audit however, is to verify the accuracy rather than the legitimacy and validity of the cost claimed.