The Guyana Government failed to protect itself from front-loaded costs in its oil and gas contract signed with ExxonMobil and its partners and as such, receipt of hundreds of millions, if not billions of dollars due to Guyana will be held back well into the 2030s.
The position has since been espoused in a recent report on Guyana’s oil and gas sector’s economics, done by the Institute of Energy Economics and Financial Analysis (IEEFA).
The IEEFA in his report noted that given the provisions in the Production Sharing Agreement (PSA) signed with ExxonMobil, “over the next five years, revenues from Guyana’s newly discovered oil reserves being developed by an ExxonMobil-led development team will not be enough to cover Guyana’s budget deficit, support new spending and build its wealth. Over the longer term, a declining oil and gas sector is highly unlikely to provide Guyana with the robust revenues promised.”
In fact, the IEEFA director in his analysis drew reference to the fact that 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.
According to Sanzillo, “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.”
He pointed specifically to the fact “it failed to include a ring-fencing provision” and explained that “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.”
To this end, Sanzillo concludes, “it is unlikely that Guyana would receive annual payments in the $6 billion range until well into the 2030s, if at all.”
He asserts the “the contract is front-loaded, which means the contractors receive more than Guyana in the early years of the contract.”
According to Sanzillo, “the absence of ring-fencing provisions acts as a subsidy. The cost of exploration for new sites is paid by reducing the annual profit to Guyana.”
As such, he was adamant the costs of new discoveries and dry holes should be made public.
The IEEFA director noted in his report that the absence of ring-fencing could be a legitimate incentive to encourage more exploration for the contractor and that “the ring fence provision is just another benefit for the contractor without a clear, transparent benefit for Guyana.”
According to the analyst, “taken alone, the absence of a ring fence front loads the contract with expenses that must be paid before Guyana enjoys an abundant revenue flow.”
It was noted too that declining oil and gas markets significantly increase the risk that in the long run, Guyana’s oil fields will not produce the revenues promised.
Recoverable costs, as defined by Sanzillo in his report, include 100 percent of all exploration and development costs, pre-contract costs, operating expenses, estimated cost of future abandonment, interest and parent company expenses.
He notes that since recoverable costs include 100 percent 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.
According to Sanzillo, the substantial balance of outstanding development costs could take even longer to satisfy since new investments, pre-contract costs, operational delays and volatile oil prices can disrupt financial plans.
He has since concluded that repayment of the development and other recoverable costs diminishes the size of Guyana’s annual cash receipts from profit oil.
As a result, lower cash payments “delay the country’s ability to benefit from the expected full annual revenue.”