IEEFA, a US-based non-profit, says the Stabroek contract may unfairly curb Guyana’s earnings from oil sales. Its arguments may have the effect of drying up funding for future investors seeking to follow ExxonMobil’s example

WHAT: A recent report has drawn attention to contractual provisions that allow Stabroek’s developers to take a share of Guyana’s oil earnings to recoup exploration outlays.

WHY: Criticism of the provision appears to be overstated, but it may draw negative attention to the project.

WHAT NEXT: ExxonMobil and other investors may eventually find themselves struggling to secure funding.

 

Bharrat Jagdeo, the Vice-President of Guyana, has expressed confidence that his country’s burgeoning oil industry will help pave the way for economic growth and improvements in the standard of living.

Speaking during an online presentation at the Offshore Technology Conference in Houston last week, Jagdeo said that Guyana’s population, which numbers around 800,000, had a “legitimate expectation” that prosperity would follow offshore oil development. This sentiment is justified because oil revenues and investments will pump more money into the Guyanese economy, thereby creating opportunities for other sectors of the economy to flourish and new businesses to be launched, he commented.

The vice-president also asserted that Guyana did not have to fear the possibility that oil-driven prosperity might prove fleeting because of plans for switching to renewable energy sources that generate less carbon dioxide. “The world will continue to use fossil fuels for the foreseeable future,” he said, according to a report from S&P Global Platts. “Even if we freeze all new investments now, there's still a $4 trillion-dollar industry producing oil and gas for world demand.”

Beyond concerns about greenhouse gas (GHG) emissions, though, there may be other reasons to worry about just how much Guyana stands to gain from oil development.

How and when will Guyana benefit?

Last month, a US-based non-profit organisation known as the Institute for Energy Economics and Financial Analysis (IEEFA) published a report on the contract that ExxonMobil (US) and its partners signed for the Stabroek block in July 2016.

IEEFA examined this contract because Stabroek is, to date, the only offshore Guyanese block where commercially viable oil reserves have been discovered – and the only block to have reached first oil. (This occurred in December 2019, when the Liza-1 field went into production.) In the report, it claimed that its examination ought to raise questions about when and to what extent the project might actually help the country’s economy – and about whether, in the end, it would deliver any economic benefits at all.

The organisation based its claims on a provision in the contract that allows ExxonMobil and its partners to charge up to 100% of exploration costs occurred anywhere within the Stabroek block against active wells in other sections of the licence area. Under this provision, it said, the US super-major now has the option to look for hydrocarbons in any part of the block and recoup all of its expenses from the money that Guyana’s government earns from the sale of oil from producing sections such as Liza-1.

Front-loading earnings

The result of this provision, IEEFA argued, is that Guyana has been put into the position of foregoing some of the money it stands to earn in the present for the sake of funding the search for oil and gas at sites that will not come on stream for years to come, if ever. (Exploration sometimes fails, after all.)

At the same time, it noted, ExxonMobil and its partners Hess (US) and China National Offshore Oil Corp. (CNOOC) do not have to make any such sacrifice. Instead, they can front-load their earnings from oil sales without regard to how this might affect Guyana’s government, it said.

If ExxonMobil’s forecasts for production from Stabroek turn out to be accurate, IEEFA added, Guyana will be entitled to sell enough oil to earn $6bn per year by 2028, assuming that crude prices average $50 per barrel. It also stressed, though, that revenues might not reach $6bn per year so quickly because of the practice of allowing ExxonMobil and its partners to recover their exploration costs from oil revenues. Instead, it said, this might not even be possible until well into the 2030s, by which time the shift to renewable energy may be advanced enough that demand for Guyanese oil will be flagging anyway.

Frontier provinces

LatAmOil is of the opinion is that IEEFA’s conclusion is at best overstated and at worst designed to inspire hair-raising headlines scolding ExxonMobil for exploiting one of South America’s poorest countries.

It is true that the Stabroek contract has drawn criticism from prominent organisations such as the International Monetary Fund (IMF) and IHS Markit, a provider of information on key sectors of industry around the world. The latter has drawn attention to the fact that the Guyanese government’s share of revenues from the development of the block will be below the global average, while the IMF has expressed concern about Georgetown’s failure to guard itself against the front-loading of costs.

But it is also true that Guyana’s offshore zone is part of a frontier province that only began production less than two years ago – and that is still being explored. It is common practice for the owners of frontier acreage to offer investors very favourable terms, including reimbursement for exploration expenses. Indeed, they may have to do so to convince investors to take the risk (and spend the money) on exploration before the province is known to contain commercial reserves.

What’s more, Guyana’s government may have concluded in 2016 that giving up future oil revenues to reimburse exploration expenses was an acceptable solution. This would not have been an unreasonable conclusion, since its contract with ExxonMobil allowed it to claim a sizeable share of production despite not having an equity stake in the project (and therefore no obligation to contribute to project costs or respond to cash calls).

The court of public opinion

Nevertheless, IEEFA has still summoned ExxonMobil and its partners to the court of public opinion, where explanations of risk and common business practices command less attention than arguments about whether the game is rigged against the underdog.

These arguments are likely to draw no small amount of support in Guyana, not least because many members of the country’s current government (including President Irfaan Ali) believe that the Stabroek contract is too generous to ExxonMobil. Ali and other members of his administration have said they intend to make sure that future exploration and development deals are different – that is, more profitable for the government.

Against this backdrop, it may not matter much to spectators in the court of public opinion whether IEEFA’s claims are overstated or worse. It may matter more that ExxonMobil is coming under fire for having the audacity to follow the oil, even when it happens to lie within the territory of a disadvantaged country. And it may matter more that the US giant has the temerity to keep looking for hydrocarbons rather than devoting itself to renewable energies that aren’t yet able to meet global demand on the same scale and with the same efficiency and economy.

If so, ExxonMobil – and the other international oil companies (IOCs) that hope to follow its example and achieve success off the coast of Guyana and neighbouring Suriname, which also possesses commercial oil reserves – may have to start working a great deal harder. They may find themselves under pressure to meet burdensome and counter-productive ESG (environmental, social and governance) conditions in order to secure the financing they need to seek, extract, transport, process, distribute and use the fuels and chemicals that sustain the world economy.

And if they do, Guyana might lose out in other ways, such as failing to attract as many investors as it might have otherwise.

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