Introduction
Today’s column expands on last week’s discussion of the government take, as it relates to Guyana’s 2016, Production Sharing Agreement (PSA). The kernel of standard definitions of this fiscal metric shows it simply means that, if the take is estimated at 50 per cent, then the total of all revenues received by the Government of Guyana (GoG) from the PSA is equal to one-half of the net cash flow generated through the operations of ExxonMobil and its partners. These revenues can be measured in discounted or undiscounted values.
As indicated last week, most of the energy economics literature is replete with advice to readers that this fiscal metric is a “misleading indicator”. I have already introduced last week, one of the reasons behind this warning. Here I merely wish to add the further observation that this fiscal metric is not prominent among the measures private investors in the petroleum sector would utilize in order to guide their decision-making. Their decision-making would utilize standard private sector valuation metrics such as: Net Present Value (NPV); the Internal Rate of Return (IRR) and the Profitability Ratio (PR), all of which were described in last week’s column.
Readers can see the wisdom of this observation, if they were to reflect on the following commonly cited illustration. Generally, petroleum investors are more likely to invest in a country which has a fiscal regime, that provides a government take as high as 90 per cent, while simultaneously allowing an IRR of 20 per cent for a given project, than one which provides a much lower government take (say 50 per cent), while allowing a much lower IRR of 10 per cent, other factors remaining the same. From the profit motivated preference function of the petroleum investor the focus is on comparative profit opportunities available for a given amount of investment outlay. The government, however, would have a different preference function. One, which seeks to capture its own political/social/economic/geo-security imperatives, as realistically as it can.