Introduction: Findings
Today’s column addresses Part 2 of the proposed three-part evaluation of Open Oil’s financial modelling exercise of Guyana’s 2016 PSA. It presents a summary of the main Findings of that exercise. I am conscious that when doing so, this is a newspaper column designed for general readership. This suggests that most readers would be discomfited and/or intimidated by presentations, which assume much beyond middle level secondary mathematics or statistics. This judgement, I believe, is supported by the headline reporting on this modelling exercise.
Perhaps the most important finding of the financial modelling exercise is its estimation of Government take. This concept I have discussed in several recent columns, and specifically in my column of April 1, 2018. I had emphasized in that column, Government take is a “fiscal metric”, which is primarily of concern to governments. I had also posited that typically, investors focus on measures of project profitability and performance such as the internal rate of return (IRR), net present value (NPV) and the profitability ratio (PR). I had also sought to distinguish between Government take and other improved measures, such as the Effective Royalty Rate (ERR) in the April 1, 2018 column.
The financial modelling exercise has indicated that Government would receive US$7.79 billion over the life of the Liza I Stabroek field project. This take is equal to 52 percent of the positive cash flows of the project, at today’s prices. To recall, based on my formulation in the April 1, 2018 column, Contractor take (that is Exxon and partners) is equal to 1 – Government take. In this case it is 1 – 0.52 = 0.48 or 48 percent. For this formulation, Government take was defined standardly (Tordo 2007, World Bank Working Paper, 123). There it is given as “the percentage of the petroleum pre-tax project’s net cash flow adjusted to take into account any form of Government participation” (see Stabroek News, April 1, 2018). In Guyana, there is no Government participation in production and distribution.