OpenOil, the Germany-based consultancy which generated the analysis that suggested that the 2016 deal with ExxonMobil could deprive Guyana of US$55b, yesterday defended its work.
In a statement, it said that ExxonMobil’s discovery of substantial oil deposits at the Liza-1 and Liza-2 wells by the end of June 2016 substantially de-risked all further development in the concession and with Guyana having effectively shared risk by making concessions prior to then, this justified an increased take for the country.
“The discovery of both Liza 1 and Liza 2 by the end of June 2016 clearly confirmed the Stabroek concession not just as a single fertile discovery but as a broader area development,” the organisation said in a statement yesterday, suggesting that the concession could no longer be considered a frontier province at the time. It added that modelling of the economics of exploration in the field shows that “these two discoveries alone substantially de-risked all further development in the concession.” This finding is supported by the actual reported exploration expenditure by Exxon and its partners since 2016, and by energy intelligence firm Rystad Energy’s estimates of continued exploration into the mid-2020s, OpenOil pointed out.
On the question of whether the Stabroek concession should have been regarded as a frontier province for negotiation purposes, the statement observed that ExxonMobil has argued that the terms of the original 1999 Production Sharing Agreement (PSA) should have been maintained in the 2016 PSA, regardless of any actual de-risking, because anything else would be to diminish the sanctity of contracts. OpenOil noted that this argument is based on the principle of balance between risk and reward. “ExxonMobil’s argument is that it was the fact that it had already taken all the risks necessary to make the discoveries that justified the preservation of the original terms, since those terms reflected an agreement made on the balance between risk and reward in 1999,” it said.
“OpenOil’s position on that question is that there is clearly enough evidence already in [the] public domain to suggest that by June 2016 the government of Guyana had made more than one concession on meeting the workplan obligations of the original agreement,” the statement said, noting that it is government’s right and no judgement is possible from the outside on whether those were sensible decisions given the policy priorities of the government at that time.
“But it is clear that such decisions should have implications in terms of evaluation of the project economics. The government of Guyana was effectively sharing risk by agreeing to make those concessions. In this view, then, the risk-reward balance has indeed changed by June 2016, and the government should benefit as well as ExxonMobil from the de-risking that has occurred as a result of the work done in the concession so far,” OpenOil said.
The organisation issued the statement yesterday amid a swirling debate following a report by the international anti-corruption watchdog Global Witness which said that inept negotiation of the 2016 Production Sharing Agreement (PSA) could cost the country as much as US$55 billion over the 40-year period of the licence for the Stabroek Block, which is held by ExxonMobil and its partners. ExxonMobil’s subsidiary Esso Exploration and Production Guyana Limited (EEPGL) holds 45% interest in the 6.6 million acre Stabroek concession, while partners Hess Guyana Explora-tion Limited and CNOOC Nexen Petroleum Guyana Limited hold 30% and 25% respectively.
The government has rejected the Global Witness report and has insisted that it had entered a “fair” agreement with Exxon.
Notwithstanding, a Cabinet-commissioned review by Clyde and Co. of the circumstances leading to the signing of the new Petroleum Agreement with ExxonMobil subsidiary EEPGL in 2016 concluded that while the agreement was negotiated and executed in accordance with the law, a lot of pressure was placed on government for a speedy signing prior to the scale of the “world class” Liza-2 discovery becoming fully known and understood. “Presumably because knowledge of a `world class’ discovery could have altered the Government’s negotiating position,” the report said.
Prior to the Global Witness report, questions had long been raised as to why Guyana had not awaited the results of the Liza-2 drilling before signing off on the 2016 agreement. The 2016 agreement has been the subject of controversy as some have argued that a better deal could have been negotiated as a significant oil discovery had already been made.
Last year, Global Witness commissioned OpenOil to produce a report and fiscal model examining how much revenue would be generated by Guyana’s Stabroek oil licence and it was one of the main bases for the NGO’s report.
In its statement yesterday, OpenOil noted that its fiscal model was sent to ExxonMobil twice before publication and critique, amendments, updated data or specific criticisms of the model was invited but “none of substance” was received.
Credible
In responding generally to arguments made, the organisation emphasised that even at the technical level, a strict divide between quantitative and qualitative financial analysis is often not possible. It said that because numbers often only provide part of the answer, many technical issues require an approach which combines sound quantitative analysis with qualitative review and in such cases, it made best efforts and consulted with a wide network of peer analysts and modellers.
Regarding transparency, OpenOil noted that there is a difference between data and analysis. “Neither our own, or anyone else’s, estimate of Guyanese government take, and revenues accruing under a fiscal regime, are data. They are all projections and estimates, based on numerous choices made around inputs and calculation methods,” it said. “It follows therefore that the proposal of any such estimate in the public space is only credible when the full underlying workings and calculations which underpin the headline conclusion are also published, in an interactive format such as Excel, for scrutiny by colleagues. This is what we have done. We invite others to do the same,” the organisation added.
“To conduct public debate about the meaning of headline numbers from models, without access to the workings of those models, is to ‘drive blind’,” it declared.
Meantime, in responding to the argument that estimating future oil revenues is speculative, OpenOil acknowledged that its model’s estimates are speculative in the sense of not being empirical fact and emphasised that all forward-looking estimates are. “But they are not somehow more speculative than anyone else’s. ExxonMobil and its partners, like all oil and mining majors, certainly have estimates and projections based on the entire life of the Stabroek project – they would not have invested billions of dollars without them, and they often refer in public statements to conclusions derived from their models. It is also uncontested international best practice that governments should have such models,” the statement said.
In terms of the length of time analysed, a figure for a difference between the two fiscal regimes examined can be retrieved over any time period, the statement said. OpenOil also pointed out that the methodology used was explained and the figures used are publicly available and invited scrutiny of same.
The organisation also responded to criticisms raised because the OpenOil estimate of government take is 52% under the current fiscal regime, at a base oil price of $65 in today’s money, compared to a published estimate of 60% by Norway-based consultancy Rystad.
“Part of the difference between the two numbers lies in the fact that the OpenOil estimate is “undiscounted”, whereas Rystad’s uses a discount rate of 10%. OpenOil’s own estimate of the government take using a discount rate of 10% is available in the published model, and is 57%. Rystad’s estimate of undiscounted take for the government “comes out to be close to 55%”, as confirmed in correspondence between Rystad and OpenOil. With both “flavours” of calculation therefore, discounted and undiscounted, the gap between the OpenOil and Rystad estimates are not 8% but in the range of 2-3%,” the organisation explained.
It noted that differences of this scale in values in this metric are common, and often not material, since modelling is not an empirical science. It added that a number of hypotheses could explain the remaining difference but they cannot be tested without access to the underlying Rystad model. The Rystad model has been used to attack OpenOil’s projections.
Comparison to the right countries
The statement also noted that another criticism is that OpenOil did not pick the right countries when it compared Guyana’s government take to others. “It has been argued that, when the particular characteristics of the Stabroek contract are compared with genuinely similar deals, Guyana is not getting a bad deal, but is actually reasonable and “in the middle of the pack”. This argument suggests that one naturally expects a lower percentage in an untried environment like Guyana, and percentages of future deals will increase over time…” the statement noted.
OpenOil said that this is a valid potential objection but the question is if it actually applies in these circumstances.
“Once again we come to the critical fact that no data exist in the public domain to validate, to a reasonable level of professional integrity, any of the headline government take figures published in tables and comparisons by anyone – including Rystad, Wood Mackenzie, ExxonMobil, and others. We are not – yet – in a situation where like can be compared with like,” the statement said.
It noted that this criticism needs to be addressed at two levels. “First, is Guyana at the low end of the pack – does it get a smaller revenue take than other countries? Our study collected all government share estimates it could from well-regarded sources that were in [the] public domain and these are included in the annex of our report. Clearly more data points would be better, but this was what we were able to find in public domain. It is notable that the most data we could gather for other countries used government takes that were not discounted. Thus, so that we could best determine how Guyana compared to other countries, we also used the estimate of Guyana’s government take undiscounted as our main conclusion in the report,” the report said. It noted that a discounted version is also available in the model.
The statement highlighted that the government share estimates show that Guyana’s current government take – 52% – is particularly low compared to other countries. “Out of 61 countries, Guyana has the 52nd lowest government take. If we switch our methodology to that used by Rystad – so we are now discounting our dollars (“NPV10”) then Guyana still comes only 22nd out of 25 estimates available,” the statement said.
As it relates to whether Guyana was compared to the “right” countries – ones that were like Guyana in 2016 – OpenOil noted that there are at least six different variables which could sensibly be applied to identify potential peer jurisdictions: frontier or well-developed, deepwater or not, high-cost production or not, gas or oil, same geographical region, or not, profit maximising policy, or not.
“In the data points referred to above, there are cases in each of these parameters which fall on either side of the Guyana outcomes across each criterion. No rigorously defined definition of peer fiscal regimes exists in (the) public domain which is capable of independent valuation, let alone the estimated values for the output metric derived from models which are also hidden from public view,” the statement said.
Frontier
As to whether Guyana was a frontier oil country on June 27, 2016, OpenOil said that closer consideration suggests there are two separate questions which have collapsed into one. “The first is whether Stabroek was a frontier province. The second is whether, even if it was not, it should have been regarded as such for negotiation purposes,” the statement said.
In this regard, OpenOil said that Exxon’s discovery of substantial oil deposits at the Liza-1 and Liza-2 wells by the end of June 2016 substantially de-risked all further development in the concession. It also highlighted that Guyana effectively shared risk by making concessions prior to then and both parties should benefit from the de-risking.
Activist and attorney Christopher Ram has highlighted that the agreement not only allows the three oil companies all the benefits under the 1999 Agreement, including pre-contract costs, and for the government to pay their taxes in Guyana, but for those and enhanced benefits to run unchanged to 2056. “No Parliament until then will have the power to make any law adverse to the interest of the oil companies, without compensating them. Nor can the Government stop paying their taxes to the GRA for them…” he had said.
OpenOil said that how much the government should benefit is not a question with a scientific answer. “The alternative regime we formulated in the model is only one possible answer. It has some merits: each of the components, the higher royalty rate and corporate income tax, are within international norms. It is aligned with existing Guyanese legislation (a corporate income tax rate of 25%), and our understanding of the focus of public debate in the country, and its overall outcome in terms of government take is…in the middle of the pack for a province that is now substantially de-risked, partly through measures taken by the government. But there are other possible approaches. The alternative fiscal regime outlined here is simply one reasonable approach to what is a thought experiment,” the statement said.
In terms of the question of what top-level government take figures signify, it noted that different parameters can affect a final value. “Wide consultation with colleagues suggests this is an area where our collective game should be raised. Suffice to say here that the difference in the government take figure in the same model, between one plausible set of circumstances and another, can easily reach 10% or 15%,” the statement said.
“The Stabroek fiscal regime is unusual in that it varies less under a range of oil price, costs, speed of development, and so on than most other contractual regimes. Most others vary considerably. This is not because the models are flawed, but because the metric itself responds dynamically to changes in market conditions. One can see this from the Rystad estimates themselves. In April 2018 Rystad issued a series of estimates which put government take estimates at 77% for Brazil, 67% for Mauritania, and 64% for Mozambique. But their latest estimates, as released last week in response to this discussion, are 63% for Brazil, and 57% each for Mauritania and Mozambique. So a 10% reduction for two countries between 2018 and 2020, and a 14% reduction in the case of Brazil. This is before we get to the question of which specific regimes in each country are being modelled, since many countries, including certainly Brazil, have more than one fiscal regime, and even which project,” OpenOil highlighted.
“….the only real way to ensure that different estimates are apples to apples comparisons is to publish the entire models which generated them, just as one would for science, and in a form which can be interrogated, such as an Excel spreadsheet. In the absence of that, comparisons of different values from different sources are too methodologically weak to be significant,” it noted.
OpenOil urged that anyone who wishes to know more about the terms of the Stabroek deal read the report in full, and take a look at the financial model. “OpenOil is committed to ensuring that published analysis is on the basis of best efforts, and if specific new information, or improved inputs, emerge, they will be folded into a subsequent version of the analysis, together with a log of the difference in estimated outcomes compared to the current version. This is an intrinsic part of an open source approach to financial modelling, which we believe is appropriate for the public policy space,” it said.
