Introduction
In this week’s column, I continue to review the national debate on Guyana’s Government Take from its petroleum sector, focusing on issues of its measurement, based on an acceptable definition. Here I recommend the commonly used definition as standard. That is, “the total effect of Governments’ fiscal terms on the cash flow of each oil field, summed-up for the country as a whole, and expressed as a percentage”, or as Rystad Energy formally puts it “The average government take for each country is the net present value (NPV) of the government take divided by the sum of the NPV of free cash flow and the NPV of government take”.
I have previously indicated the range of applicable fiscal terms that are covered in this measure. Of note, no retail taxes on petroleum products are included. Further, the emphasis is on the totality of the fiscal terms as a package. Experience clearly indicates that fiscal terms are adjusted/ improved, when working with them reveal impediments. In this sense, no country’s “PSA” is fixed in stone. All PSAs evolve/improve in time, wherever this is deemed necessary.
As also indicated last week, Government Take is the price Governments charge in the international market place for mobile capital seeking petroleum exploration and development acreage. In order to do so effectively that price must be sensitive to the geological, financial-economic and geo-political risks attached to the acreage. As regard the last listed risk, readers must be constantly aware of my proposition that the Venezuelan territorial claim on Guyana remains an existential risk to the infant petroleum industry.
As a rule, Governments want to maximize their Take, as well as, to sustain investment flows into the sector. Petroleum companies want to maximize their returns, lower risks and promote their corporate goals. There is, therefore, a continuous trade-off facing both parties. Undeniably, petroleum companies may have far greater experience in navigating this trade-off than a “novice” Government, like Guyana.
It is important to recognize that Government Take is essentially a “fiscal metric”. As such, it is therefore, of more concern to Governments than petroleum companies, which generally do not see this as affecting or determining field performance outcomes.
One lesson to be learnt from this is a “one-size” Government Take does not suit all circumstances. Each fiscal metric must to be adapted to the concrete circumstances, on offer in a country. It also has to be, ultimately, a negotiated package.
Based on such considerations, the serious literature assiduously warns against the extreme difficulties persons outside a petroleum company would face when estimating that company’s net cash flow. Such data are clearly proprietary and are not handed over to researchers/consultants, making it necessary for them to assign “theoretical” values, particularly of cost and price.
The noise and nonsense elements of Guyana’s national petroleum debate, either are unaware or—pretend to be unaware of this reality—and, therefore, ultimately wish away the severe limitations on “unofficial” estimates of Government Take.
Dishonesty & deception
All Government Take estimates are fraught with severe limitations. It is dishonest for researchers/ analysts not to state up-front the limitations on their estimates. Where this dishonesty is greatest, as we shall see in coming weeks, is when researchers/analysts arrive at a “selected Government Take ratio” and apply it to draw results. Such results are worthless, given that the higher the Government Take ratio the researchers/analysts unilaterally apply to any field, or indeed any country, the higher is the likely outcome if other things (like production) are maintained at present or pre-set levels! Yet this is the preposterous deception presented by those who allege how much money a PSA gives away to a petroleum company!
Government Take and projects
Consider the phases of a typical petroleum project in Guyana. First, there is the licensing phase, where permissions are sought for petroleum acreage. If successful, the second phase is exploration of the petroleum acreage. The results of the exploration phase are appraised for their potential value of hydrocarbons (quantity and quality). If the results are favourable the project enters the development phase. Here feasibility studies and development planning are undertaken. It is only after this that production starts. And, when the finds are exhausted, the company abandons the field, under pre-determined conditions.
Measurement of Government Take
Given the above, accurately measuring Government Take for Guyana at the project level, clearly requires an accurate forecast or ex ante projection of expected cash flow to the project. It also requires at the ex post level, company data. At the country level, the above statement similarly applies; except that the country may have several PSAs in force, for different companies and different fields! Lacking proprietary data from petroleum companies, the overall cost and prices that are applied in these measures, as well as their “spillover effects” are excluded from the calculation, as these are unknown.
Rystad Energy has added some significant data to this type of analysis and debate. According to that Company, over the period 2015 to 2019 all petroleum companies in Guyana spent about US$8.1 billion in off-shore exploration and development. The companies assumed all risks (geological, financial-economic and geo-political). Further, despite the persistent efforts of the “noise and nonsense” elements of the national petroleum debate, to downplay the advent of Guyana’s petroleum sector, Rystad Energy is now edging closer to my prediction back in 2016.
Oil Now (February 2020) is now reporting Rystad Energy projects Guyana will produce 1.2 million boe per day, by the end of this decade. Annual revenues are projected at US$28 billion, based on an oil price of US$65 per boe. The Company’s estimate of Government Take remains at 60 percent.
Of course the “noise and nonsense” elements have labelled Rystad Energy as a “mouthpiece for ExxonMobil”. They seem to be no consideration given to the fact that, because of the tight disciplines of the global market place, a firm cannot be a thriving commercial success based on giving fake advice. Rystad Energy is a widely reputable and commercially successful energy research, intelligence, analysis/analytics, as well as consultancy company. It has offices in London, New York, Houston, Moscow, Rio De Janeiro, Singapore, Stavanger, Tokyo, Sydney, Dubai and Bangalore. It is absurd to claim from the outside, it is not giving “good advice” to those who pay for it!
Conclusion
Next week the discussion continues.
