Introduction
In the previous three columns I have been addressing the August 2020 IDB report, which estimates prospective Guyana Government Take (revenues) accruing from its one- year- old crude oil and gas sector. Thus far, I have considered three topics. These are: 1) the mechanisms of the fiscal regime that are enshrined in the Production Sharing Agreement (PSA) which the Government of Guyana has with ExxonMobil and partners; 2) the applicable parameters of the model utilized by the IDB (the IMF FARI model);, and 3) a brief elaboration of the key features of the FARI model. The third task was executed in my previous column.
I take the opportunity here to add a concluding observation on last week’s presentation of the FARI model. While I had noted last week, the model’s usefulness for measuring revenue sharing between the principal Parties in crude oil projects, government and contractor, it has also several other useful features. For example, it allows governments as well as other interested parties to track, monitor, review and, indeed, verify revenue performance; identify fiscal gaps; forecast revenue; perform comparative analyses; and other such analytics.
Regretfully, I have to disregard these options as my focus for today’s column is on reporting the main results of the IDB’s modeling of Guyana’s PSA with Exxon Mobil and partners for the Stabroek Block operations.
Context
Two comments are warranted before proceeding further. The first of these is that I had introduced the IDB report with the principal intent of buttressing my evaluation of prospective Government Take from Guyana’s infant oil and gas sector. As matters stand though, if read closely, it will be seen that the IDB report has, as its main driver, the estimation of likely Government of Guyana (GoG) Take and related effects. Thus, the Abstract states: “In the paper we systematically… examine the fiscal regime and projected revenues” Further, the Introduction notes: “Section 4 models and estimates Guyana’s share of total revenue”
Second, it is universally acknowledged that the further out in time projections are modeled the greater is the level of risk attached to them. Guyana has had a phenomenal creaming rate since 2015. It is, therefore, somewhat understandable that some may have come to the belief that the country’s hydrocarbon de-risking means that the sector no longer carries risk! ExxonMobil’s recent disappointment in drilling at the Tanager reservoir is a stark reminder that risk remains. And, specifically, this risk remains in the estimation of government revenue over decades.
The Problematic
As indicated above, Section 4.2 of the IDB Note reports the results of its modeling and estimation of GoG’s share of total revenue. It begins with an analytic statement of the key problematic underlining this effort. That is, simply stated, given mobile capital, a rational investor’s choice for where to locate capital across jurisdictions in the crude oil sector will be influenced by the ruling Average Effective Tax Rate (AETR) or Government Take. Indeed, the report asserts: “Government take is an essential tool for the comparison of fiscal regimes in extractives, it magnifies the importance of key fiscal mechanisms”
The mechanisms cited in the report have been previously addressed in these columns; namely, royalties, bonuses, profit sharing ratios, direct and indirect taxes and equity participation, if any.
Results
The IDB reports an estimated GoG Take of 51 per cent. Of note, this estimated ratio falls comfortably in line with the four others independently modeled and estimated, all of which I have previously reported on. I’ll return to this topic next week where I wrap-up my commentary on the IDB Note. Here I stress the need to avoid fake views deliberate suggestion that Guyana gets nothing and gives away all in its oil deals. We can certainly get more and do indeed deserve more. It is gross intellectual dishonesty, however, to argue for justice from a base of economic fallacies, propagandistic noise and nonsense, along with plain untruths.
The IDB avoids such blatant dishonesty and indeed indicates its preference for non-involvement in the local print and social media debates. Pointedly, it correctly observes “Guyana’s government share of total revenue sits at the lower end for state revenue capture but presents one of the most attractive PSA’s in the region.” This brings to the forefront the fundamental trade-off I have repeatedly highlighted in these columns. That is, the dis-incentive effect of higher tax rates to private investors versus the allure of revenue capture or greater government take arising from higher tax rates. While lower tax rates or government take incentivizes investors revenue capture could disappoint.
As the five projects’ schedule reveals, by 2020 only the Liza 1 project is producing crude. The IDB further estimates government take for last year at US$300 million. This total rises to US$0.9 billion by 2026 after cost recovery claims are exhausted. The break-even price is US$18.6 per barrel before closure costs are added. Revenue flow from Liza 1 over the life of the project is estimated at US$31.5 billion. The GoG: “is expected to net US$9.9 billion in revenue, while the operator’s total income derived from production is US$8.8 billion over the life of the project”
Taking into account the full five projects sequencing the IDB projects GoG Take is US$49 billion by 2054. Readers should recall here the model is circumscribed to the five projects entirely; no new projects come on-stream. Further, there is no significant enhancement in the applicable terms of the PSA. As indicated, these are rather heroic assumptions given how far into the future these projections go.
Conclusion
In next week’s column I wrap-up this effort to locate the IDB report on Guyana’s Oil Opportunity from the perspective of likely GoG revenue capture and related economic features.