Dear Editor,
When we enter into a contract we expect that whatever was agreed would be executed, whilst simultaneously holding the firm reassurance that the law would sort things out with reference only to what was agreed, should either party fail to perform or seek to evade performance. This understanding is often referred to as the sanctity of contracts.
Nobody would bother to commit their resources, property or labour to a contractual undertaking if the terms agreed could be adjusted willy-nilly at the request of either party after signing. It might be argued that this is more so the case when the contractual consideration is significant – as in the financial commitment made by ExxonMobil and its partners, Hess Corporation and CNOOC/NEXEN who have invested in excess of $3 Trillion to date. In my opinion this seeming imbalance has certainly evened out since the consideration given by Guyana has within a very short time significantly increased in value – as in becoming way more than anticipated at the time of entering into the contract. To date ExxonMobil has drilled 33 successful wells with Guyana’s estimated reserves consequently increasing by tens of percentage points beyond all initial expectations. Indeed, according to Schreiner Parker, Senior Vice President and Head of the Latin America Division of Rystad Energy, the independent Norwegian consultancy specialising in energy research and market intelligence, if measured on exploration success rate, the Stabroek block “probably does not have an equivalent in the world”.
In business, like in life generally, things can turn out to be significantly better or conversely much worse than initially expected. Still, the law of contract makes allowances in some cases where the parties were of uneven standing – for example where the parties’ bargaining power was significantly disproportionate – and it should be noted that Guyana, one of the poorest countries in the hemisphere at the time of entering into and subsequently renewing the contract in 2016, only pumped first oil not quite 3 years ago in December 2019, whereas international major ExxonMobil has been in the oil business for more than 150 years.
The London-based non-profit non-governmental organization Chatham House, the Royal Institute of International Affairs, whose mission it is to analyse and promote the understanding of major international issues and current affairs, supports the insertion of renegotiation clauses in future Government of Guyana oil contracts, including terms that specify what would trigger renegotiation. The United Nations Development Programme (UNDP) also supports this outlook.
According to Chatham House, new circumstances such as a major discovery being made, may prompt many producers to seek to change the terms of their contracts with foreign companies. Chatham House concludes that “renegotiation of terms is sometimes necessary in order to maintain a long-term partnership between oil companies and governments because the refusal to review terms could be destabilizing and unfair to some countries”. Guyana, with the almost daily remorseful criticism of the ExxonMobil oil contract coupled with frequent official reports of successful drilling operations of that company since first oil, fits perfectly into this precarious position of potential instability and a national feeling of being hard-done by, as ExxonMobil’s estimated profits mushroom with each new discovery. It is anticipated that Guyana’s relationship with the company will last some 30 years at very least.
All that having been stated, Guyana’s deal will work out to somewhat more than 50-50 including royalties after cost recovery is complete – and that’s certainly not a bad deal at all – whenever cost recovery is eventually completed. Unavoidable questions remain, however, like why should Guyana be paying ExxonMobil’s income tax to GRA out of Guyana’s share of the profits whilst also paying ExxonMobil’s insurance premiums and the interest on loans that company took on to finance its operations? The short explanation of the unique tax deal is that ExxonMobil is making a nonsense of the purpose of any double taxation treaty. A Guyana tax waiver means that the company would still be liable to pay US taxes – so to avoid this inevitability ExxonMobil gets GRA to certify for presentation to IRS the fiction that ExxonMobil did not simply benefit from a waiver but effectively paid Guyana taxes due.
The absence of ring-fencing is also questionable as being unfair both to Guyana and indeed all ExxonMobil’s competitors. Whereas Tullow Oil will lose the money it invested in unsuccessful drilling activities, ExxonMobil and associates simply carry such costs over to successful drillings and bills Guyana as legitimately claimed ‘cost recovery’. The Guyanese people thus pay those costs, extending the cost recovery period during which Guyana’s takeaway is just 14½% including royalty! ExxonMobil runs a virtually ‘no-risk’ operation in Guyana. Small wonder that production costs in Guyana are its lowest worldwide! By continuing to pass on to the Guyanese people costs that should fairly be borne by the company, and by also continuing to burden the Guyanese citizen with paying its due taxes out of Guyana’s legitimately earned oil profits, ExxonMobil would continue to sow seeds of destabilization in the fertile soil that is Guyana – a state of affairs that is inimical to a long-term partnership between oil company and government.
Yes, a deal is a deal. The sanctity of contracts is a fundamental principle for business efficacy. Nobody but an enemy, however, would want ongoing instability and an entire nation harbouring feelings of ill will against a company that in fact brings so much that is of benefit, and indeed pivotal, to the transformational development of our resource-rich country. There is good practical justification for ExxonMobil to now consider, in the utmost good faith, making some negotiated fair-play adjustments to what astonishingly was confirmed on 27 June 2016.
Yours truly
Ronald Bostwick
