Introduction
While as indicated last week, over the years Production Sharing Agreements, PSAs, have given rise to well documented generic critiques of their processes, as hinted towards the end of that column, they have also proved to be from the very outset dynamic and even disruptive, as a novel social construct, to the then ruling order of transnational crude oil exploration, development, production, and marketing legal contracts.
Today’s column recognizes this, and therefore, starts with some further deliberation of this key feature of PSAs as a class of contracts.
PSAs as Disruptive
As I had earlier advised five years ago, back in 2017, readers should keep to the forefront that, initially, the introduction of PSAs was widely viewed as provocative and deliberately challenging to the prevailing contractual forms that promoted the dominant position of foreign ownership, control and domination of oil and gas resources in developing countries. In the 1960s and 1970s, PSAs were seen as disruptive of the established traditional transnational oil majors. To be truthful, they were strongly opposed, if not dead-set against the surrender of their legal ownership to the sub-surface rights of a country’s oil and gas reserves, which PSAs conceded.
Indeed, one may argue that, the wave of nationalizations of oil wealth, as well as the growing anti-colonial and anti-imperialist sentiment of the time were coalescing to make concessionary contracts more or less obsolete. As a concrete manifestation of this confluence of circumstances, the much discussed Organization of Petroleum Exporting Countries (OPEC) was created in 1960.
Indeed, the balance of global sentiment had tilted in favor of PSAs by the 1960s. PSAs were viewed as “new, radical and innovative” contracts for deployment wherever oil and gas exploration and production was taking place in poor countries. This was supported also in the rise of the so-called “oil independents”. These “independents” were large oil and gas companies, which were willing to challenge the dominance of the established transnational oil and gas majors. “Independents” accepted the PSAs, because they were convinced they still offered enough scope for profit-making, despite their radical shift towards full acceptance of the State’s sovereign rights over their petroleum reserves. As we would have observed from the descriptions of PSAs above, there is indeed such great scope.
Strategic Road Map: Petroleum Revenues
I had advanced the view in my volume of columns dedicated to formulating a Road Map for Guyana’s Development of its Hydrocarbon Resources 2019/2020 that the Guyana Government take or its petroleum revenues are functionally dependent on seven principal variables. These were listed then as follows: 1) the fiscal rules in the ruling Stabroek Production Sharing Agreement, PSA; 2) Guyana’s geological features, petroleum finds, and estimated reserves (quantity and quality); 3) the projected daily rate of production (DROP); 4) petroleum prices; 5) existential risks linked to commercializing production; 6) the Contractor’s capabilities; and 7) established cost-price relations during the production process. These seven features are briefly commented on below, and are returned to at the start of next week’s column.
It is not my intention to re-visit or indeed re-litigate the legal features of the ruling Stabroek PSA. I have offered my insights, such as they are, to a quite widely debated topic and recommend the Inter- American Development Bank, IADB’s analysis of the topic, which I have review-ed in several earlier columns. My main purpose on this occasion is to endorse the postulate that the fiscal rules of the ruling PSA indicate the sources of Government revenue yield, the permitted exemptions, and therefore the potential revenue yield.
Second, the finds or projected resources discovered indicate the quantity, quality and trend in petroleum reserves available for commercial production, sale or other exploitation.
Third, taken together these considerations allow for an estimation of the likely Daily Rate of Production, DROP, in real time.
Fourth, there are typically severe risks confronting all petroleum projects. Some of these I have termed over the years as clearly existential in actuality. By this I mean that these risks determine whether a petroleum project is started or becomes, what energy economists label as “stranded assets”.
Fifth, the actual dollar value of the DROP is principally a function of the prevailing market price for the type [quantity and quality] of petroleum products Guyana is expected to produce; mainly light/ medium sweet crude oil and gas.
Sixth, under the ruling PSA, Guyana (Host country) is the owner of the petroleum resources. The Contractor (Exxon and its partners (CNOOC Nexen and Hess)). The Contractor is the international oil company, IOC, directly responsible, at this stage for production and sale of expected petroleum products. The Contractor’s efficiency and capabilities are therefore central to actual outcomes, as Guyana does not possess the capital, know-how, or skills to produce and export petroleum on the required scale.
The above indicates six of the guideposts for “getting” Guyana’s petroleum revenues. The seventh (and final) guidepost is the expected profitability of Guyana’s petroleum project. This in large measure is expressed as a function of the cost-price relation for Guyana’s petroleum output.
Conclusion
Next week’s column concludes the discussion of the fiscal rules of the ruling Stabroek PSA. After that, I move on to introduce the projected Guyana Government Take ratios provided by a number of modeled estimates starting about three years after the country’s First Oil.
