Introduction
In today’s column, the focus of this intended re-visit of my previous evaluations of the Guyana Government Take and Reported Hydrocarbon Reserves shifts its attention to my reporting of published measures of the Take ratio for Guyana. That is, in a nutshell, to report on publicly available modeled projections of the likely Government of Guyana, GoG, take ratio, or percentage share of net petroleum revenues going to Government, based on the ruling Stabroek Production Sharing Agreement, PSA.
As will be observed, I report on projections that are all based on modelling exercises. I shall note for readers’ benefit that two of these exercises I have previously evaluated in considerable detail during this ongoing series of Sunday columns devoted to Guyana’s emerging oil and gas sector.
Clearly, the validation or otherwise of these Take projections, including my synthesizing of those on offer, and for that matter, any rivalling noise and nonsense offerings will all be determined by the actual data outcomes, going forward. Given this reality engaging in speculative evaluation of the accuracy of Take ratios is not truly worthwhile.
Recap
Last week I reminded readers that, so far, I have addressed three areas of PSAs. These are: 1] the intellectual origins of Production Sharing Agreements, PSAs, as a social and legal construct that governs the legal relation between the social groups of natural resource Owners and Contractors for the latter’s “utilization of the resource for benefit”; 2] the generic critiques attached to the real time operation of PSAs; and 3] the dynamic and disruptive features of PSAs as an innovative social construct. Thus far, in attending to this task, I have also largely drawn on analysis I had undertaken during the years 2017/ 2018 before the Stabroek PSA was released publicly!
In the items listed above it is evident that I have devoted no time in this particular revisit to the adaptation of PSAs to the limitations of PSAs as these arose in the course of time. For the sake of brevity, I shall skip this topic now, as the adaptations have been numerous.
Examples of these adaptations include: ringfencing, de-commissioning of wells, and the Indonesian gross profit split. And they also include two generic theses; namely: 1] the theorem of PSAs as incomplete contracts; and 2] the complementary necessity of establishing a National Oil Company, in order to enable an enhanced State share of benefits.
I have discussed these issues at some considerable length during 2018. And, in an effort to save time here and now I’II encourage readers to visit my columns on the topic, starting with my Sunday column of December 31, 2018 entitled, “How production sharing agreements have had to adapt.”
In the next section, I introduce my reporting on projections of Guyana Government Take ratios.
Guyana Government Take
I have long urged the view that, upfront, the Guyana Government Take ratio from the country’s petroleum earnings, will severely constrain the likely size of public spending despite other revenue sources. Further. Government priorities for all its spending is constrained by macroeconomic challenges, which will invariably emerge as the petroleum sector expands. While Guyana’s PSA’s fiscal rules are not discussed in detail here, clearly the tricky consideration is recovery cost, as claimed by the operating International Oil Companies, IOCs. Such costs depend on the maximum set in the PSA (75 per cent), and the variable life-cycle of petroleum fields. Government Take therefore represents Government’s share of each project’s net cash flow.
As I have noted repeatedly, on a global scale PSAs have always proven to be “risky”. Why? Simply put PSAs cannot guarantee outcomes, because of several known and unknown unknowns, embedded in the petroleum industry. The division of earnings between the Host country and Contractor, as stated in the PSA, is therefore dynamic, changing/evolving over time. Guyana’s present PSA, like all others, is likely to be amended/changed/re-negotiated through time, albeit at an unknown cost. PSAs, however, strive to attain multiple objectives, and not exclusively revenue-sharing. Thus, Guyana’s addresses concern like: protecting the nation’s wealth against adverse environmental effects; promoting efficiency; and, establishing “local content” requirements, LCRs.
In summary, Guyana’s PSA rules, include crucially: 1) a one-time signature bonus, of US$18 million; 2) a 2% royalty; 3) cost- recovery provisions and related production sharing regulations; 4) income tax provisions, based on ‘Government payment on behalf of the IOC; 5) miscellaneous taxes and revenue imposts; 6) rental charges and fees; 7) profit-sharing; and 8) domestic market obligations (DMOs). As I reveal next week, there are five published calculations of expected Guyana Government Take.
Conclusion
Under all operating PSAs, persistent pressures will mount for Governments to increase their Take, or share of net revenue flows from operating oil fields. Guyana will be no exception to this trend, particularly as the nation introduces and/or strengthens its petroleum sector capabilities and the petroleum industry is progressively consolidated.
Given my previous official positions in the previous Government, I repeat my earlier disclaimer: At the outset, I take great pains to observe once again that, in no capacity have I ever been privy to official estimates of Guyana’s expected net cash flow share, calculated by either of the Parties to the current Stabroek Block PSA. That is, the Contractor or Government of Guyana, GoG.
Next week I focus on the published modeled projections of Guyana Government Take
