As it announced that the auctioning of some 14 offshore blocks will not take place until next year, government yesterday disclosed that the new model oil and gas Production Sharing Agreement (PSA) will see big changes such as the upping of royalty from 2% to 10%, corporation tax of 10% and a limiting of the amount of blocks for companies.
“We have decided to auction 14 blocks, and these 14 blocks will range from about 1,000 square kilometres to about 3,000 square kilometres for each block, with the majority of them being closer to 2,000 square kilometers. Eleven of these will be in the shallow area and three in the Ultra-Deep, Area ‘C’ area,” Vice President Bharrat Jagdeo yesterday told reporters at a press conference he held shortly after Cabinet was updated on issue.
“The new fiscal regime …will now govern not only the award and the contracts that we will sign with the bidders who are successful, but [it] will govern all of the subsequent PSAs that we will sign for any other exploration that will take place in the other areas. The 50/50 profit sharing will be retained. That is the fifty percent [each], yes. The royalty rate will go to 10%. There shall be a corporate tax of 10%. The maximum for any given year going to cost oil will be 65%. These are the key fiscal conditions,” he added.
The 2016 PSA based on a model from the PPP/C’s Ramotar administration has been trenchantly condemned for six years over the paltry 2% royalty, the 75% cost recovery ceiling and an arrangement that sees the government paying corporation tax for ExxonMobil and its partners.
There are no restrictions on tendering by current block holders.
Of significance, Jagdeo explained, was that signing bonuses would now see a minimum US$10m for blocks in the shallow areas and a minimum US$20m for deep water blocks.
“We decided we needed to get the bid more competitive. We will allow local and foreigners and international companies to bid. There will be minimum technical qualifications and minimum financial qualifications for the bids. They have to meet these. We don’t want them [requirements] to be too onerous, but people have to meet some minimum qualifications. The qualifications will be more stringent for the ultra-deep area because only few companies can work there. The minimum requirements there will be much greater than the shallow,” he said.
Under the Ramotar administration, companies without qualifications were allowed to bid for and win blocks.
“We’re putting in a minimum signature bonus of $20 million per block in in the ultra-deep area and it will be $10 million in the shallow area…if you win a bid, you’d have to pay that money over as a signing bonus. So we are not restricting how many blocks you can bid for but we’ve decided to limit the award to three to any company. So there is a maximum of three. While you can tender for all the blocks, you wouldn’t have to do so and list your preferences so we get a more competitive pay for all the blocks, but the award to a company will not be more than three blocks maximum,” Jagdeo explained.
Each bidder will be required to put up a work programme because the criteria for assessing the bids will be weighted between the price and the work programme, he also pointed out.
What we wanted
And even as it still believes that the current PSA with ExxonMobil is lopsided in the US oil major’s favour coupled with the fact that it holds true to sanctity of contracts, the new terms, according to Jagdeo, reflect what government hoped should have been put to ExxonMobil by the former government.
The highly controversial PSA between Guyana and the Stabroek Block co-venturers states that up to 75% of the revenue earned from production could be used for expenses and to recover the companies’ investment (to date over more than US$9 billion), while the remaining 25% – profit oil – is to be split evenly between them and Guyana. Royalty stands at 2% of the production.
The quantity of blocks assigned and relinquishment provisions have also been contentious issues as the Stabroek Block is made of some 6.6 million acres.
“Given what we wanted at the beginning; a greater share of the revenue for the government and the people of Guyana; we believe we will succeed and with this new fiscal formula, [gain] significantly a greater share of the proceeds. We wanted that. That was one of our objectives,” the vice-president said.
The other objective, Jagdeo related, was to swiftly attract major oil companies here to maximize on time, as global green demands will continue to make it difficult for fossil fuel producers.
“We know already that the funds are scarce, largely because of net zero (carbon) targets. It’s harder to raise money now for the oil and gas sector. We’ve had cases where loans are vetoed. So it’s becoming more and more difficult to finance oil in the oil and gas sector. We have seen globally from these international oil companies, 70% to 80%, historically, of their total CAPEX, go to upstream activities. And by 2025 this figure will drop to just over 60%. So they themselves are putting less. Reflecting risk, they’re putting less money into exploration. Many of them they’re selling off assets globally,” he said.
“A second objective was still remain globally competitive and to accelerate the exploration in the context of net zero. So we looked at the spectrum of countries and total government take, starting with those that have very small takes and those that have massive major ones. We opted for a simple formula with fixed royalties, fixed royalties, some countries have variable royalty depending on the internal rate of return on the project etc. So we did not go down a complex system because it’s hard to monitor those. The fixed royalty also protects you against the downside when oil prices drop. So you’ll get this if you if you have a variable royalty, and when oil prices drop, you lose,” he added.
Pulse
The Vice President, whose responsibility includes the oil and gas sector, informed that government hired international experts IHS Markit to help it craft the fiscal terms for the new PSA and they have assured that the proposals are globally competitive. “IHS market is a global consultant and they have (the pulse of) the industry,” he assured as he pointed out that currently some 65 countries across the globe either are in or currently preparing to go to auctions.
“IHS market that worked with us, they did most of the simulations. Internally we did them, and then they verified and dated simulations as to what the total take will be. They [IHS Markit] assured us at these levels, although they may seem high to some people – the 10% royalty, the 10% corporate tax… we remain very competitive.”
IHS Markit is the United Kingdom-headquartered data and information services provider and financial services firm that conducted the ExxonMobil US$460 million pre-contract audit back in 2019. Although it has been completed, government is yet to release its findings, with President Irfaan Ali promising this newspaper two months ago to look into its status.
Meanwhile, government is also sending a warning to companies that there will be strict relinquishment provisions as the new PSA will entail clauses which stipulate companies on the time they will have to work the blocks and the investment sums it intends to use.
“We are going to tighten up relinquishment provisions. In the deep, because of the complexity, you would have 10 years. That first initial three years, for both shallow and deep is for the seismic. And at that time when you move on to Phase 2, after the first three years, you will have to relinquish 50% of the block. So you have three years to do all your seismic and then relinquish 50% of the block, both for shallow and deep. Then we’ll give two extensions, one year each extensions…” he added while noting the additional five years will be to move on with their work programme.
“We are doing this because we want a greater turnover. We don’t want people sitting on the blocks. And if this comes back to government, it can go to subsequent auctions… we don’t want them sitting on it for three years, and then at the end of the three years, you hear ‘we can’t do anything, we moved forward, we need to relinquish it ’, and the country would have lost three years from potential development,” he added.
On the availability of remaining blocks, Guyana Geology and Mines Commission (GGMC) Commissioner, Newell Dennison, had in 2018, told this newspaper that from rough determinations, approximately 9,500 square kilometres are available within the coastal environment, 24,000 square kilometres within the environment of the continental shelf, 10,000 square kilometres within the deep water environment, and 9,000 square kilometres within the ultra-deep water environment.
