Dear Editor,
I wish to offer some of my thoughts on the fiscal criteria being considered for the upcoming auction of oil blocks in offshore Guyana.
1: I like the 10% corporate tax on profits. I am relieved that a transparent corporate tax regimen will be used from here on; and that the operators will be actually paying their taxes. I have previously written that whoever is signing the attestation of tax payment on the Stabroek block might ask for a letter ruling from the United States IRS validating the procedure.
2: A tax rate of 10% of profit is generous, but it is reasonable in view of the other aspects of the fiscal criteria. However, the government should reasonably expect that other businesses operating in Guyana will be asking for the same rate.
3: A total take of at least 27.5% of sales even while the capital expenditure is being recovered is aggressive. I expect that potential bidders will undertake much negotiation regarding some sort of sliding scale to accommodate fluctuating oil and gas prices, in order to protect their investments if oil prices drop below breakeven. There are several models available to achieve that objective while keeping the 27.5% take more or less intact. A take of 27.5% is easy on both parties when the price is high. By my rough calculation, at a government take of 27.5%, if there is a sustained oil price below $50 per barrel it will strain the finances of any operator. By way of contrast it would take a sustained oil price of below $40 per barrel to strain the operators of the Stabroek Block.
4: A total take of 27.5% of sales, right from the start, before the operators recover their capital expenses is unusual and extraordinary. It might limit the number of interested bidders, especially if the price of oil drops towards the $50 dollar per barrel mark in the next six months. This can be mitigated by the prospective bidder having an ironclad long term contract with a qualified buyer who agrees to buy the production at a price above breakeven, even if the going price drops below the operator’s breakeven cost. This is done often.
5: The US government gets around 16% royalty on Gulf of Mexico deep water auctions. It gets handsome signing bonuses but no part of the profit. Norway gets around 18% to 20% of sales of its North Sea oil and gas. See the Library of Congress website for royalty rates for different countries. The website of the Bureau of Ocean Energy Management has details of the Gulf of Mexico oil auctions, in size and location of blocks and what was paid in signing bonus and by which company.
6: It looks like a total of around 28,000 square kilometers in 14 distinct blocks will be auctioned. That is nearly 7 million acres. That’s bigger than the Stabroek Block. The latter is 6.6 million acres. One square kilometer is 247 acres.
7: The signing bonus is usually the most important and defining criterion for winning an oil auction. A starting bid of $20 million for the deep water blocks and $10 million for the shallow water blocks is on the low side but since it just a minimum figure, just to start the bidding, it’s okay.
8: The absence of ring fencing in these fourteen blocks in this round is generous to the bidders and can be justified because these blocks singly, are smaller than the Stabroek Block. But they are not really that small. Even the 1000 square kilometer blocks are a quarter million acres apiece. Contrast that with the Gulf of Mexico blocks. If a bidder wins contiguous blocks, then ring fencing should be invoked or Guyana would be dealing with the same issue and it’s negativity all over again.
9: It’s good that all potential bidders have access to all seismic data currently available on the blocks to be auctioned. Hopefully, the exploration staff will be able to identify many good prospects.
10: IHS Markit, the consultancy group that has reportedly been advising the government on this matter is well known and has a good reputation in the Oil and Gas industry and beyond. Using an established international consultancy is a good CYA strategy and it helps to refute unending negativity.
11: If and when these blocks kick into production, and more likely even before then, the Schedule dealing with the “Calculation of the Ceiling on Annual Withdrawal” from the National Resource Fund will need to be revised. If not, Guyana would be stuck at using just a small fraction of its Oil and Gas revenues while the present inhabitants suffer the devastating consequences of a hyperactive, hugely inflationary economy. If Guyana receives 8 billion US dollars in Oil and Gas revenues in one year, using the present ceiling on withdrawal, the government can only withdraw less than 1.5 billion US dollars the following year, unless it makes a claim for emergency withdrawal. That is just not fair to Guyanese living now.
12: While there are billions of barrels of recoverable oil in the Stabroek block, especially along the Berbice canyon, there is no guarantee that that there will be recoverable oil in other blocks. At least not until you find it. There is a huge difference between oil in place and recoverable oil. And, considering what is recoverable, will it be as high in quality as that of Stabroek; and cheap to extract like Stabroek? If it is not, then my calculations in paragraph 3 will need to be negatively revised.
13: Speed of action and implementation is essential. Wind and solar, tide and batteries will wait for no man, carbon capture and sequestration notwithstanding. Stabroek Block is safe. It’s up and running and running fast. It’s high quality and it is cheap. These new blocks are basically unknowns and they are starting late. If they turn out like Stabroek, they will do fine, they will catch up. There is room for Stabroek quality oil for at least another thirty years because the more environmentally friendly alternatives will not be enough for the whole world until well after then.
Sincerely,
Tulsi Dyal Singh, MD.
