Dear Editor,
Apart from several easily fixed grammatical errors across the entirety of the initial draft submitted for public comment, the “Draft Model Production Sharing Agreement for Shallow Water” is a good first version and the team should be applauded for their efforts. As for the areas of opportunity for improvement, there are some key items that would benefit from additional reviews and updates. For example the following should be relooked at:
• The majority vote should be used on page 5 instead of the 50%
• The overhead charge should be used for each specific project to allow for ringfencing
• In 4.6 the minimum technical and financial capacity should be defined alongside the safety and financial record of the Contractor. Reviewing, and jointly developing with the US their ongoing work on the “fitness to operate standards” would be beneficial to the Sector
• In 7.1 the natural gas field production period is an outlier at the high end of the range with a 30 year window being given. The period allotted is usually 15 years to 25 years
• In 16.5 the expectations for waste management need to be explicit in the development plan. Waste discharge information is required, but the gap on waste management currently exists
• In 20 there should be a stipulation for the use of flare and vent meters with an associated accuracy requirement
• In 21.3 & 21.4 gas leaks should also be added, and the risk management plan should comprise of a risk reduction and risk mitigation plan
• In 21.5 a containment plan should also be outlined
• In 25.5 it should state unrecovered cost after depreciation
• In 27.4 f) the mention of a predictive, preventive and corrective maintenance program needs to be included
• In 27.4 k) a major safety audit needs to occur annually and not every 4 years. (Reference: Bureau of Safety and Environmental Enforcement, US department of Interior). The annual audit needs to also be supported by daily/weekly, monthly and quarterly safety inspections. Fines for breaches in safety protocol also need to be outlined
• In 29.5 inclusion of a lease surety bond that also covers decommission costs, and protects against Contractors filing bankruptcy that can result in wells being “orphaned” would add more structure to the Sector. Article 29.5 touches on this, but there is an opportunity for a sector specific instrument
• The improved royalty rate of 10% is a great step forward, but it should be noted that rates are higher for shallow offshore wells, and the US has recently adjusted their rates up to 12.5% and 18.75% based on depth. (Reference: report of the US Department of Interior, November 2021)
• In 30.3 there is an opportunity to structure the insurance requirements as 1) Offshore physical damage coverage; 2) Operator’s extra expense (control of wells); 3) Excess liability insurance coverage; 4) Business interruption; 5)Workers compensation / Employer’s liability. Our location doesn’t have the natural disasters of the Gulf of Mexico, which should result in lower premiums for Contractors. There should at least be the mention of $10 Billion in coverage. This was mentioned over 12 years ago (Reference: Liability and Financial Responsibility Issues Related to Offshore Oil Production, Testimony of Rawle O. King before the Senate Committee on Energy and Natural Resources). Article 30.3 is too vague and should clearly outline the minimum insurance required based on production volume, vessel type, and with worst case oil spill discharge considerations contemplated. No fines nor penalties are outlined in this section. This should be clearly outlined.
• In 34 the amount charged could be higher. Based on the proposed use of the funds this will train less than 40 individuals annually if Exxon’s training cost per employee is used as the benchmark
• In 35 the signing bonus should be established, and using a percentage of the contract awarded should be considered
• In 36.5 there is no tax on exports. A low and competitive tax rate should be implemented. This is money being left on the table.
• In 37.1/4/6 We have an opportunity to include the futures market for oil as a percent of the crude oil basket to hedge against negative market forces. This was a gap during the startup of the Sector that we should avoid going forward. The setting of natural gas prices would also benefit from this approach
• Other taxes have been added back in, which is a positive adjustment to the PSA!
• In 39.1 import duties are at 0 and we should consider a low and competitive rate on this as well. Another area where money is being left on the table
• In 41.3 the proposed abandonment plan should be submitted with the development plan and updated annually to reflect changes in technology, the project and the decommissioning cost. However, the notice for the abandonment can be given 2 years prior. It is implied in the later part of the PSA, but also needs to be clear in this section. (Reference: Section 32a Guidelines on decommissioning plans for offshore facilities of installations, Center for Energy Resources, 7 August 2018)
• In 42.9 the audit process should be able to run simultaneously with the internal expense approval process of the Contractor, and be audited by a good standing international accounting firm similar to the one currently doing the audit of Exxon’s financial statements
• In 45.6 there is no mention of fines nor penalties for environmental damage. This should be clearly outlined (Reference: USEPA Oil Pollution Act)
• In 47.9 Arbitration has been assigned to the ICSID. There is an opportunity to consider the use of LCIA, which was established in 1892 and is based in London. The comparison of the arbitration rules should be undertaken by the Chambers of the Attorney General to ensure that the substantive laws of the Cooperative Republic of Guyana will be upheld and applied during the Arbitration process. For example, the ICSID expedited process reduces the number of arbitrators from 3 to 1, placing it in conflict with the requirement for 3 arbitrators as outlined in the Article. (Reference: Shuffling the Pack – New rules for ICSID investment treaty arbitration by Clyde & Co. 27 June 2022)
As mentioned, overall it is a great start towards an improved model for Production Sharing Agreement. There is quite a bit of reference to the use of international best practices. The team should initiate the use of these best practices as they add more substance to the articles within the draft.
Sincerely,
Jamil Changlee
Chairman
The Cooperative Republicans of Guyana
