Dear Editor,
There is a suggestion that “no ring-fencing is good for you (Guyana).” The argument seems to be that if fiscal obligations were consolidated across all projects at some level higher than an individual well, more resources would be available to the developer, which in turn would lead to more production and greater revenues in the future. As one person put it, “At the end of the day, it’s all about encouraging investment to maximise the return of the country.” The impression one gets is that ExxonMobil would prefer if the level of consolidation were its entire operations, both current and future. If Exxon had tax liabilities because of significant profits at one well at some point, it could end up having no tax liability if losses at other wells could be used to offset its obligations arising from its profitable well. Consolidation allows just this, and so is valued by investors. Putting aside any concern that no ring-fencing creates an opportunity for the investor to over-invest in exploration and development just because costs can be recovered from profitable wells today, there are at least three other considerations in Guyana’s case that are worth mentioning:
1. Even if consolidation across a number of current and planned projects were allowed, future projects outside of the implied time frame cannot be included or some perverse possibilities would arise. In particular, it would mean that some, if not all, of the risks and costs of all future exploration, development, and production would effectively be borne by Guyana, and none by the investor(s). Alternatively, it’s as if Guyana were making a grant to the investor for it to use to increase future production. With the right information, one might be able to work out exactly how much of the future exploration, development, and production risks and costs will be borne by Guyana in the absence of risk-fencing.
2. A dollar received sometime in the future is not the same as a dollar today. To say that all exploration, development, and production costs incurred early on will produce enhanced revenues in the distant future is one thing. To say that Guyana will be maximising its return by foregoing revenues today for enhanced revenues in the distant future not only makes Guyana the investor (as implied in No. 1 above), but it amounts to telling Guyana that it doesn’t need to discount future values at all. It amounts to telling Guyana that it can postpone development (financed from current revenues) because future development due to enhanced oil revenues will fully compensate for any lost opportunities today.
3. A zero discount rate for future values implies that there is no uncertainty in the relevant future that Guyana needs to concern itself with; or that whatever its perception of the future, Guyana (ought to) love taking risks about that future. The relevant future, as pointed out by other commentators, includes oil prices, well productivity, and even climate change events that might affect the livelihoods of Guyanese.
My point is that this ring-fencing thing warrants a much more nuanced discussion than what an oil man here or a policymaker there might conveniently choose to say on the spur of the moment.
Sincerely,
Thomas B. Singh
