With only two of the six awarded bidders for oil blocks here meeting industry standards, the government said the criteria were relaxed for the auction awards process but promised a thorough due diligence process during the negotiations round.
“I don’t think they assessed the individuals. They assessed the proposals made. So that is how the due diligence was done; on the proposals. So, the consultants did that and then our evaluation team looked at the consultants’ reports,” Vice President Bharrat Jagdeo said on Wednesday.
“When we get to the contracting stage… this is where [it will be more vigilant], because this is where you have to talk about concluding deals, to deliver on what you put in a proposal, because your proposal was assessed. So, when you come to that stage, that is where you have to be more vigilant and vigilance has to be exercised,” he added.
Jagdeo said that of the six awards, only the two large oil majors had met industry standards and implementing that across the board would have put local companies at a disadvantage. He explained it was why the government took the decision to implement large financial penalties in an effort to eliminate less reputable individuals and companies.
“With the exception of the two major ones, which is the one that involves Total and Qatar and the ExxonMobil, every other assessment, for all the other blocks, identified weaknesses in the submissions. If you look at all the weaknesses you would not have awarded anything else,” he contended.
“Where does that leave us? With these blocks unallocated,” he added, as he explained the rationale in implanting the huge upfront monetary payments that are tied to the contracts.
“We made it clear that given the upfront fee, the risk then gets transferred to the bidding company,” he said.
“Many of them have not had any major track record in working in not just shallow waters… They did not have track records but I answered why we moved away from prior experience… that would have excluded all the locals and we inserted instead a big financial penalty and a big upfront fee.”
All six companies that had submitted bids for eight of the 14 offshore oil blocks that were up for auction in September have won an area and will now move to stage one of negotiating terms with the government.
“Remember, they would have to come and verify their plan, show sources of financing, show the ability to pay the signature bonus and all of that. They will be engaged next week,” Jagdeo informed.
He explained that if one of the larger companies agrees to the draft Production Sharing Agreement, the government will be ready to collect the money and deposit it, but if another company wants time to finalise their plans, they will be given that scope. “We want to do a good job. Time is not the issue here; it is doing a good job. Ensuring the due diligence is done, getting a proper contract signed. We are not running a sprint here, so if it takes one month in some cases and three in another, providing a good job is done.
“In the discussions we will know if people are serious. If a company said we need two years, we can’t have that. So let’s have the discussions first with the companies and… then get a decision on the maximum time,” he added.
Jagdeo said that during the discussions, the government’s expert consultant will be present. “It will not be a Trotman affair,” he said, referring to APNU+AFC Minister of Natural Resources Raphael Trotman who was the signatory to the controversial 2016 PSA with ExxonMobil and partners in the Stabroek Block.
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.
“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… The maximum for any given year going to cost oil will be 65%. These are the key fiscal conditions,” he had explained.
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.
Significance
Of significance, Jagdeo explained, was that signing bonuses would now see a minimum US$10 million for blocks in the shallow areas and a minimum US$20 million for deep water blocks.
“We decided we needed to get the bid more competitive. We will allow local and foreign 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.
“… 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.”
Each bidder was required to put up a work programme because the criteria for assessing the bids were weighted between the price and the work programme, he had also pointed out.
Another reason in setting the current terms, Jagdeo had explained, was to swiftly attract major oil companies here to maximise 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 had posited.
“A second objective was still to 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, … 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 have a variable royalty, and when oil prices drop, you lose.”
The Vice President, whose responsibility includes the oil and gas sector, informed that the government hired international experts IHS Markit to help craft the fiscal terms for the new PSA and they have been assured that the proposals are globally competitive. “IHS Markit is a global consultant and they have [the pulse of] the industry,” he had said as he pointed out that currently some 65 countries across the globe either are in or preparing to go to auctions.
