Dear Editor,
Permit me to comment on a letter by Dr. C. Kenrick Hunte in today’s (October 22, 2024) edition of your newspaper. With respect to petroleum activities in Guyana’s Stabroek Block, Dr. Hunte claims that Article 11.2 of the production sharing agreement (PSA) “has the condition that the total cost of oil production is equal to 75 percent of total revenue”. He then uses this “condition” as the basis for his argument that the average total cost of a barrel of oil produced is 75% of the price of a barrel of oil. Hunte then throws in “Guyana’s average breakeven price” of US$36 per barrel of Brent crude, as reported recently by the online publication Oil Now, to calculate the “hidden profit that is captured by the company as cost oil” whenever 75% of the price of oil is greater than the breakeven price of US$36.
He illustrates this for the Liza 1 project using a price of US$70 per barrel to show that average total cost is, therefore, equal to US$52.50 (75% of US$70) per barrel, leaving just US$17.50 in profit per barrel as opposed to US$34 (US$70 minus the reported average total cost of US$36). Dr. Hunte then argues that, of the 452 million barrels of oil estimated to be produced from the Liza 1 project, the breakeven amount under this “PSA method” (average total cost = 75% of price) is almost twice as high as it would be under the “traditional method” (average total cost = reported US$36). What he has effectively done amounts to comparing a ring-fenced project to the same project with no ring-fencing but without accounting for the lack of ring-fencing.
Please allow me to explain. Article 11.2 of the PSA allows all recoverable contract costs incurred by the contractor to be recovered from the value of a volume of petroleum, produced and sold from the contract area, that is limited, in any month, to 75% of the total production excluding whatever is used for operations or is lost. Article 11.2 also defines this amount as “cost oil”. Recoverable contract costs are specified in Annex C of the PSA and include exploration, development and production costs. This means that having spent money exploring for oil and, having then discovered oil and invested further sums in developing that oil field for production, the contractor, once production begins, is allowed to recover amounts invested prior to production along with costs associated with production.
However, these sums, in total, cannot exceed 75% of the value of production in any one month. This is applied to the entire Stabroek Block without ringfencing of individual discoveries. The contactor is, therefore, able to fund new exploration and development from current production as long as the total recovery or cost oil does not exceed 75% of the value of production in any month. Many persons have taken issue with this aspect of the PSA, however, this letter is not intended to address the advantages or disadvantages of ringfencing. My intention is simply to highlight the flawed premise that underpins Dr. Hunte’s argument, i.e. average total cost per barrel is equal to 75% of the price per barrel. This is untrue for a ring-fenced project since, once the exploration and development costs for that project have been recovered, the 75% cost recovery limit only applies if the price of oil per barrel is less than 33% higher than the cost of producing one barrel, a possible but unlikely scenario.
It is also untrue for a project without ring-fencing, such as Liza 1, since the mere fact that the project is not ring-fenced cannot change the average total cost of that project over its lifetime. In this case, after exploration and development costs for Liza 1 are recovered, the pre-production costs of upcoming projects can be funded from the sale of Liza 1’s oil, up to a limit of 75% of production per month. These pre-production costs for additional projects are not acknowledged in Dr. Hunte’s analysis. Instead, they are combined into Liza 1’s total cost, thereby inflating the average total cost of Liza 1 and allowing him to treat these sums as losses or hidden profits to oil companies when compared with the US$36 reported breakeven cost.
In short, the 75% cost recovery limit refers to recoverable costs incurred by the contractor across the entire block and is applied to the value of all production in the block. It cannot, therefore, be used as a basis for calculating total cost and, by extension, average total cost for any single project as attempted by Dr. Hunte.
Sincerely
Dominic Gaskin
