AS the ExxonMobil-led offshore consortium edges closer to first oil, Guyana’s private and public sectors are positioning themselves to capture the economic benefits created by the industry. The most significant of these will be the revenues the government takes from its production sharing agreement (PSA) with the consortium.
The process of turning crude oil into revenue is not a simple one. The oil that is produced must be split amongst the parties according to a form of contractual agreement and then marketed and sold on the global market. This process can occur in several ways and is often determined by the type of contract that a country enters with an oil industry operator. Potential arrangements include, but are not limited to, production sharing agreements (PSAs), national oil company (NOC) concessions, joint ventures, or in-kind royalty and tax payments.
Each of these arrangements changes how a government receives its share of production or revenue. Often, governments will set up designated regulators or authorities to oversee oil and gas activities and handle this process. Governments typically receive their share “in-kind” (meaning they receive the crude oil itself) and the government markets its own crude oil, or “in cash” if the sale of the government’s share of the crude oil has been conducted by another party.
As many will know, Guyana entered into a PSA with the offshore consortium operating the Stabroek Block. In a PSA, the government awards licences to operators, who then explore the block, develop economically viable projects, and bear the financial and operational risks of those activities. The operator retains a share of oil production to cover its costs (“cost oil”) and then the remaining profits (“profit oil”) is split between the consortium led by the operator and the government, depending on the contract terms.
Our agreement creates a flat 50/50 split of profit oil between Guyana and the consortium, plus an additional government royalty rate of 2 per cent of gross sales. The royalty will be paid to the government in cash.
The government elected to receive Guyana’s 50 per cent share of the profit oil in-kind, meaning that the government will be responsible for the actual sale of the oil. This can be a complex process, as it entails determining the right price, marketing, identifying buyers on a recurring basis, finalising sales conditions and then executing the logistical operations to support the sale, which can also be complicated by the higher and higher volume of resources the country will be marketing as more oil developments in the Stabroek and surrounding blocks begin producing.
The Department of Energy will likely be responsible for this process. These operations require significant staffing and preparation, a major step for a new oil producing country. Recent announcements by the Department of Energy indicate that preparations for marketing and selling Guyana’s profit oil are already underway and will be supported by capacity-building loans such as the recent $20 million loan from the World Bank.
Under the terms of the PSA, Guyana has the option to request that the consortium make “reasonable efforts to market abroad on competitive terms” for all or some of the government’s oil. This simply means that Guyana can transition from receiving in-kind payments to instead receiving cash payments by giving the operator six months’ notice in order to do so.
It is good that Guyana’s contract includes this flexibility. If Guyana at any point no longer wants to market its own share of the oil, it can simply ask the operator, Exxon, to handle this activity. Either way, once oil starts to flow, Guyana will be in a strong cash position and able to spend its revenue to build critical infrastructure such as schools, hospitals and roads, and broaden its economic development outside of the energy industry such as the manufacturing, technology and finance sectors.