RECENTLY, critics of Guyana’s expanding energy sector and the country’s rapid rise as a major oil producer have continued to stir the conversation surrounding royalties. The claims have sometimes conflated Guyana’s oil contract, its debt, and the royalties it is entitled to.

Back in early February, Guyana’s national budget of G$552.6 billion was approved and passed, making it the largest in the country’s history. Even more important is that, for the first time, it included G$126.7 billion from the Natural Resources Fund (NRF), which represents Guyana’s share of profits and royalties from oil production.

The government, despite some of the challenges that come with a rapidly expanding sector and economy, has worked to take the proper steps and assurances to maximise the gains from production for Guyanese.
Guyana’s Stabroek Block Production Sharing Agreement (PSA) shouldn’t be misrepresented, especially the claims about royalties—which some commentators have claimed could be recovered by companies as a cost of production.

At the Trinidad and Tobago Energy Conference in May, and again last week, Vice President Bharrat Jagdeo made it clear that, “if it is royalty, it cannot be recoverable.” Royalties are not recoverable under Guyana’s PSA and companies have made no attempt to recover any royalties as costs.

Under the terms of the PSA, Guyana is entitled to two per cent of all pre-cost revenues as a royalty and 50 per cent of all profits with a cost recovery ceiling of 75 per cent, which is roughly average when compared to agreements with other frontier oil and gas countries. The average government take will generally be around 60 per cent of profits or 14.5 per cent of overall revenues, when both the pre-cost royalty and the post-cost profit sharing are accounted for.

What critics sometimes omit is that Guyana isn’t taking on any financial risk in developing its oil and gas, but still stands to benefit handsomely. Guyana has not invested any of its own capital into the discovery and exploration phase and has avoided the fate of many countries which have gone into debt for exploration efforts that ultimately found nothing.

There is a substantial upside to a contract structure that has oil companies take the significant risk associated with oil exploration. Companies have to walk away empty-handed if no oil is found, despite billions in investments. Were this not the case via the PSA, average Guyanese would foot the bill through higher taxes, higher government borrowing, and less money for critical needs. Since companies make investments valuing billions of dollars in developing production, they are allowed to make back these costs through the cost recovery process, in the same way that investors in any business have to account for initial capital costs before calculating profits.

Despite erroneous claims to the contrary, cost recovery is a normal process and Guyana does not “owe” the companies anything.
Understanding the various types of contract structures and where Guyana’s deal falls on that spectrum is also key to understanding the debate over royalties. Deals that have high royalties do not normally split profits, while countries that tax operations heavily receive lower royalties or no profit sharing. Across the industry, countries that have long histories of production generally receive higher shares since the risk to companies is lower. In the United States, for example, companies pay a royalty of 12.5 per cent to 18.5 per cent and pay some income taxes. But they do not give the government any share of profits from oil found.

Beyond royalties and revenues is the long-term future of Guyana’s burgeoning energy industry. Decades from now, projects will require decommissioning. It is a common best practice to set aside earnings in the early years to save for these eventual costs of capping wells and removing equipment. Many countries require companies to set aside these funds as part of their costs. This is happening in Guyana as well. Some voices have misunderstood this process and claimed that this is a way to take away earnings from Guyana. But decommissioning costs are the same as any other costs that companies incur during production, and the royalties and profit cheques the government receives already account for all costs.

As Guyana’s oil and gas sector continues to expand and the government receives greater revenues, it is critical that the public conversation reflects the complex details of the contract accurately. It is incumbent on journalists and outlets to carefully evaluate claims to ensure that citizens are getting quality information rather than ‘fearmongering’.