By Joel Bhagwandin,
Financial Analyst
I AM elated to offer greater clarification and respond to some of the questions posed by Professor Kenrick Hunte in his letter published in Kaieteur News edition of August 10th, 2022. Readers would recall that Professor Hunte and the undersigned have recently been engaged in a public debate on the fiscal terms of the Production Sharing Agreement (PSA). To this end, I recently published a comprehensive forecast which I have conducted based on the project economics of the four approved developments to date, namely: Liza 1, Liza 2, Payara and Yellowtail.

Unfortunately, Professor Hunte was not privy to the full report as only parts of it were published. As such I would like to invite Professor Hunte to visit my LinkedIn page to access the full report here: https://www.linkedin.com/feed/update/urn:li:activity:6958434256062693376/ and for easier reference I have attached the full report to the email sent to the media so that he can access same from the media houses.
Notwithstanding, for the benefit of your readers, I am pleased to provide a systematic response to the specific issues raised by Professor Hunte in his August 10th letter, which he contended are issues I did not consider.
First, Professor Hunte argued that I did not consider ring fencing in the modelled forecast. This is not true. I am well aware that there is lack of ring-fencing provision in the current PSA framework; however, the following should be noted:

i) To date there are just about three dry wells out of a total of thirty-three wells in the Stabroek block.

ii) The 30 commercially viable wells amount to the estimated 11 billion barrels of crude oil in the Stabroek Block. To date, approval has been granted for the development of four projects as previously mentioned. These four projects account for an estimated 2.64 billion barrels of recoverable crude oil which represents 24 per cent of the total discovery in the entire block so far.

iii) The estimated capital expenditure (CAPEX) for the four projects combined is US$29.3 billion. Importantly to note is that the CAPEX includes the exploration costs and development costs. This means that the cost for the dry wells which ranges between US$60 million per well on the lower end and US$100 million on the higher end are included in the CAPEX.

iv) The gross revenue to be generated over the productive life of the four projects combined using an average price of US$60 per barrel is an estimated US$177 billion. Hence, using the higher end cost per well, the total exploration cost for the dry wells so far is an estimated US$300 million which represents 0.17 per cent of the total revenue that will be generated from four out of thirty commercially viable wells. Therefore, the impact of the dry wells on the total development relative to all of the commercially viable discoveries so far could be far less than the 0.17 per cent.

v) It is worthwhile to note as well that the lack of ring fencing is actually a good thing for Guyana as it incentivises the industry to attract more investment which is crucial for Guyana. Other countries with more stringent fiscal terms are now looking to relax their fiscal regime to be able to compete and attract investments in the sector. The aim in this regard is to develop and extract the resource as quickly as possible and as much as possible before the global industry winds down to the extent of no longer being commercially viable. This is due to the global energy transition agenda. (In a separate and forthcoming article, this thematic area will be dealt with in more depth).

Second, Professor Hunte argued that no business will be financially viable, if it cannot cover all its costs. Referencing Articles 11.2, 11.3, 12 and 13 in the PSA, Professor Hunte went on to argue that: “This condition implies that EPGL will most likely be ramping up exploration, development, and extraction, since they have a guaranteed soft landing in place that is fully covered by current revenues. It is therefore useless to write 14.5 per cent or any other percentage in the contract, given this extravagant gift.”
Admittedly, I don’t quite understand what Professor Hunte meant here other than to say he contradicted himself where, on one hand, he agrees that EEPGL needs to recover all its cost in order for its investment to be viable and on the other hand he is describing the 25 per cent profit share of which EEPGL, and its partners gets 50 per cent and the Government gets 50 per cent as an extravagant gift.

Third, citing Professor Hunte: “the Financial Analyst make the prediction that, ‘The estimated gross revenue is approximately US$177.3B (this is: 2,638 million barrels times $67.22 per barrel); the total Government’s Take is an estimated US$49B or 28 per cent while the Oil Companies’ Take is an estimated US$42B or 24 per cent.”  Adding together the revenue shares of the Government (US$49B) and EEPGL (US$42B), this total of US$91B falls short of the total revenue of US$177.3B by US$86.3B (48.7 per cent). In the circumstances, the Financial Analyst must explain who this unknown party is who is receiving the largest share of the revenue (48.7 per cent) when in fact the only two known entities in this arrangement are the Government and EEPGL.  I implore the Financial Analyst to shine some sunlight on this hidden entity.”

Again, I am flabbergasted at the above question from Professor Hunte on who is getting the 48.7 per cent of revenue. Nevertheless, for Professor Hunte’s benefit the 48 per cent of revenue represents the cost recovery of the capital expenditure and the operating expenses. This is the most elementary fundamental in finance where from revenue, cost of sales is deducted and total expenses.
Where Professor Hunte went on to argue that the oil companies receive 72 per cent of the revenue by including the capital recovery costs and operating expenses (which is the 48.7 per cent), this is an incorrect and misleading interpretation.

Part of the operating expenses are to pay for employees’ wages and salaries, suppliers for goods and services, etc., cannot be monies going to the oil companies. This is another elementary concept in business, economics, and finance.
Of course, there is always the issue of transfer pricing but this is a different matter and an issue for the audit of cost oil.

More importantly to note, the capital injected into these projects are sourced from the oil companies and not the Government of Guyana. In other words, the oil companies invested their own capital.
Speaking to the project life-cycle – in the article published I only spoke about the productive life of the projects based on their estimated reserves and not the full life cycle. For clarity, therefore, the project lifecycle includes the exploration stage which can last for about 5-10 years or even 15 years, the development stage once oil is found in commercial quantities, this is another five years and then the productive life another 10 years per project. In total, the total lifecycle is around 30 years or more. (This was explained in my full report which Professor Hunte was not privy to).

Fourth, citing Professor Hunte: “It is reported in an article in Kaieteur News   August 7, 2022, written by Kiana Wilburg, that Financial Analyst Joel Bhagwandin objected to the Government share of 59 per cent of revenue made by Schreiner Parker, Rystad Energy’s Senior Vice- President. The Financial Analyst contends that this share is overstated due to the fact, ‘… that taxes are included as part of what the Government already gets from profit oil. He said this occurs based on the structure of the 2016 Production Sharing Agreement (PSA).’  Editor, may I remind the Financial Analyst that EEPGL does not have to pay income taxes on its profit share and the Government has to provide a receipt that can be used for tax deduction purposes. Undoubtedly, issuing a Government receipt for money not collected is fraud and corruption. The implication of this situation is that Government would be giving-up its sovereignty to a private company, and therefore Guyana would be a laughingstock for all time.”

With respect to Professor Hunte’s fourth argument above, I can’t blame the journalist for paraphrasing what I said and in so doing drive home the main point of emphasis. At the forum, I offered a technical explanation which I suspect the journalist, who is not trained in finance, business, or economics, did not fully understand the technicality other than to emphasise the point that Government’s take cannot be 59 per cent of Rystad included the taxes. Someone of Professor Hunte’s caliber though should have consulted the actual recording where he would have heard for himself my contentions verbatim and not a paraphrased version that ignored the technicalities of my explanation. Again, for Professor Hunte’s benefit, I argued that the tax is a nominal tax and therefore cannot be included in the revenue stream for the Government’s Take.
Finally, with respect to Professor Hunte’s final point in his letter, I already addressed that aspect in my response to his first point on ring fencing above.