Dear Editor,
THE notion that the oil companies are walking away with 85.5 per cent take by adding the 75 per cent cost recovery and the 12.5 per cent profit oil then less the two per cent royalty is an incorrect and misleading interpretation.
According to a modelled forecast conducted by SPHEREX analytics, using the project economics for the approved developments so far, namely: Liza 1, Liza 2, Payara and Yellowtail, a discount rate of eight per cent, average price of US$60 per barrel, estimated recoverable reserves of US$2.64 billion barrels of crude, and capital expenditure across the four projects of an estimated US$29.3 billion, the total estimated revenue from all four projects combined is US$177.3 billion. The Government of Guyana’s Take (including royalty and profit oil) is US$49 billion or 28 per cent and a net present value (NPV) of US$35 billion while the oil companies take is 24 per cent. (See full report here: https://www.linkedin.com/posts/joel-bhagwandin57481470_an-updated-outlook-of-guyanas-take-from-activity-6958434256062693376- ENYr?utm_source=linkedin_share&utm_medium=member_desktop_web).
The model also assumes a relatively low operating cost of 12 per cent – 30 per cent which is in line with the operating cost of ExxonMobil – if one were to peruse the company’s annual report for their global operations. This, coupled with the fact that Guyana’s upstream activity is also a low-cost environment – premised upon the fact that Guyana’s crude is a light and sweet crude and the state-of-the-art technology employed in its operations to optimize efficiency and minimise cost.
The 75 per cent cost recovery ceiling is a formula designed for the oil companies to recover their invested capital as quickly as possible, which was necessary to explore, find the resource in commercial quantities then develop the resource for production. And while doing so, both the oil companies and the Government get to earn from the profit oil at the onset of production. Further to note, the resources offshore took 20 years to explore, discover and then develop before it starts to produce whereby the Government of Guyana and the oil companies start to cash in on the tangible benefits in the form of royalties and profit oil.
With this formula, it means that at some point, the value of profit share will increase from 12.5 per cent in the case of government’s take in profit oil to a high of over 20 per cent. This would be obtained because after the capital cost for the investment is recovered, there will only be the operating expenses remaining which would be deducted from the revenue.
The capital expenditure includes the exploration costs and development costs. The operating and administrative expenses include the following: Wages and salaries of the companies’ employees, goods and services supplied to support the upstream activities such as: 1) Rental of office space 2), Accommodation services 3), Equipment rental 4), Surveying 5), Pipe welding – onshore 6), Pipe sand blasting and coating onshore 7), Construction work for building onshore 8), Structural fabrication 9), Waste management 10), Storage services (warehousing) 11), Janitorial and laundry services 12), Catering services 13), Food supply services 14), Administrative support and facilities management 15), Immigration support services 16), Lay-down yard facilitation 17), Pest control 18), Cargo management 19), Environmental services and studies 20), Engineering and manufacturing, etc., etc
The list of services can go onto another 20 or some 200 plus list of services – referencing for example, Guyana’s Local Content Act, where forty areas of goods and services for the oil and gas sector were carved out for Guyanese. Additionally, the oil companies would have announced as part of the Yellowtail investment, some US$300 million to finance the development of a shore-base facility on the West Bank of Demerara. The gas-to-shore project which is an estimated US$1.3 billion for the pipeline infrastructure will also be financed from cost oil. Both of these projects, for example, will translate to a stream of tangible direct and indirect benefits for Guyanese. With this in mind, considering the increase spends from cost oil on the procurement of goods and services, inter alia, the Local Content Act, Guyana’s take will be much higher than the 14.5 per cent and 28 per cent. As Guyanese professionals or individuals and companies continue to build capacity in preparedness for the future opportunities, the value of local content spend will increase relatively.
To corroborate this view, local content spend in 2016 was US$12M which increased to US$219M in 2021, representing an increase of US$207M or 1725 per cent.

Yours faithfully,
Joel Bhagwandin
Financial Analyst