Understanding Energy: Guyana updates fiscal terms ahead of major oil block auction

OPEN oil and gas bidding rounds involve a process in which the government invites oil and gas companies to bid for the rights to explore, develop and produce any oil and gas found. Open bidding rounds are most often used once some discoveries have been made and global interest is high—this is the position Guyana now finds itself in.

Earlier this month, the government held a press conference to outline the upcoming auction of offshore blocks with new fiscal terms. Through the Ministry of Natural Resources, the Government of Guyana will auction off 14 oil blocks, which will mark the country’s first-ever competitive offshore oil and gas licensing round and serve as a guide for any future offshore investments or projects that end up reaching the production stage. The blocks being put up for auction range in acreage from 1,000 sq km to 3,000 sq km, with 11 in shallow water and the other three in deep-water.

The bidders will be evaluated on their work programmes, financial offers and local content commitments. There won’t be any restrictions to the number of bids a company is allowed to submit, but a successful bidder will be limited to an award of no more than three blocks. The winning bidders of the shallow-water exploration blocks must pay a minimum US$10 million signing bonus and twice that for the deep-water blocks and bidders will be required to provide a development plan for consideration, along with their financial bids.
The government is seeking to generate investment and build on the success it has seen with the Stabroek Block with this auction, but doing so requires a careful balance of the fiscal terms and non-fiscal factors.

In oil and gas producing countries, fiscal terms are what govern the relationship between various operating parties such as private companies and governments and determine how financial benefits and risks are divided. At the Stabroek Block, exploration went on for years before any discoveries were made and the risks of finding nothing despite hundreds of millions of US dollars spent fell entirely to the companies.

Under the terms of that profit sharing agreement (PSA), Guyana was 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 take for Guyana will be around 60 per cent of profits or 14.5 percent of overall revenues, when both the pre-cost royalty and the post-cost profit sharing are accounted for. More generous terms in contracts such as the Stabroek PSA are often used for “frontier” regions with no existing oil production, and are a way to draw in companies and entice them to take big risks on unproven areas.

Comparatively, the new fiscal terms recently announced by Vice-President, Dr. Bharrat Jagdeo, reflect Guyana’s much more mature status as an oil producer and the lower risks that companies face. During the press conference, Vice-President Jagdeo said that the cost recovery ceiling will be “a cap of 65 per cent, 35 per cent remains to be divided. So, at a 50-50 profit share, you get 17 and a half per cent of the gross and then another 10 per cent royalty.” These new terms are a direct reflection of billions of US dollars already spent to make discoveries and reduce the risk for new investors.

But even now, this process is about balance. Guyana is in a very different position than it was seven years ago, but commercial discoveries have still only been made on one block. There are trade-offs throughout this process that can attract or push away investments, speed or slow development or increase or decrease revenues.

Contracts that are too heavily weighted to the resource owner can drive away investors, as in Suriname, which held a bid round for shallow-water blocks back in 2021 that was met with little interest. Only three of eight blocks received any bids and at least 60 per cent of Suriname’s offshore acreage remains unlicensed.

Despite several commercial discoveries, no company has committed to develop any wells to production. As a result, Suriname has yet to see any revenues from its offshore oil finds and is unlikely to in the near future, despite promising geology. That ultimately means a “better deal” remains purely hypothetical. Getting that balance right requires fine tuning the fiscal and non-fiscal factors that go into a contract, which Guyana has prioritised doing and is clearly reaping the benefits from.

This year is likely to be a competitive one globally. According to IHS Market, there are about 65 countries this year that are in a bid round or launching one.

“It’s harder to raise money now for the oil and gas sector. We’ve had cases where loans are vetoed, so it’s becoming more and more difficult to finance the oil and gas sector,” Jagdeo said.
To position Guyana to get what it deserves in its next deals with international oil companies Jagdeo highlighted: “We had to give them what we wanted at the beginning: a greater share of the revenue for the government and people of Guyana for Guyana, which we believe we will succeed and with this new fiscal formula a significantly greater share of the proceeds […] that was one of our objectives but a second objective was still to remain globally-competitive and to accelerate the exploration in the context of net zero.”

While Guyana is aiming to receive the best prices for the blocks, non-fiscal terms need to be considered as well, including local content policies, regulations and policy issues like ring fencing. Examples like Suriname stand in sharp contrast to the double-digit growth Guyana has experienced and these next block auctions likely will only increase that growth. Guyana remains a highly desirable destination for investment as it continues to try and strike the right balance for the future.

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