THIS topic has been explored about a year ago by this author where a number of factors were discussed. Of recent, proponents for the renegotiation of the 2016 Petroleum Agreement have renewed and amplified their calls for renegotiation.

However, those proponents have consistently failed to adequately expound on and justify the “bargaining powers” in Guyana’s favour that it can leverage to successfully pursue same. Others have questioned whether the government has even approached ExxonMobil Guyana and its Co-Ventures (CoVs) on the issue of renegotiation, to which ExxonMobil Guyana has already indicated publicly that it is unlikely that they would agree to a renegotiation at this stage.

In this regard, reference is made to the provision in the Petroleum Agreement (2016) which establishes that both parties must agree.
With this background in mind, this author wishes to revisit this topic―and, in so doing, examine some other factors that have previously not been explored by this author. For ease of reference, hereunder is a summary of the background to this issue and a summary of the preceding arguments.

SUMMARY OF PREVIOUS ARGUMENTS
Previously, the author examined the subject matter of this analysis from three dimensions, namely: (1) the project lifecycle, (2) the investment risks and capital-intensive nature of the industry, and (3) the impact of climate change policies and energy transition on the future demand for the global industry. Towards these ends, it was argued that the project lifecycle of the oil and gas business is approximately 40 years.

The exploration and development phases spanned 20 years (1999-2019) before production (first oil), the oil companies have continuously injected capital to explore and develop the resource. The nature of the oil and gas business is such that it is inherently of high investment risks and highly capital intensive.

The exploration and development costs for Liza 1 alone amounted to about US$4 billion, the total estimated development cost for Liza 1, Liza 2, Payara and Yellowtail is an estimated US$29.3 billion, representing 100 per cent of Guyana’s pre-oil GDP in the case of Liza 1, and for the four approved projects combined represents 7.3 times Guyana’s pre-oil GDP.

Many countries are already accelerating climate change policies, aiming to transition from a fossil-fuel driven energy system to renewable energy with investments amounting to hundreds of billions in US dollars, which ultimately means that these developments will have a direct impact on global crude oil prices which will be on a downward trajectory, at some point into the future, whether its 50 years or 100 years from now.

Fiscal regimes. It is worth noting that it is normal practice for petroleum producing countries to design a separate fiscal regime specifically for the oil and gas industry that is usually different from the mainstream fiscal regime applied to companies operating in other sectors. There are different types of fiscal regimes that can be applied to the oil and gas industry.

The reason for this is largely because of the highly capital-intensive nature of the industry, the size of the industry and investments, the nature of the project life cycle, which is about 40-50 years; 10–15 years of exploration, another 5-10 years developing the fields for production (provided that the fields are commercially viable), and another 20 years of productive life.

Oil price volatility: Typically, oil price volatility is impacted by market conditions (demand and supply) as well as geopolitical tensions. The criticisms concerning the 2016 Petroleum Agreement are often characterised as extremist views, ignoring these and many other practical variables.

Geopolitical risks: The ongoing border controversy between Guyana and Venezuela ought not to be discounted from the risk matrix. See article here exclusively on this topic by this author. https://www.guyanastandard.com/2023/10/01/the-guyana-venezuela-border-controversy-the-geopolitics-of-oil-regional-security/.

The incumbent government has done a commendable job in terms of maximising value for the country through better contract administration. Two critical elements in which the government has succeeded in this regard are (1) the local content legislation and (2) the gas-to-energy project, of which both will translate into another US$2 billion annually in direct and indirect benefits for the country.

Political risks: The sanctity of an investment contract and stability of investment go hand in hand. This is especially important when a country that is historically underdeveloped has been starved for investments, foreign direct investment (FDI) in particular, and is seeking to stimulate investors’ confidence and to attract investments in the economy.

The multiplier effect of investments helps to create sustainable employment opportunities for the population, develop and monetise the natural resources of the country, contribute to national development through the value chain matrix, tax revenue for the State, foreign exchange earnings through exports, and improving the overall social and economic well-being of people and by extension the country.

Moreover, investment security in this case is considered highly critical given that there needs to be some degree of assurance that would sustain at least eight political cycles, with the project lifecycle and risks in mind which cover a 40-year period as discussed earlier.

It is within these contexts that investment security and stability, especially for oil and gas investments, are particularly important for the reasons such as: Minimising the political and market risks of the country which, in turn, would lend to an attractive investment climate for global and domestic investments.

Considering Guyana’s political history, it is important to ensure that the political risk of the country is viewed as low-moderate so that Guyana continues to be regarded as a globally attractive destination for investment across all sectors, inter alia, demonstrably assuring investors of their investment security.

DISCUSSION AND ANALYSIS
The government has been strongly criticised for not renegotiating the Stabroek Block Petroleum Agreement (2016) largely because it has promised to do so when they were in opposition. But this argument conveniently ignores the vital context altogether.

There are two separate recorded interviews with the Vice President as Opposition Leader in 2019, and President Ali, as the Presidential candidate leading up to the elections in 2020. Both President Ali and Vice President Jagdeo had said in opposition that they are committed to reviewing “all of the contracts” and the entire legal, fiscal, and regulatory frameworks for the oil and gas sector, together with improved contract administration. The fact is that the government has done exactly what it said it would do in opposition.

To this end, the government did the following:
i. As soon as the government assumed office in August 2020, it moved swiftly to implement Local Content Legislation which is now generating an estimated US$1 billion annually from cost-oil to procure goods and services from Guyanese suppliers and provision of employment opportunities for Guyanese.

ii. Work began on the implementation of the gas-to-energy project which would translate to another US$1 billion in direct and indirect benefits for the economy.

iii. A new model Production Sharing Agreement (PSA) was developed with significantly improved fiscal conditions that will result in the government’s take increasing from 28 per cent based on the 2016 PSA to 50 per cent. The new fiscal terms include the introduction of a 10 per cent corporate tax, 10 per cent royalty up from two per cent, cost recovery ceiling down to 65 per cent from 75 per cent, and profit oil remains at 50 per cent. This new PSA will apply to all future production agreements.

iv. A new modern Petroleum Activities legislation was developed (already passed in the National Assembly) which would repeal and replace the outdated Petroleum law.

More importantly to note is that apart from the Stabroek Block which is the only block that had moved to production before the government assumed office in 2020, there are nine other active Petroleum Prospecting/Exploration Licences. So, once commercial discoveries are made, the new PSA/fiscal terms will apply to those. In other words, the government has effectively renegotiated nine other contracts that were based on the old fiscal terms because those have not moved to production as yet unlike the Stabroek Block.

In addition to the earlier argumentations as to why the government opted not to renegotiate the Stabroek Block, there are some other considerations that were not articulated before―by anyone including this author. These are examined hereunder.

There were two unprecedented events that weakened the government’s position, even if it wanted to renegotiate the Stabroek Block’s PSA. In this respect, the government would have been in a stronger position if by the time it assumed office following the general elections, ExxonMobil and its CoVs had not moved to production. Cognisant of the ramifications, ExxonMobil Guyana aggressively transitioned into production in record time by December 2019, knowing full well that election was due in March 2020.

By ExxonMobil’s own admission, coupled with independent research to verify same, the timeline by which ExxonMobil moved from discovery to first oil in just five years, is a record achievement across the global industry, aided by the deployment of advanced technologies.

Historically, it took about ten years to develop projects from commercial discovery to production following an investment decision. Secondly, one would recall that after the successful passage of the “No-Confidence Motion” (NCM) in December 2018, elections were constitutionally due three months thereafter; but was not held until March 2020, then the election result was declared five months later in August 2020.

Almost one and a half years later, there was a change in government following the NCM in December 2018 and the general elections in March 2020.
One has to appreciate that the investment decision for the Stabroek Block was based on the 2016 PSA and the fact that Exxon had already started production, renegotiation would have been difficult.

There are lessons from the experiences involving a neighbouring country that had forcefully imposed additional fiscal conditions through legislative amendments.

This experience resulted in that country ultimately becoming liable to the oil companies for the breach of terms and conditions of the original contract, to the tune of some US$40 billion in compensation.
There is another notion that the government’s reluctance to renegotiate the Stabroek Block PSA is a huge loss for Guyana largely owing to the fact that the Stabroek Block’s discovery has proven to have a high-quality crude proven reserves thus far, and it is the largest oil block that ExxonMobil and CoVs control.

Notwithstanding, even this notion has its limitations when one analyses the situation. In so doing, it was found that, based on all of the current discoveries and approved projects so far, the sum total of the size of the project development (PDA) areas is equivalent to less than 10 per cent of the entire Stabroek Block.

The Stabroek Block comprises an area of approximately 26,806 sq.km or 10,843,003 hectares. The total discoveries to date is excess of 11 billion barrels of crude, which ExxonMobil Guyana aims to develop through a total of ten (10) Floating Production Storage and Offloading (FPSO) vessels by 2030.

So far, there are six projects of which five have been approved, and two are already in production. Together, these six projects cover an area of approximately 441 sq.km or 44,100 hectares, of which the largest is Whiptail, covering approximately 10,900 hectares.
As such, it is safe to assume that the other four-projects that will be developed by 2030 to bring the total FPSOs to ten, may cover an area of an average of 10,000 hectares each, giving rise to a total of 841 sq.km or 84,167 hectares. In total, this represents 3.14% of the total Stabroek Block area.

Pursuant to the 2016 PSA, taking into account the one-year extension granted by the government for force majeure, the Petroleum Prospecting License for the Stabroek block will expire in 2027, given the maximum amount of time the license can be renewed in accordance with the Agreement.

This means that, even with continued exploration activities in the Stabroek Block until 2027, considering the current discoveries after 24 long years, it is highly unlikely that ExxonMobil will be able to explore and develop more than six per cent of the Stabroek Block area before the expiration of the 2016 PSA.

It, therefore, means that when the 2016 PSA expires, ExxonMobil Guyana and CoVs will have to relinquish an estimated 90 per cent-94 per cent of the unexplored Stabroek block, at which point the new fiscal conditions and PSA shall apply.
Contrary to the popular view propagated by the critics of the government that it has walked back its promise to renegotiate the oil contracts, as discussed and demonstrated herein, this is not the case.

The Stabroek Block is the only Block out of ten active exploration licences that moved into production almost one and a half years before the government assumed office in 2020.

In the circumstances, it is imperative for the government to create an environment of political, economic, social, and geopolitical stability which are the prerequisite conditions that will enable the government to pursue its transformative economic and development agenda in a sustainable manner, while building a prosperous nation.