RECENT discussions about Guyana’s oil revenues have focused on one number, 39.8 percent. For some, this has raised the question of whether Guyana’s share of its oil has fallen from the 50 percent agreed under the Production Sharing Agreement (PSA).
It has not. Guyana’s contractual share of profit oil remains 50 percent. The 39.8 percent figure represents approximately how much of total oil production Guyana currently receives after accounting for oil used for cost recovery. These are two different measurements.
Every barrel produced can be understood through three basic concepts: total production, cost oil and profit oil. Total production is all the oil produced. A portion can then be used as cost oil to recover eligible costs associated with developing and operating the projects. The PSA allows up to 75 percent of monthly production to be used for cost recovery. However, 75 percent is a ceiling, not an automatic deduction. The amount required depends on the eligible costs that need to be recovered at a particular time.
The oil left after cost recovery is profit oil, which is then shared equally between Guyana and the Stabroek Block partners. A simple example shows why Guyana can receive about 39.8 percent of total production while retaining its 50 percent profit-oil share.
Imagine 100 barrels are produced. If roughly 20 barrels are needed for cost recovery, about 80 barrels remain as profit oil. Guyana receives 50 percent of those 80 barrels, about 40 barrels out of every 100 produced. That is broadly consistent with the reported 39.8 percent figure. So, Guyana is not receiving 39.8 percent of profit oil. It is receiving 50 percent of profit oil, which currently works out to approximately 39.8 percent of total production.
The figure is not permanent. As accumulated costs are recovered, fewer barrels may be needed for cost recovery, leaving more profit oil to share. Conversely, new eligible development and operating costs can be added as projects expand, increasing the amount that may be recovered. This means Guyana’s share of total production can move in either direction over time, even though its contractual share of profit oil remains 50 percent.
This also explains why questions about the cost bank, audits and disputed expenditure matter. A cost can be under review, disputed, or ultimately determined to be non-recoverable. These are not the same thing. A disputed cost may remain recoverable while the matter is being resolved. If it is later determined to be non-recoverable, the necessary accounting adjustment can be made, potentially increasing the profit-oil pool. These are legitimate areas for transparency and accountability. However, they should be considered separately from the basic operation of the PSA’s cost-recovery mechanism. The 39.8 percent figure also does not represent Guyana’s complete petroleum take. Guyana additionally receives a 2 percent gross royalty on production. Therefore, the country’s overall petroleum revenues cannot be measured by looking at the 39.8 percent figure alone.
Recent public commentary has also renewed calls for ring-fencing and greater scrutiny of how future developments are financed. Ring-fencing would generally restrict costs associated with one development from being recovered against production from another, potentially allowing a greater proportion of production from established projects to become available as profit oil sooner. On the other hand, the absence of ringfencing allows companies to pool costs and revenues across multiple projects within a single contract area. In the case of Guyana, this has created a financial incentive for investors to accelerate field development in the Stabroek Block.
The issue has gained attention as current cost recovery has declined, while future developments could introduce new eligible investment and operating costs. Government has indicated that it is examining how the next phase of oil and gas investment should be structured and financed, but has maintained that the existing 2016 PSA will not be reopened or renegotiated.
These questions form part of the wider debate about how Guyana maximises value from its petroleum resources, but they do not change how entitlement is calculated under the existing agreement today.
The fiscal debate, however, is only one dimension of the value associated with petroleum production. Production also generates benefits beyond the direct fiscal return, including opportunities for Guyanese businesses, employment, workforce development and the transfer of increasingly specialised technical capabilities.
The bottom line is simple: Guyana’s contractual share of profit oil remains 50 percent. The 39.8 percent is a current snapshot of how that 50 percent share translates into Guyana’s share of total production after cost recovery. It is not a renegotiated share, a permanent entitlement or the complete measure of Guyana’s petroleum revenues.
DISCLAIMER: The views and opinions expressed in this column are solely those of the author and do not necessarily reflect the official policy or position of the Guyana National Newspapers Limited.
