By Joel Bhagwandin, Financial Analyst

THE terminology “foregone” means to “give up,” but the government is not necessarily “giving up” revenue owing to the lack of ring-fencing. Rather, owing to the lack of ring-fencing, as this author argued in previous articles, the government made a deliberate and intentional decision to ramp up production rapidly. Consequently, what proponents are referring to as “foregone” revenue, is in fact a “tradeoff.”

The tradeoff is simply trading “short-term” gains to leverage maximised gains achievable in the medium term. In so doing, the gains derivable in the long run will far outstrip the short-term gains.

As regards the tradeoff on account of the lack of ring-fencing that chartered accountant Mr. Ram refers to as “foregone” revenue, which he contextually mischaracterised as equity―to lend credence to his notion that the government is a de facto investor, is a false premise.

To this end, it is not only the classification of the “tradeoff” or “foregone” revenue that one has to consider; one has to also consider the source of funding and “who” raised the finances. In this case, within the framework of the Petroleum Agreement (2016) and the Petroleum law, it is the oil companies’ (the contractor) that raised the initial capital in the form of both equity and debt financing. Within this framework, it is the contractor that assumes 100 per cent of the financial risks, not the government.

Considering the foregoing, from a pragmatic legal and technical standpoint, the government is neither a de facto investor nor a direct investor in the Petroleum Exploration Activities.
For the sake of drawing a relatable analogy that chartered accountant, Mr. Lalbachan Ram may better appreciate as an auditor; in the same manner that when private sector companies employ “creative accounting” or “window-dressing” techniques in the preparation of their financial statements, designed to deprive the state of tax revenues, the government is not referred to as a “de facto” investor in these instances. Similarly, the government cannot be regarded as a de facto investor in the petroleum exploration activities, which is not provided for in the Petroleum Agreement (2016).

With respect to the investment of the NRF, the NRF Act prescribes the fund’s investment mandate. In this regard, the NRF Act establishes that “the fund shall be invested according to the principle of passive investment management…” and this is the responsible way to manage the fund at this time.

Altogether, the government is involved in the decision-making process, albeit at the policy level and not at the day-to-day operational level. Therefore, to say that the government is not included in the decision-making process is totally inaccurate and a false premise. More so, the notion that the government is a de facto investor in petroleum-exploration activities is at best a distorted, deceptively premised interpretation.

INTRODUCTION
In his column of December 15, 2023, chartered accountant, Mr. Lalbachan Chris Ram theorised that: “Guyana’s foregoing of profit oil necessarily adds to the windfall of the oil companies, allowing them the use of what is properly Guyana’s funds to finance petroleum activities. In other words, the government is putting up 50 per cent of exploration investment―equal to the combined investment of Exxon, Hess, and CNOOC―in exploration, but has no seat at the table, and no say in the decision making. And guess what? The government cannot extract a single change in the concessions available to the oil companies.”

Then, in his column of December 22, 2023, he contradicted his own absurdly “superficial theorisation” referenced above, by asserting that: (1) referring to the IMF and IDB reports… “it is not in the DNA of the PPP/C to prefer management to spending and one fears this is likely to happen in the final year and months of an election cycle”; (2) he finds it disturbing that the entire portfolio of the Natural Resources Fund (NRF) is held in cash and cash equivalents; and (3) he raises concerns about the impossibility to determine the NRF Investment Committee’s decisions made on an “appropriate portfolio that can maximize investment income while securing the investment.”

In a subsequent invited commentary by Kaieteur News (carried in their December 25, 2023, edition), Mr. Lalbachan Ram reaffirmed his position that the government is a de facto investor in the petroleum-exploration activities with ExxonMobil, Hess and CNOOC.

He further opined, in an apparent attempt to debunk a statement by the Vice President, Dr. Bharrat Jagdeo, where he (the Vice President) said that the government has no borrowings in relation to the petroleum exploration and development activities in Guyana, therefore, not an investor.

Ram then sought to counter this view by stating that there are two principal methods in raising financing, referring to shareholders’ equity and retained earnings… (which is incorrect… the two principal methods are in fact via debt-financing instruments and equity financing instruments. Retained earnings, as Ram alluded to as one of the principal forms, is actually a form of equity financing, i.e., an internal source of financing).

This article seeks to demonstrate how the above varying positions from the chartered accountant are contradictory in nature, hence, his contradictory dilemma. Moreover, this article seeks to provide readers with an alternative perspective grounded in an empirical discussion and analysis in relation to the aforesaid issues.

DISCUSSION AND ANALYSIS
The notion that the government is putting up 50 per cent of the exploration investment but has no seat at the table and no say in decision making is an egregiously distorted and false narrative. The proponents of this view are premising this belief on the supposed “foregone” revenue attributed to the lack of ring-fencing, 50 per cent of which should have been profits for the government at the outset.

The chartered accountant Mr. Ram contended that this supposed “foregone” revenue is equivalent to “retained earnings” or equity. This concocted conception, however, is a matter of creative interpretation, albeit flawed; as opposed to an analysis grounded in facts considering the policies and decisions of the government; the framework of the Petroleum Agreement (2016); and the tradeoffs among other factors.

In strict terms, the terminology “foregone” means to “give up. But the government is not necessarily “giving up” revenue owing to the lack of ring-fencing. Rather, owing to the lack of ring-fencing, as this author argued in previous articles, the government made a deliberate and intentional decision to ramp up production rapidly. Consequently, what proponents are referring to as “foregone” revenue, is in fact a “tradeoff.”

The tradeoff is simply trading “short-term” gains to leverage maximised gains achievable in the medium-term. In so doing, the gains derivable in the long run will far outstrip the short-term gains.

In that regard, this author demonstrated in several articles (recently) that all things being equal, the exploration/prospecting licence pursuant to the Petroleum Agreement (2016) expires in 2027. Thus, with ExxonMobil Guyana aiming to bring online 10 Floating Production Storage and Offloading (FPSOs) vessels by 2030, which will enable increased production to upwards of 1.3 million barrels per day, coupled with a short payback period of three-five years attributable to the 75% cost-recovery ceiling, the total exploration and development costs may be fully recovered by 2035.

This means that, all other things being equal, the government’s take by 2030 could reach an estimated US$4.7 billion annually (larger than the pre-oil GDP), and peak at around US$8 billion annually by 2035 and thereafter (all other things being equal). By then, the government’s take will increase from 14.5% (during recovery period) to between 25%-30% (post-recovery period by the year 2035) from the Stabroek Block, under the 2016 Petroleum Agreement.

It is worth noting that the size of the Stabroek Block is an estimated 26,806 km2, and to date, based on the size of the project-development area (PDA) for all of the discoveries (46 discoveries), less than 2% of the Stabroek Block has been explored (after 24 years of exploration activities).

Therefore, by 2027, when the 2016 Petroleum Prospecting Licence expires, not more than 3%-five per cent of the Stabroek Block will have been explored, thereby effectively placing the government in a position to re-possess at least 95% of the Stabroek Block, following which the new fiscal terms, inter alia, the new model Petroleum Agreement (s) shall be applied to any new exploration and production licences. Moreover, the tradeoff on account of the lack of ring-fencing that the chartered accountant Ram refers to as “foregone” revenue, which he contextually mischaracterised as equity―to lend credence to his notion that the government is a de facto investor, is another false premise. [See part two of this Op-Ed in the Saturday, December 28, 2023 edition of the Guyana Chronicle.]