Category: The Road to First Oil

This Column has finally been able to put its hands on the Bridging Deed referred to in Article 30 of the Petroleum Agreement signed by the APNU+AFC Government and Esso, Hess and CNOOC/Nexen. The Deed, is frightening in its intent and far too clever in its execution, signed more than one year after the oil companies had hit gold. Key players in the Deed, other than the oil companies are the ubiquitous Raphael Trotman, then Minister responsible for Petroleum and Sir Shridath Ramphal, described as the Escrow Agent and keeper of what is described as the Escrow Letter.

According to the Bridging Deed, Sir Shridath agreed to hold the Documents – circuitously described to have the meaning assigned to it in the Escrow Letter, but which is itself a closely guarded secret! It is unclear whether Sir Shridath performed any other functions in connection with the Bridging Deed or the Petroleum Agreement and how he was compensated but if he was paid by the Government of Guyana, it is hoped that in the cause of transparency, particulars of that arrangement will be shared with the Guyanese public.  

What the Bridging Deed sought to do

The Bridging Deed sought to give life to the expired 1999 Agreement signed by then President Janet Jagan under the authority of section 10 of the Petroleum Exploration and Production Act. Under that Agreement, Esso was granted a Prospecting Licence over some 26,806 SQ. KM, much more than normally permitted by law. The law allowed for a Prospecting Licence initially for four years plus six months and subject to two extensions of three years each. Unless during that time, there is an application for a production licence, the Agreement lapses, the oil blocks go back to the State.

During the ten year period however some things happened – there was the Surinamese incursion into Guyana’s territorial waters leading to a Force Majeure and the extension of the period of the licence by the duration of the Force Majeure. The information on when the 1999 Agreement expired is a bit blurred but what is known is that shortly after the APNU+AFC came to power in 2015. The other big thing was the late discovery of oil announced in 2015 and the realization by Exxon that its time was fast drawing to a close. It needed to come up with some trick, to do it fast and to hide it.   

At the same time, it sought to put pressure on Trotman and the Government to treat the 1999 Agreement as if it never existed and to get a completely new Agreement.

That required legal gymnastics and some clever mind then came up with this idea of a Bridging Deed. Bear in mind that at this stage, the oil companies knew they were sitting on a gold mine but their time had expired or was soon to expire. Someone thereupon advised the oil companies to belatedly relinquish the extensive holdings but to replace it with a “new petroleum prospecting licence and to enter into a new petroleum agreement, in respect of the Contract Area.”

Audacity

Compounding the wickedness, the authors of the Bridging Deed audaciously including as one of the Recitals in the Deed, the following:

“Pursuant to section 10 of the Act, the Minister has entered into this Deed together with the Contractor Parties to set out the process whereby 1999 Licence and the 1999 Petroleum Agreement will be replaced by a new petroleum prospecting licence and petroleum agreement in respect of the Contract Area.”

Section 10 of the Production Exploration and Production Act gives the Minister no power to enter into any Deed and certainly not one to breathe life into an expiring Agreement. In fact, what the section does is grant the Minister the power to enter into an agreement not inconsistent with the Act, (emphasis mine), with respect to any or all of a four specified matters, namely, the granting of a licence, the conditions attaching thereto, the procedure to be followed in exercising any discretion granted to him under the Act and any matter incidental thereto. Perhaps Trotman or some legal luminary will explain how section 10 can be read to give Trotman the supernatural power to revive a dead Agreement via some artificial device.

Burnham weeps

It is hard to be diplomatic about any person who conspires to sell or who sells the national interest whether on the basis of grand incompetence or grand corruption but Trotman, his advisors and the APNU+AFC Government are guilty of the worst act against Guyanese and Guyana. Trotman had a duty to tell the oil companies that their proposal to employ Guyanese nationals as cleaners, drivers and security guards not only did not meet the test of satisfactory to him as Minister but was downright insulting to us as a nation.

Trotman had a glorious opportunity to correct the wrong inflicted by the 1999 Agreement in respect of the number of blocks awarded. At least Janet Jagan could plead that hers was a pre-discovery Agreement but what can Trotman plead? A person of average intelligence aware that oil was found would have insisted of Guyana’s right under section 22 of the Act to an interest in any venture for the production of petroleum in the blocks. Trotman did not.

Trotman could have told the oil companies that the 1999 Agreement had run the clock and that his powers were constrained by law and that relinquishment was not a choice or option open to them. Instead, Trotman allowed himself to be bullied or led into agreeing to relinquishment being conditional on his taking certain action and if he did not, the Notice of Relinquishment by the oil companies would be considered withdrawn and “the 1999 Agreement shall continue in full force and effect.” No, that is not how a sovereign country operates. That thing came to an end and that was it.

This spinelessness demonstrated by the APNU+AFC and Trotman is disgraceful and shameful to us as an independent, sovereign nation. This is as big a sellout of a country’s patrimony imaginable. That this embarrassment is being imposed on Guyana by a Government led by Forbes Burnham’s own Party and people for whom he no doubt had the greatest of respect, must make him weep.

Today’s column returns to the issue of Local Content Policy which appears either to have been drowned out by the excitement of First Oil or in which interest seems to have ebbed – a pattern since the Local Content was first raised in the aftermath of the disclosure of the signing of the 2016 Petroleum Agreement. As Column 79 reported the first Draft Local Content Policy Framework was dated April 2017, the second May 2018 and the third May 2019. Perhaps we are heading for another May, maybe.

In the scheme of things, Trotman’s successor has been no more diligent in pursuing a Local Content Policy than Trotman and in fact, all of Bynoe’s high profile contractors have been non-locals: Mr. Matthew Wilks, Advisor on Oil and Gas, Dr. Michael Warner, Advisor on Local Content and Ms. Virginia Markouizou, described as Crude Marketing Specialist, with little evidence that any of the three was appointed through the transparent mode of procurement. It is almost forgotten that there are mandatory local content requirements in the Petroleum Exploration and Production Act which Trotman and Bynoe have completely disregarded to the detriment of Guyana and Guyanese.

The WTO scare

Within the past couple days I attended a meeting of private sector players trying to galvanise interest in a Local Content Policy. I was surprised at the strength of feeling that Guyana needs to have a well-articulated, pro-Guyanese, prescriptive Local Content Policy that is enshrined in the laws. I pointed out at the meeting that a country with strong LCP is Kazakhstan and was again surprised that one of the other attendees readily circulated an e-book written by two academics from Kazakhstan and two from Reading University, my most recent alma mater. The book is called Local Content Policies in Resource-Rich Countries and would make a great gift to our policy-makers.

One common criticism of LCP’s is that it violates WTO Rules. Well, here is what the writers have to say in their book.

Under WTO rules many forms of LC are prohibited – they are perceived as protectionist and trade-distorting measures. Nevertheless, there are multiple examples of violation of WTO rules in the form of WTO members pursuing LC policy. At the same time no country-to-country level case has been pursued under WTO regulations in the O&G sector. There is a clear weakness in the WTO’s dispute-settlement system but, more importantly, interpretations of LC requirements vary making it costly to pursue disputes and damaging for the relations between countries.

Learn from Brazil and Trinidad and Tobago

Evidence abounds that not only resource-rich, developing countries have local content policies that are underpinned by law. In its publication Local Content Policies in the Oil and Gas Sector, the World Bank notes that “In Brazil and Norway, NOCs have been instrumental in developing and sustaining LC. In Trinidad and Tobago, LC is defined as the maximisation of the level of usage of local goods and services, people, businesses and financing.” While it may be going too far to describe Trinidad and Tobago as being extreme in terms of LCP, it has certainly not been bashful in promoting and protecting its national interest. Its Ministry of Energy and Energy Industries equated “Local content and participation” with “local value added” in terms of ownership, control and financing by the citizens of Trinidad and Tobago.

The failure to embrace local content by the Granger Administration has serious legal, economic and social implications: it constitutes a dereliction of its duty to place the interest of Guyanese foremost in its development agenda consistent with Article 15 of the Constitution of Guyana. But its inability to recognise that by placing LC in a wider developmental agenda, a government can also contribute to generating competitive conditions that facilitate innovation and enhanced resource recovery. In so doing, a sound LCP contains within itself an eventual exit from LC requirements, as domestic supply and technological solutions attain international competitiveness. It need not be permanent.

Conclusion

Examples of workable LCP’s abound across continents and can be found in Asia, Australia, Europe, Africa and in North and South America. Angola, Ghana, Nigeria, Indonesia, Malaysia all offer great examples from which Guyana can develop its own unique LCP. WE can learn from Angola, a WTO member, which promotes and enforces LCP via three levels:

1. Certain categories of procurement expenditure reserved for Angolan companies, including logistics, catering, pressure tests for storage tanks and pipelines. And here is where I think we ought to be firm: For purposes of Oil and Gas, a Guyanese company should be defined as one in which resident Guyanese own 66⅔ % of the equity shares and the range of services expanded significantly;

• Spending categories that fall under a “semi-competitive regime,” where bidding by foreign suppliers and service providers is predicated on these companies first forming joint ventures with Angolan companies (expenditure categories under this regime include geophysical sciences, drilling controls and fluid analysis, and the operations and maintenance of production facilities; and

• A “competitive regime,” which places all other categories of expenditure into international competitive tender, yet provides for “Angolan State companies and/or private companies the right of first refusal, provided that the value of the relevant bid is no more than 10 percent higher than those of other companies.”

Quite what Dr. Bynoe and the Granger Administration find so difficult to understand about the virtues and value of LCP is hard to imagine. They gave away the lion’s share of billions of dollars’ worth of our non-renewable resources. You would think that out of regret, they would want to ensure that Guyanese share handsomely in the balance. Even that they refuse to do.   

Introduction

This column should have continued my take on Local Content. I will defer this to a later piece so that I do not miss the very focus on this series: the Road to First Oil. Readers will recall that this series which began in June 2017 was titled the Road to First Oil. That day arrived with a statement by ExxonMobil on December 20, 2019 that oil production had started from the Liza field offshore Guyana less than five years after the first find of hydrocarbons. In what was a clear sign that Guyana’s national petroleum agenda is driven by the American oil giant, Guyana’s President David Granger made a similar announcement only minutes before that by ExxonMobil which incidentally operates through a shell company incorporated in The Bahamas. 

But even before the announcement, there was again obfuscation and confusion concerning the sale of Guyana’s share of the soon-to-be-produced oil of which notification came not from the Government of Guyana but from Bloomberg, an American news agency. In recalling the falsehoods of then Oil Minister Raphael Trotman about the signing of the 2016 Petroleum Agreement by Raphael Trotman and the concealment of the Signing Bonus by the Ministry of Finance, one fails to recognise any significant improvement in competence, accountability and transparency since control and management of the petroleum sector was removed from Trotman and handed to Dr. Mark Bynoe who seems to be running a one-man show. At least one thing can be said for Trotman – he is a member of Cabinet, Bynoe is not.

Sole control

It is simply unbelievable that any country, any leader, or any Government would give sole control of such a critical sector to a single individual with no relevant expertise or experience and who does not even sit in Cabinet. While the sale of petroleum by Dr. Bynoe aroused public consternation, the broader issues of legality, violation of the Petroleum Agreement and of governance do not appear to have troubled too many persons. Admittedly, one attorney-at-law was quoted in the media as taking the matter to court but that never seemed to have happened. Subsequently, Dr. Bynoe caused to be issued on December 15, 2019 a statement in which the Department of Energy stated, that “the process underway in the coming week is not for marketing services. It is for a direct sale of the first 3 lifts assigned to Guyana.”

This statement seems to have been a response to the criticism that the sale constituted procurement and therefore violated the Procurement Act. For the record, I did not think it was a procurement issue and I agree with the Department of Energy (DoE) that it was a sale of Guyana’s share of the First Oil. What I do not agree with is that Guyana is somehow assigned any lifts – no Sir, we are entitled to such lifts. Yet, the  outline of the arrangement as reported by Bloomberg is that bidders for 3 million barrels of Liza Blend crude, being Guyana’s accumulated share of royalty and profit oil of 14.25% of production, in which the buyer is required to take the unusual role of handling “all operating and back office responsibilities” related to exporting the crude”. Adding to the unorthodoxy is that bidders were required to make face-to-face presentations of their bids.

Odd arrangement

It appears from information gleaned from separate sources that Exxon’s subsidiary and its two partners, Hess and CNOOC/Nexen will take the first three shipments while Guyana will receive the fourth shipment some time in February. But there is something odd about this arrangement. Profit oil is calculated after the deduction of recoverable costs and subject to a 75% restriction. This means that while the restriction on recoverable cost is in place – which will probably extend over a couple of years – Guyana will get the same amount of profit oil (12.5%) as the three contractors combined. Put another way, the three contractors will be entitled to receive their share of the remaining 12.5% proportionate to their holding – Esso 5.63% of profit oil, Hess 3.75% and CNOOC 3.13%.

What the arrangement with the oil companies suggests is that those companies will not only be receiving their modest share of profit oil but also a good chunk of their investment in a manner not contemplated by the Agreement. Bynoe may not recognise it but this arrangement will create accounting and auditing headaches if not nightmares. 

For Guyana to have three shipments, it means that the cycle of Esso, Hess, CNOOC and Guyana will be repeated but since production is not shared equally, (Esso has a 45% stake, Hess 30% and CNOOC 25%) it is not clear how and when Guyana will become entitled to three million barrels given its entitlement to 50% of profit oil after a 2% royalty.  

Violation

I am convinced however that what the DoE described as an interim arrangement is a clear violation of the Petroleum Agreement. The Agreement expressly provides for the oil companies to bear and pay all Contract Costs incurred in carrying out Petroleum Operations and for them to recover Contract Costs as Recoverable Contract Costs only from Cost Oil. It further provides that such costs are to be recovered from the value of the volume of Crude Oil produced and sold from the Contract Area.     

Dr. Bynoe has recruited another foreign consultant to tell him at a cost of millions of dollars who are the international oil players. But Bynoe and his advisers have failed to appreciate that the Agreement is based on monthly production. See Article 11.3 of the Agreement. Dr. Bynoe is being led by Exxon to operate outside of the Agreement for which he has no authority. In the process, he is exposing Guyana to price and exchange rate fluctuation by deferring its right to take up and dispose of its share of oil.

Bynoe is playing around not only with the Agreement but with Guyana’s entitlement under it. The tragedy of the Granger Administration’s mismanagement of the oil sector just seems to get worse.

Introduction

Last week’s column gave a brief overview of the Third Draft of Government’s Local Content Policy which was released to the bemused public by Dr. Mark Bynoe, Director, Department of Energy part of the super Ministry of the Presidency. For this rather poor piece of work, Dr. Bynoe paid Warner US$104,500 in what is just another costly demonstration of how inept Bynoe and the Government have been in relation to the petroleum.

Column 79 had written that the Local Content Policy Draft could be described in two words – First Consideration. I take that back. It is one word and that word is junk. Yes, that is what I think of this so-called policy.  No wonder and incredibly, not even the author Dr. Michael Warner was prepared to identify himself with the Document. In all my years of work, I have never come across a Report that does not bear the name of the author.

Now, this is supposed to be a Policy Paper of the Government of Guyana to govern, regulate and direct our country for the next forty years or more. Yet, incredibly, nowhere among the stakeholders in public and private sectors identified in the document’s Preamble as informing the formative consultations was the Minister of Natural Resources; the Director of the Department of Energy; the Minister of Social Protection, including the “Minster of Labour”; the Minister of Business or leading Trade Unionists. In fact, as the Consultant on a Policy of such considerable importance, this man should have insisted either meeting Cabinet or receiving a substantial Brief from them. It was no surprise however and rather quite ironic that Warner was not shy in naming ExxonMobil and Ratio as among his formative consultations!  

Evidence of Warner’s unfamiliarity with Government’s intention, let alone policy, is evident on page 3 when he describes as subject to confirmation whether the Government is considering codifying the policy through regulation, underpinned by the necessary legal framework. This hodge-podge of a document is so weak, woolly, unclear that it would be impossible to codify in any form.

I have seen some members of the private sector describe this Draft as an improvement on Drafts 1 and 2. They must have been pretty bad indeed. But I do not blame Warner – after all not many people refuse candy from a kid which is what happened here. I blame the Government and the Private sector Organisations for their failure to prepare their own draft and submit it to the Government. But the problem is that many who were expected to take a lead role might have been too busy looking after themselves without sufficient attention to the country’s interest.

It escapes me that they would expect that a Government which has largely been sleepwalking for four years during which almost every sector has seen a decreasing role of and for Guyanese somehow wakeup and protect local interest. It really does pain me to witness how village businesses have been destroyed by the influx of Chinese selling low cost, low quality goods.    

Maybe with some self-interest, I wonder too about the contribution of the Institute of Chartered Accountant of Guyana to the consultations. I have heard of some work done by some non-Guyanese accountants have raised in my mind serious questions.   

It is disgraceful that more than four years after the discovery of oil, we have no local content policy by whatever name. It is now almost too late for a local content policy since those who are already here as a result of our inaction and lack of any policy, cannot be excluded. Clearly, the Granger Administration has not treated the matter either as important or urgent and so there have been three drafts over three years with hardly any forward movement. Worse still, there is no likelihood of any progress in the near future.

Yet, a serious column cannot ignore the issue and having criticised the third draft as junk, it is my duty to offer some constructive suggestions – all pro bono.

How it is approached depends on who takes the initiative – Government, or civil society made up of the principal stakeholders. In either case, the first thing I would recommend is that we return to the drawing board. The existing draft does not even constitute a proper base or structure. In other words, scrap it.

The next question is to determine the objective of a local content policy. We have to see a Local Content Policy as one of the chief means of clawing back the vast benefits which the Granger Administration has given away on a platter. If we take as a given that the ultimate objective of any country is to ensure that its people have the first claim and must be the principal beneficiaries of the country’s resources then the rationale behind such a policy is obvious – the creation of jobs and capacity and skills building of the population and the retention and reinvestment of wealth back into the local economy.

In our case, with so many of our best brains having left our shores, the clawing-back can only be achieved through a sound and well-structured Local Content Policy – one that is reasoned, reasonable and practical, with the concomitant legislation force to ensure compliance.

Next week’s column will identify some of the main ingredients recognised by similarly placed policy-makers mainly from developing countries.

Introduction

The word is now out that long before the earlier planned date of First Oil, Guyana will witness the historic pouring of the first barrel of crude oil catapulting the small country of barely three-quarter million persons onto the world’s petroleum stage. Among Guyanese, there are those who are exuberant at the development while others cannot help but wonder whether instead of realising our dream, we are soon to be afflicted by the resource curse, whether the event taking place in the absence of a functioning Parliament is an omen like the Ancient Mariner’s.

Let us put that off and get back to more mundane matters like Local Content which has become the new buzzword. In fact, it is so important that after three attempts over more than two and a half years, the Government still cannot get it right. The Government has sought to address the matter by commissioning a Local Content Policy and has published three drafts, the First of which was dated April 2017, the second in May 2018 and the Third in May 2019 Draft. The most recent was itself only partially complete with numerous instances of the words to be confirmed or the initials tbc.

In an act of pointed irony, clearly the foreigner recruited by the Granger Administration to make the case for local content did not seek the help of a local counterpart who would have told him that there is no such thing as a GRA definition “Guyanese-Owned, Registered in Guyana” and “CARICOM-Owned, Registered in Guyana”.  That is the least of my concerns about this Draft. Maybe like so many others, he did not take the time or make the effort to read the Petroleum Exploration and Production Act or the Regulations made thereunder.

What local content is

That in my view has to be the starting point with the end point being the legislative changes which would have to be made even if only to repeal the existing provisions should the Government decide not to have local content as a statutory requirement. This column has pointed out ad nauseam the provisions of the Act and Regulations regarding local content. Section 36 of the Petroleum and Production Act prohibits the granting of a production to an applicant unless the proposal for the employment and training of citizens of Guyana and with respect to the procurement of goods and services obtainable within Guyana are both satisfactory. This prohibition is extended to an application for a petroleum prospecting licence as well. 

So what does the most recent draft state? It is of course a reasonably long document – thirty-six pages – so this column deals only with a few issues raised in the Draft. To start with, “Local Content” is defined to mean the active participation and development of Guyanese labour and suppliers in the petroleum sector and the benefits that arise from expenditure in the sector on labour, goods and services for Guyanese industry, the economy and wider society.

Local content is relation togoods and servicesis divided inclusively and exclusively into two groups – Group A and Group B.Group A means categories of goods and services where evidence shows the presence of one or more Guyanese Suppliers with the required capability, capacity and competitiveness sufficient to be invited to provide and expression of interest or otherwise engage in a tender process, either directly, as a partner or sub-contractor to another supplier.

Contrastingly, Group B means categories of goods and services where evidence shows an absence of any Guyanese Suppliers with the required capability, capacity or competitiveness sufficient to be invited to provide and expression of interest or otherwise to engage in a tender process, or where the Operator or its Primary Contractors can justify single or sole sourcing for reasons fully consistent with good industry practice.  

The Policy also envisages a label carrying a certificate “Certified Made-in-Guyana” which means a specified material, product or equipment that has been issued with a certificate by the [name of Guyana certifying agency] stating that the good meets requirements of domestic value addition to be classed as ‘Made-in-Guyana’.

For the purposes of preference for the Employment and Training of Guyanese, a“Guyanese Person” or “Guyanese Citizen” or “Guyanese”means a person or persons who have Guyanese Citizenship under the Constitution of the Co-Operative Republic of Guyana Act, Chapter 1:01, 1980, which includes inter alia a person born in Guyana (Article 43) and a person born outside Guyana who is a child of a parent with Guyanese Citizenship (Article 44).

First Consideration

To maximise the benefits of the petroleum sector for local employment and local businesses, investors, Operators and their Primary Contractors are expected to conduct their affairs and operations in Guyana in a manner that gives Guyanese persons and Guyanese Suppliers fair and adequate opportunity and first consideration where capable and competitive to provide labour, goods and services and improve and enhance their capabilities.

The essence of the Policy can be summarised in two words: First Consideration. The Draft, in perhaps its most definitive pronouncement, requires Operators and their contractors, in making decisions concerning recruitment and procurement to execute petroleum activities, to give first consideration to Guyanese persons having appropriate qualifications and experience, and to Guyanese Suppliers where capable and competitive.

The Draft contains an elaborate system of record-keeping and reporting under the watchful eyes of the Ministry while using a series of matrices.

To be continued.