Every Man, Woman and Child in Guyana Must Become Oil-Minded – Column 165
Introduction
Chevron has won the right to acquire Hess’s 30% share in the Stabroek Block. This is not a direct acquisition but one made at the shareholders level where Hess shareholders will receive 1.0250 shares of Chevron for each Hess share. Exxon had challenged the transaction claiming that it had the right of first refusal but the International Chamber of Commerce in Paris ruled otherwise. Exxon’s challenge stemmed from its interpretation of a joint operating agreement (JOA) that governs the Stabroek Block. The agreement included a “right of first refusal” clause, which Exxon argued gave it the right to buy Hess’s stake before it could be sold to a third party. The flaw in Exxon’s thinking is that this was not a Guyana/Stabroek Block transaction.
These columns had argued that Guyana ought to have stepped in and bought the share, paying out of future profits. Clearly, this Government has no appetite to challenge anything the Stabroek Block partners do. But it is more than that. Vice President Jagdeo, in an apparent endorsement of Chevron’s success expressed confidence that Chevron will serve as Guyana’s guardian angel. Such an opinion reflects a fundamental misunderstanding of how multinational oil companies operate and what the recent arbitration victory actually reveals about corporate priorities.
Jagdeo’s misguided logic
Let us try to understand Jagdeo’s convoluted idea. He argues that “having another US major that had a kind of well, tense relationship with Exxon… that tension between the two could serve our country better” because Chevron will be “making sure that those costs are minimised”, thus increasing Guyana’s take which currently stands at about 14%. Those sentiments reveal dangerous naiveté about corporate motivations. Jagdeo believes Chevron will somehow prioritise Guyana’s interests over profit maximisation – a fundamentally flawed assumption. All he had to do was read the statements coming out of Chevron, or read the Joint Operating Agreement signed by Exxon, Hess and CNOOC.
In fact, central to their case before the Arbitration Panel, was the interest and their duty to their shareholders. ExxonMobil CEO Darren Woods stated the company had “a clear duty to our investors to consider our preemption rights to protect the value we created through our innovation and hard work.”
And following the approval of the deal, Chevron’s CFO Eimear Bonner emphasised that the deal would “drive significant free cash flow and production growth into the 2030s” and achieve “$1 billion in annual run-rate cost synergies.” And CEO Mike Wirth stated it would “drive greater long-term value to shareholders.”
Guyana not in oil companies’ equation
When asked about operational changes, Wirth told American television that his company anticipates headcount reductions due to “overlaps.” Notably absent from any of these shareholder communications was any mention of looking out for Guyana’s interests or serving as a watchdog over ExxonMobil’s costs. Jagdeo, the policy wonk, should know better. The 2016 Petroleum Agreement explicitly designates ExxonMobil as the operator with comprehensive authority over day-to-day operations. This operational control provides ExxonMobil with several crucial advantages that limit Chevron’s ability to effectively police costs. Chevron, as a non-operating partner, will have limited ability to challenge these decisions effectively, particularly given that ExxonMobil can leverage its technical expertise and its 26 years in the Block, to defend expenditure decisions.
As an economist, Jagdeo understands that when costs are largely recoverable and profits shared proportionally, there is extremely limited incentive for cost reduction, let alone cost policing. (They get back 100% of cost but only 50% share of profit). Nor does he seem to understand boardroom dynamics. Even after the bitter arbitration dispute, ExxonMobil immediately welcomed Chevron as a partner, stating: “We welcome Chevron to the venture and look forward to continued industry-leading performance and value creation in Guyana for all parties involved.” Indeed, there is no evidence internationally that show joint venture partners in oil or other resource projects acting as effective watchdogs for host governments. Their primary obligation is to their shareholders, not to the host country.
The Audit Reality Check
If Jagdeo believes that Exxon and CNOOC are inflating costs, then he is admitting that the three annual audits of the oil companies’ books allowed by the Agreement are ineffective, a waste of time and money. It is disturbing even to contemplate that the government expects Chevron, the new kid on the block, will spend time seeking to solve Guyana’s audit problem. The issue is ineffective contract administration and weak government oversight which Jagdeo’s approach is seeking to outsource to Chevron! Instead of protecting the country’s interests through robust regulatory mechanisms, Jagdeo seeks to abdicate its duty.
Conclusion
VP Jagdeo’s faith that Chevron will look out for Guyana’s interests represents dangerous naiveté about corporate motivations. The recent arbitration battle demonstrated that both ExxonMobil and Chevron are primarily concerned with maximising returns to their shareholders, not protecting Guyana’s fiscal interests. In fact, if they were that interested in Guyana’s interest, they would proactively agree to renegotiating the 2016 Agreement. But Jagdeo does not want to hear that. The Joint Operating Agreement dynamics, combined with cost recovery mechanisms in the 2016 Petroleum Agreement, actually align the interests of all foreign partners against those of the host government.
Guyana’s interests will be protected only through robust government oversight, technical expertise, and strong contractual frameworks – not through hoping that one Stabroek Block contractor will police another. We should not contemplate, let alone afford to outsource our country’s oversight responsibilities to foreign oil companies whose primary allegiance lies elsewhere. Jagdeo’s statement does not inspire confidence.