Category: The Road to First Oil

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. 

Introduction

Mr. John Hess CEO of Hess Corporation disclosed that his company paid US$30 million for a 30% stake in ExxonMobil’s Stabroek Block. This revelation, publicised in the Kaieteur News on November 19, 2019, is sure to have caused some discomfort to Exxon which has adamantly refused to confirm or deny that it has received but not properly accounted for significant sums not only from Hess but also from CNOOC/Nexen and from Shell, a former partner in the Stabroek Block.

Let us recall that the forty-fourth column of this series published on May 18, 2018 was titled Pre-Contract cost numbers do not add up. That column included a Table constructed from the audited financial statements of the three contracting companies (Esso, Hess and CNOOC/Nexen) which hold the vast swathe of petroleum blocks offshore Guyana.

Recall that the 2016 Petroleum Agreement signed by Raphael Trotman and the Minister responsible for petroleum called on Guyana to recognise as pre-contract cost the sum of US$460,237,918 up to December 2015 in addition to such sums incurred between January 2016 to the effective date of the Agreement, all of which had to be agreed on or before April 30, 2017. Those figures were set out not in the Agreement proper but close to the back of Annex C to the Agreement. 

Strange Numbers

The Table forming part of Column # 44 showed that “at the very least”, the claim of US$460 million was overstated by approximately US$92 million. My opinion of its being “the very least” was based on several considerations, the first being that not all expenditure qualifies as recoverable pre-contract costs. I noted for example that Esso had close to US$5 million in current assets, mainly in inventory, which will be expensed as they are placed into use and consumed. I argued that such expenditure should they be expensed when used and therefore could not be included as pre-contract cost. 

A more significant matter was any money paid to Exxon by participating companies in the Stabroek Block which resulted in Exxon’s share declining from 100% to 45% in that most lucrative Block. In that column I drew attention to a statement by Hess that it had acquired a “participating interest in the Stabroek Block” while the company’s ultimate parent company reported to its international stockholders that it had acquired a “working interest”, which is another term for farm-out. I also noted that in 2008, Esso had entered into an Assignment Agreement and a Farm-out Agreement with Shell which would have also had financial implications.  And sticking to the same column, I referred to CNOOC’s statement that it had acquired its interest from ExxonMobil, which was never a party to any Petroleum Agreement. In that column I asked Esso to confirm whether that statement was correct, and if it was how much money, if any, was paid.

Contempt for Guyanese

The problem I have with Exxon’s and Esso’s conduct in Guyana is that it surpasses arrogance and borders on contempt for the Guyanese public. Guyanese have an absolute right to all information concerning Esso’s operations in Guyana: we take seriously section 2 of the Petroleum Act which states that “The property in petroleum existing in its natural condition in strata in Guyana is hereby vested in the State, and the State shall have the exclusive right of searching for and getting such petroleum.”

This past week as a motley group of oil people descended on Guyana, Hunter Farris, Senior Vice President (Upstream Oil and Gas Deep Water) of ExxonMobil told an audience which included Raphael Trotman in the front seat that “Our ExxonMobil Guyana company is just that – a Guyanese company.” That is complete nonsense and ignorance. ExxonMobil does not operate in Guyana. The operating entity in Guyana is Esso Exploration and Production (Guyana) Limited, a Bermudan company which has registered as an external company under the Companies Act.

Our media should have pressed

No doubt his presence in Guyana was tightly managed but I cannot but help being saddened that our local press corps did not do more to get an interview with him. Perhaps they tried but “at the very least” (here I go again), a series of questions should have been prepared and submitted to him. He ought to answer questions not about the details of the pre-contract costs but whether ExxonMobil or the Bermuda shell company was involved in these inflated numbers and whether he supports an independent audit of the numbers.

Farris ought to have been asked about ExxonMobil’s record on bribery of locals including Third World politicians; its manipulation of data on global warming; its support for the Paris Accord; and whether he thinks that a lopsided contract negotiated by applying duress can be considered fair.   

We do not know how much of a stake Shell had bought into Esso’s 1999 Agreement. We know however how much Hess paid for its 30% interest – US$30 million. Using that as a basis, it is fair to assume that CNOOC would have paid at least US$25 million for its 25% share. The Guyana Dollar value of the combined sum is north of eleven billion Dollars.

Conclusion

John Hess cares not for one minute for Guyanese, seeing our country in the same way as the pirates and wealth seekers did half a millennium ago. Ironically however, he has been more honest than ExxonMobil and CNOOC/Nexen. He has provided us with first-hand information which none of his partners would ever admit, let alone volunteer. He boasts that our Government pays the taxes on the bonanza profits his company would earn in Guyana.      

We will soon have First Oil. The event will be historic. But sadly and dangerously, we have as a partner an oil company that has not displayed any scruples in conducting its business around the world. If Farris really wants to make their ExxonMobil Guyana company a Guyanese company, then let ExxonMobil offer shares to the Government of Guyana, have its workers unionised and let it display transparency and integrity, characteristics which have so far been missing. And immediately, have ExxonMobil state how much it received from Shell, Hess and CNOOC/Nexen and importantly where those moneys went. Until then, it stands accused.