Category: The Road to First Oil

Introduction

Today’s column looks at what is called Cost Oil, both in the petroleum industry around the world and in the Petroleum Agreements signed by Guyana with contractors. Generally the term is used to mean the expenditure which the operator can charge against income in arriving at what is called profit oil. Cost oil falls under Article 11 of the Model Petroleum Agreement which carries the broader heading “Cost Recovery and Production Sharing”. A comparison of the Model Agreement and the 1999 Agreement signed by Janet Jagan with Esso Exploration and Production Guyana Limited (Exxon) shows that the two are identical, give or take the capitalisation of a few letters!

Here are two of the opening paragraphs extracted from the Agreement.

“11.1 Subject to the terms and conditions of this Agreement, the Contractor shall bear and pay all contract costs incurred in carrying out petroleum operations and shall recover contract costs only from cost oil as herein provided.

“11.2 All recoverable contract costs incurred by the Contractor shall, subject to the terms and conditions of any agreement relating to Non-Associated gas made pursuant to Article 12, be recovered from the value, determined in accordance with Article 13, of a volume of crude oil (hereinafter referred to as “cost oil”) produced and sold from the contract area and limited in any month to an amount which equals [seventy-five percent (75%)] of the total production from the contract area for such month excluding any crude oil used in petroleum operations or which is lost. “Recoverable contract costs” means such costs as the Contractor is permitted to recover, as from the date they have been incurred, pursuant to the provisions of Annex C. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 17)”

Trotman’s new Agreement

Today’s column seeks to address an issue which has largely gone under the radar because Mr. Raphael Trotman, the Minister of Natural Resources has been less than forthcoming in disclosing his actions in relation to ExxonMobil since the APNU+AFC Government took office in 2015. On every occasion that Mr. Trotman was asked about ExxonMobil (Exxon) he has always answered rather evasively, and only that he had negotiated an increase in the royalty from 1 % to 2%. In my research for a Moray House presentation last Friday on the challenges and opportunities posed by the discovery of oil in offshore Guyana, I realised Mr. Trotman actually did more than that.

Some background would be useful from the following timeline.

– June 14, 1999: Petroleum Agreement and Prospecting Licence signed by President Janet Jagan as responsible Minister for approximately 600 blocks.

– Sept. 29, 2001: Exxon declares force majeure due to hostile action by Surinamese naval vessels against the CGX oil rig and drillship C.E.Thornton.

– Sept. 7, 2007 UN pronounces on Guyana/Suriname dispute.

– October 2008: Exxon lifts Force majeure status.

– October 2008: An Addendum and Extension Deed to the Petroleum Prospecting License signed, modifying the Contract Area, the relinquishment obligation, and the initial period.

– Aug. 2, 2016: Official Gazette reveals that a new agreement was signed between Guyana and Exxon and its JV partners on 27 June 2016. That document has not been released to the public or the National Assembly. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 16)”

There is a wide variety of petroleum contracts which countries, with the single exception of the USA, may choose to adopt. The USA is unique in that the state or the Government does not have blanket ownership of petroleum resources. If it is on government land, then yes, the property with the petroleum vests in the government and so too if the petroleum exists offshore. But otherwise, petroleum found under the land owned by a person belongs to that person.

In Guyana, as in every other country, the ownership of petroleum vests in the State, whether or not the petroleum is found in private property. Section 2 of the Petroleum Exploration and Production Act which was passed since 1939 vests in the State the property in petroleum existing in its natural condition in Guyana and grants the State the exclusive right of searching for and getting such petroleum. This may not be popular, nor does it seem right and the day may not be too far off when the issue is tested in our courts, whether on the basis of the technical definition of land or the constitutional right to property or on the basis of fair and adequate compensation. We will leave that discussion for another day!

We continue the discussion begun last week when we discussed the concession System /Royalty Tax System practised by some countries, particularly in the early days of petroleum production. This of course is just one of the options at Guyana’s disposal in what is described as the petroleum fiscal system. It is a term which refers to all payments to government required under a petroleum agreement and may be defined as the framework which the government of an oil producing country employs in managing, regulating and sharing the revenues that accrue from the stages of petroleum exploitation. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 15)”

The importance of royalty

In the last column which appeared on August 17, I indicated that I would touch next on royalty in petroleum contracts. The concept of royalty under Guyana petroleum laws gained some prominence when the Minister of Natural Resources had succeeded in negotiating an increase in the royalty rate from 1% to 2%, in each case expressed as a percentage of crude oil produced and sold. In fact, the Model Petroleum Agreement provides that royalty would be paid in kind and at the delivery point which is defined as the “fob point of export in Guyana, either offshore or onshore, which shall be agreed by the oil company and the Minister.

Royalty is not peculiar to any particular type of petroleum agreement which broadly can be one of the concessionary system or the contractual system. In other words, royalty can feature in the concession system or the contractual system. Recall that under the concession system, the host country may be paid a signing bonus, royalties based on production and taxes on taxable profits.

Concessions are recorded as the oldest form of petroleum contracts but these are more recently referred to as the Royalty Tax System. Generally, a royalty tax regime can be made up of a combination of three elements: a royalty to secure a minimum payment, the regular income tax applicable to all companies and a resource rent tax which is aimed at capturing a large share of the profits. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 14)”

The Prospecting Licence and the Production Licence under the Petroleum Exploration and Production Act

Introduction

Much is being made of the world class calibre of the advisers to the Granger Administration and Minister Raphael Trotman as they construct a path to First Oil in 2020. None of them apparently has told Messrs Granger and Trotman that the first steps should have been the adoption of a Petroleum policy, the urgent revision of the petroleum laws and the establishment of a team of skilled individuals with knowledge, competence, integrity and capacity to engage the oil men.

Oil is of course serious business, involves big dollars and is full of messy, technical details. At the end of the day however, it is about negotiations, understanding one’s strength and exploiting the other person’s weaknesses. Of course, the other side would be doing the same and it will boil down to who has the chips, the guts and the skill. Let us leave the world class experts to advise the Government. We need to get on with our work.

Today’s column sets out the provisions of the Petroleum Exploration and Production Act relating to the two licences which operators may apply for. The licences are a Prospecting Licence and a Production Licence, a prerequisite of which is an agreement between an applicant and the Minister under the powers vested and subject to the duties imposed under section 10 of the Act. The Agreement covers both types of licences but each is in turn subject to its own conditions. Continue reading “Every Man, Woman and Child in Guyana Must Become Oil-Minded (Part 13)”