ChrisRam.net

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.

Today’s column highlights a few issues raised by Mr. Raphael Trotman, then Minister of Natural Resources who appeared before the Natural Resources Committee of the National Assembly on May 18, 2018. In his presentation, Trotman misled the Committee on the origins of the 2016 Agreement, revealed that the signing bonus was not really a signing bonus, lied about the presence of natural gas in the 1999 Agreement, misrepresented the nature of the Stabilisation Clause and grossly exaggerated the share of revenue that will flow to the Government from petroleum. In summary, Trotman was either clueless or dishonest but whatever it is, he and the Government have cost the country dearly.   

The origin of the 2016 Agreement

According to Mr. Trotman, the Granger Administration took a decision in 2015 to update the agreement with ExxonMobil, describing the occasion not as a re-negotiation but as an “update of an agreement”, something of dubious authority and alien to the Petroleum Exploration and Production Act. Apparently Trotman in the give-away of the century was unaware of the changed circumstances between 1999 and 2016 – the difference between pre- and post-discovery. But what moves the matter from incompetence to dishonesty was that when Trotman appeared before the Committee in 2018, he had already been in receipt of an April 2016 Memo relating a confrontation between ExxonMobil and the Head of the Petroleum Unit of the GGMC in which the oil giant insisted that “For Esso to start spending, the replacement petroleum licence and agreement is needed”.

In other words, the Government was forced into a decision by Exxon who recognised its tenuous position with the 1999 Agreement coming to an end. 

The signing bonus

The Report quotes Trotman as saying that Guyana “received the sum of US$18 million, which was termed as a signature bonus. But for all intent and purposes, US$15 million of that has always been earmarked as the legal fees to be paid for our legal challenge in court, and US$3 million was set aside for capacity building for the country, in the years 2017 through to 2020.”

Trotman told the Committee that the persons rendering advice to the APNU+AFC Government in 2016 were the same persons who had given advice to the PPP/C Government in 1999. Perhaps that advice extended to legal services as well but that question was not asked of Mr. Trotman by any Committee member. The so-called signing bonus then, based on Trotman’s testimony was not really revenue but to protect the massive oil blocks granted to Esso. To use Trotman’s words, “ExxonMobil, after some discussions, agreed to give Guyana some support …”

We have since learnt that part of the US$15 million is already being drawn down and it would be interesting to know for whose benefit. Could it possibly for some of the same persons who might have been paid in 1999?

The Stabilisation Clause

This is in fact a separate Article in the Agreement which Trotman traced to the Petroleum Agreement with Anadarko Petroleum Corporation which was signed in 2012. Trotman deserves credit for his Trumpian habit of making up credible stories with a straight face. In fact, the Article is a replica of Article 32 – Stability of Agreement contained in the 2012 Model Petroleum Agreement published when Robert Persaud was the Minister! Indeed, a Stability Article appears in the 1999 Agreement. 

To confuse the Committee even further, Trotman linked the Stability Article to the Beal Deal and with his straight face telling the Committee that “(a)fter the collapse of the Beal Deal, because of strong opposition from Bolivarian Republic of Venezuela, companies want and continue to want to know that they have a regime that is almost iron-clad, that Government would not turn, put its tail between its legs and run away whenever opposition comes, nationally and internationally.”

If there is any evidence that Trotman was never fit to hold the portfolio, incapable of negotiating a Petroleum Agreement or even understanding what he had signed up Guyana to, it is his ignorance of the origin and the content of the Stability Article. It has to do with exempting the oil companies from any legislation passed by any Government having an adverse impact on Exxon.

Natural gas

Mr. Trotman boldly asserted to the Committee that “We have also included the clauses for the use of natural gas. The 1999 Agreement had nothing about natural gas.” I do not know whether to laugh or to weep for Mr. Trotman but how could he not know that the 1999 Agreement had as Article 12 – Associated and Non – Associated Gas, the same title as the 2016 Agreement and that the two Agreements bear striking similarities?

Guyana’s earnings

Demonstrating the mathematical wizardry which underpinned the APNU+AFC’s definition of a majority, Trotman delved into some hyperbolic calculations directing the members of the Committee who have calculators to follow his maths. Using a base of 3.2 billion barrels of oil he asked them to multiply that number by 50% and then declaring that “it would be in the realms of US$300 billion and half of that is already coming into Guyana. We are already going to be wealthy.”

Here again, Trotman is displaying further evidence of his limitations which operate against the interests of the country. It is unclear from his convoluted maths whether he is assuming a price of US$200 per barrel or US$100 per barrel, the first of which is crazy and the second extremely optimistic. He completely ignores Cost Oil which includes annual operating, financial and other onshore costs as well as pre-contract and pre-production costs. Conservatively, for the first three to five years all Guyana might receive is 14.25% of gross revenues including royalties from the Esso contract.

It is true that Guyana will receive income from employment and withholding taxes that are not insubstantial. But against this has to be weighed the cost of regulating the sector by the Customs and Trade Administration, the Guyana Revenue Authority, financing the Department of Energy and the Environmental Protection Agency all of which can add up to several billion dollars annually. Trotman is no longer the Petroleum Minister and that is a good thing. Hopefully Dr. Mark Bynoe is better at maths and with facts.    

Introduction

For some time, questions have been raised about the royalty provisions in the 2016 Agreement under which Trotman/Greenidge/Granger partially signed away the birthright of all Guyanese past, present and future. This short column seeks to identify both the direct and indirect provisions on royalty found in the Agreement.

Before doing so however, it may be instructive to consider what a royalty is and how it arises. The word “royalty” has a host of meanings but in the business or commercial sense it is used to refer to moneys paid for the sale or use of a capital asset owned by another. It is not uncommon to see the word used in relation to intellectual property, including artistic and literary works, and in the mining sector, it is used to describe the payment made to the owner of resources for the extraction of some natural resource whether renewable – such as timber, or non-renewable, such as precious stones, bauxite, manganese or petroleum.

Is we own

To ascertain the owner of Guyana’s petroleum resources one has to look at a little considered, and ultra-short piece of legislation dating back to 1939. It is called the Petroleum (Production) Act and on the enactment of the 1986 Petroleum Exploration and Production Act, it is left with two sections, including the short title! It is good to be reminded however that section 2 (1) of the Act provides with clarity and brevity as follows:

                “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.”

As Dave Martins will say, “is we own”

So here we have it: the non-renewable petroleum resources belong to the State and anyone seeking to exploit it must pay a royalty for that right. So we turn to the Petroleum Agreement to see how this commonsense, practical business matter is addressed. While the term is actually used a few times in the Agreement, Article 15 thereof is titled Taxation and Royalty which makes this Article of the Agreement perhaps the best place to start. Paragraph 15.6 provides as follows:

“The Contractor shall pay, at the Government’s election either in cash based on the value of the relevant Petroleum as calculated pursuant to Article 13 or in kind, a royalty of two percent (2%) of all Petroleum produced and sold, less the quantities of Petroleum used for fuel or transportation in Petroleum Operations, from all production licenses subject to this Agreement.”

The end of clarity

A plain reading of the provision makes it pellucid that the royalty payable to the State of Guyana for the alienation of a non-renewable resource is a mere 2%, which is hardly an improvement on Janet Jagan’s 1% Royalty in a 1999 Agreement! But clarity ends there. Production is in the form of crude oil and it is unclear – with no assistance from the Agreement – on resolving the confusion of measuring (raw) crude with fuel for transportation in petroleum operations. The confusion does not end there: a deduction from gross production for transportation is in respect of every production licence under the Agreement. And there will be many, many!

There is a further problem: quite what does “produced and sold” mean? Well, yes we know what “produced” means but sold? None of the oil companies described as contractors in the Agreement is likely to be selling crude oil so just when and in what form does the sale take place? Or what conversation factor does Guyana expect or will be prepared to accept as a reasonable application of the term “produced and sold”.

It does not end there. Article 14.1 provides among other things that:

“The Contractor shall have the right to use as much production as may be needed in any Petroleum Operations within the Contract Area and also within the transportation and terminal system. In the event of third party usage of the transportation terminal systems the quantities so used or lost outside the Contract Area shall be proportionate to aggregate use of that transportation and terminal system. All quantities so used or lost shall be excluded from any calculations of entitlement pursuant to Article 11.”

Generously misleading

In other words, Article 14.1 is more generous than the Taxation and Royalty Article by allowing deduction from gross production the fuel equivalent (my term) used not only in the Contract Area of 26,806 sq. km. but in an enlarged transportation and terminal system! With our petroleum people showing a frightening mix of unwillingness to learn with an apparent inability to learn, the Agreement sets us up for a very lopsided arrangement.

I am not entirely satisfied that these concessions are in fact permitted under the Petroleum Exploration and Production Act but who cares? We fight for political power but nonchalantly give away our patrimony.

Interestingly, the Agreement at Article 15.5 suggests that the payment of the royalty is by the Contractor but that is at best misleading. Royalty is not being paid by the Contractor but, like any other expense, is borne by the Government as well as the Contractor. Moreover, because royalty is a deductible expense to arrive at profit oil, the Government bears half the cost of the 2% royalty. In other words, for a non-renewable resource with implications for the environment, the economy and the society, the royalty the State gets is 1%! I do not think it is a stretch to suggest that the effect on the fishing sector will take up part of that royalty.

Renegotiating the royalty?

Now for those who have been calling for the renegotiation of the Agreement, here is what Article 32.1 has to say about that:

“After the signing of this Agreement and in conformance with Article 15, the Government shall not increase the economic burdens of Contractor under this Agreement by applying to this Agreement or the operations conducted thereunder any increase of or any new petroleum related fiscal obligation, including, but not limited to, any new taxes whatsoever, any new royalty, duties, fees, charges, value-added tax (VAT) or other imposts.”

This is the inheritance which Trotman, Greenidge and Granger have bestowed on Guyana. What a shame! All that is left for them to do to complete their generosity is to waive the royalty as they are permitted to do under section 49 of the Petroleum Exploration and Production Act.