A fair balance for Guyana’s share of profits must focus on a new production sharing agreement

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Dear Editor,

Recently, I read a report prepared by SPHEREX Analytics, an accounting firm that produced the 2020 and 2021 financial statements for Esso Exploration and Production Guyana Limited (EEPGL). In the report, it is claimed that “…Guyana’s share of profits and royalties exceeds the net profit of the oil companies”. While this statement is correct, he argued here that measuring only the profit oil and royalties that Guyana collects is misleading and misleading. This specification is misleading and misleading because this measure of profit oil and royalties does not take into account the share of total revenue captured by EEPGL, which is many times greater than the share of total revenue that Guyana receives. In particular, it is stipulated in the contract that EEPGL will receive 75% of the total revenue (TR) as a cost; Guyana will receive 2% of total revenue (TR) in the form of royalties and 12.5% ​​profit oil. What this actually means is: Profit = TR – Total Cost = PQ – 0.75 (PQ) = (1 – 0.75) PQ = 0.25PQ where P is the price per barrel of oil; Q is the quantity of barrels of oil sold; PQ is the total income; and Profit oil total = 0.25 (PQ).

Since Guyana receives 50% of the Total Profit Oil, this gives Guyana Profit Share = 0.5 (0.25 PQ) = 12.5%. Adding 2% for royalty time (PQ), plus Guyana’s profit share, gives Guyana a total revenue share (GSTR) = 0.145 PQ. Therefore, the share of EEPGL in the total revenue is 85.5% of the total revenue (TR), which implies that the share of EEPGL in the total revenue (TR) is 5.896 times that of the share of Guyana in total revenue (TR). What 5,896 clearly indicates is that for every 6,896 barrels of oil sold, Guyana receives only one barrel of oil, while EEPGL owns and can sell 5,896 barrels of oil. Furthermore, acknowledging that the oil belongs to Guyana and that it is a non-renewable resource, this is the gross inequity that Guyana is experiencing; and this must be rectified immediately in order to generate a fair and just return for Guyana’s oil, our non-renewable heritage.

Moreover, what contributes in part to this inequity in the production sharing agreement is the relationship between cost and revenue, where cost is proportional to total revenue: Cost = 0.75TR = 0.75(PQ) . This cost specification is outrageous, because a cost function does not include the price (P) of the product (a barrel of oil). In other words, this specification indicates that each time the price of a barrel of oil increases, the cost increases, which is obviously false. Recent increases in the price of oil and President Biden’s statement that “Exxon made more money than God this year” are relevant to this discussion. In addition to the concern over total revenue in the cost function, Tom Mitro in a June 24, 2022 KN article stated that “…all interest on loans borrowed to finance the development of related petroleum projects.” can be included as a cost. EEPGL does not have to pay tax on its share of profits and the government must provide a receipt which can be used for tax deduction purposes. Undoubtedly, this transaction of issuing a government receipt for uncollected money is fraud and corruption; because if an official of any department initiates such a transaction, that person could be charged and possibly incarcerated for a crime based on an illegal directive. Hopefully, the person writing the receipt and the person who authorized the transaction are aware of the consequences of this fraudulent transaction. Certainly the Auditor General has work to do, because this kind of fraudulent transaction cannot be swept under the rug; otherwise, this precedent may become endemic and unstoppable in all government departments.

In the meantime, there are other possibilities which can have an impact on costs. Among these are the transfer prices, between the subsidiary, EEPGL, and Exxon Mobil and the other owners, namely, HESS Corp, and China National Offshore Oil Company (CNOOC). Additionally, there is flexibility, ‘…for costs exceeding the 75% ‘ceiling’ to be deferred to successive months until recovered.’ In this case, the 75% “cap” on costs is expected to come to an end; and the cost will decrease to something less in the future, resulting in a 12.5% ​​increase in profit share for Guyana. It’s a false hope at best, no less than trying to empty the mighty Essequibo River with a spoon; as EEPGL will be reluctant to relinquish control of its 75% share of total revenue. In addition, as the life of the project approaches its final production date, EEPGL may terminate operations before that date and claim that it is not financially viable to continue production; and it would be too late for Guyana to get extra profits and taxes. In these circumstances, one remembers the old Russian proverb made popular in the West by Ronald Reagan, “Trust but verify”. This can be accomplished by using comprehensive oversight and appropriate controls/sanctions/incentives on exploration, investment, employment, production, marketing and ensuring environmental balance. Additionally, use comprehensive audit programs with corrective actions; and hire the best and the brightest, regardless of their political affiliations. I don’t know if we are ready for that, but failure would lead to adding a few lines to the Russian proverb: “Trust but verify”; otherwise, the statements received will only deceive.

In order to better understand the revenue split between Guyana and EEPGL for fiscal years 2020 and 2021, SPHEREX Analytics has prepared the information presented in table (a) below. Total revenues in 2020 and 2021 are $176.1M B and $545.1M B respectively. It is further reported that in 2020, Guyana’s net catch (profit oil and royalty) was G$25.532 million, split as profit of G$22.0 million and royalties of G$3.532 million. dollars G. In 2021, it is reported that Guyana’s net catch was 79.0 million Guinean dollars with a royalty of 10.9 million Guinean dollars and a profit oil of 68.1 million Guinean dollars. Given the financial information in table (a) above, there are a few issues that need to be clarified. First, in 2020, profit oil (G$44,022 million), royalties (G$3,522 million) and cost recovery (G$132,066 million) total G$179,610 million, which represents total revenue. However, this $179,610M is $3,522M higher than the reported income of $176,088M in 2020. Interestingly, the $3,522M is the same as the payment of the fee, and this should be explained by SPHEREX Analytics. Similarly, a similar gap is observed in 2021, where the sum of profit oil ($136,272M G), royalties ($10,902M G) and cost recovery ($408,815M G) totals $555,989 M$ B$. This total ($555.989 billion), compared to the total income in 2021 of $545.086 billion, is overestimated by $10.903 billion; and this amount is equal to the payment of the royalty in 2021. SPHEREX Analytics must explain this inconsistency. It is important to recognize that with a 2% royalty, this is equivalent to one barrel of oil, out of 50 barrels of oil, with the remaining 49 barrels to be split between Guyana and EEPGL (Table 1).

As noted earlier, when Guyana receives 14.5% of total revenue (profit oil and royalties), this earns Guyana one barrel of oil, while EEPGL receives 5.90 barrels of oil. Furthermore, the data in Table 1 confirms that as Guyana’s share of total revenue increases, EEPGL’s share of total revenue and barrels of oil decrease. And unsurprisingly, at 50% of total revenue, Guyana and EEPGL would each receive one barrel of oil when two barrels of oil are sold. It is therefore claimed that a fair balance is somewhere between 25% and 50% of total revenue for Guyana; and this would imply that for every four barrels of oil sold, EEPGL would receive three barrels of oil and Guyana would receive one barrel of oil. The result of this arrangement is that there is no need to worry about the royalty, but the focus should only be on a New Production Sharing Agreement (NPSA): 3 barrels for EEPGL and 1 barrel for Guyana . This should be the objective of the renegotiation team. Now applying this NPSA to sales in 2020 and 2021, respectively, would yield the following:

1. Guyana’s levy in 2020 = 0.25 (176,088 B$M) = 44,022 B$M, i.e. the total profit in 2020; while EEPGL’s take in 2020 = 0.75 ($176,088B) = $132,066B, which is cost recovery.

2. Guyana’s catch in 2021 = 0.25(G$M545, 086) = G$M136, 272 which is profit oil, while EEPGL’s catch in 2021 = 0.75 (G$M545, 086 ) = G$M408, 815), which is cost recovery. In conclusion, it is worth pointing out that given the history of Guyana, our heritage of non-renewable resources, such as gold, bauxite, manganese, silica sand and other minerals, cannot no longer be wasted, because extraction without optimal compensation must cease. Therefore, get organized Guyana; and be more proactive, so that we can build a nest egg for our future generations.

Sincerely,

C. Kenrick Hunte, Ph.D.

Professor and former ambassador

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