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December 14 2019

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Oil production has not yet commenced but Guyana is already saddled with a bill for US$11B. Of this amount, US$960 M is pre-contract costs and the remainder is the estimated costs for developing the two major fields, Liza 1 and Liza 2.Before a drop of oil has been produced, every single Guyanese owes Exxon Mobil and her partners, US$15,000 or about G$3M. This per capita burden is about five times higher than the per capita debt burden which made Guyana one of the most highly indebted nations in the world.And those with memories will recall how much suffering that debt burden inflicted on the population.Despite the oil, Guyana will have a bigger debt, in the form of cost recovery, to service that debt. It will take years to remove this debt from around the necks of Guyanese.


Let us assume, hypothetically, that it costs US$5M for the development costs of Liza 1. Oil production is expected to start at 120,000 barrels per day. Assuming a price of US$55 per barrel, and the 75% cost recovery cap, it will still take about four years to clear the initial developmental costs of Liza 1 alone.


The Opposition leader has joined the chorus of calls for greater scrutiny of the US$10B developmental costs. Guyanese are circumspect about these projected costs and, as given the suspicion, there are fears that these costs can be overstated by as much as US$2 B.A great deal can be done with US$2B. You can build a high span bridge across the Demerara and Berbice Rivers.You can bridge all of our rivers, construct the road from Linden to Lethem and increase public service wages five times and still have plenty change left over.

The discussion about scrutiny of the development costs of Liza 1 and Liza 2 are therefore not misplaced. It is important that every cent be accounted for.And this is what this newspaper has been calling for. It is simply calling for Guyanese to demand from their leaders that the country is not overbilled for the development costs of these two fields. For every billion dollars which the country is overcharged a great deal could have been done to benefit the country and its people.But who is going to scrutinize these costs? Guyana is just pretending that it has the capacity to audit these costs. It does not. This is a task which is beyond Guyana. The GRA does not have the capacity to do this. It does not have the skills to undertake such a task.


One solution is for the outsourcing of the auditing of the costs. Well, Guyana has not had a good experience in outsourcing scrutiny of foreign multinationals. The Jagan government brought in a firm to examine the Omai deal. The firm advised that Guyana got a decent deal. The 5% royalty was considered a decent deal.
Guyanese know what happened. An estimated 2.5 million ounces of gold was taken out of Guyana and the company never showed a profit. So much for a good deal.


According to Exxon, The Liza Phase 1 development is expected to produce up to 120,000 barrels of oil per day with a with storage capacity of up to 1.6 million barrels. The field is expected to have 17 wells in total – eight oil producing wells, six water injection wells, and three gas reinjection wells.Production from Liza 2 is expected to commence in 2022 and the field is designed to produce 220,000 barrels per day. It will have approximately 30 wells, including 15 oil producing wells, nine water injection wells and six gas injection wells.The combined production of Liza 1 and Liza 2 will only result in production of around 330,000. This is not going to be enough to allow for rapid pay-off of the developmental costs so that more monies can come Guyana’s way. And no amount of auditing of the pre-contract costs and the field development costs is going to change that.


There is only one solution to the present conundrum in which Guyana finds itself. Auditing the pre-contract costs and the development costs of Liza 1 and Liza 2 are not solutions which are likely to be favourable to Guyana.There is only one solution: renegotiate the oil deals. As someone said, β€œSimply put, the Stabroek Block contract has to be renegotiated, and the Canje and Kaieteur contracts rescinded now.”

Replies sorted oldest to newest

Django posted:
Bibi Haniffa posted:

How long will it take Guyana to pay Exxon the $11 billion?

That's why me ask Laba to ask TK , to help out with the numbers. Looks like approx 12 yrs calculated ,$30 per barrel at 120,000 barrels a day.

This is a pre-production cost. What about ongoing production costs? Would this not reduce Guyana's share and add to Exxon's expenses? Just asking.

FM
Last edited by Former Member
Django posted:
Bibi Haniffa posted:

How long will it take Guyana to pay Exxon the $11 billion?

That's why me ask Laba to ask TK , to help out with the numbers. Looks like approx 12 yrs calculated ,$30 per barrel at 120,000 barrels a day.

Why ask TK? You should ask economist Bharrat Jagdeo because his PPP/C government will have to poney up that mammoth amount of money.

FM

Hey hey hey...de aile deh under de ocean bed. Nobady na seh dem go tek am out until Exxon seh abie go tek am out. Foh tek am out Guyana na pay one cent. Exxon up front de money foh pump am out. De peopkle gat foh get back dem cost. Na suh business does wuk? Fof run me cane juice stan me gat to pay cost. Business gat cost...hey hey hey, na? Bai...dem PNC/AFC one lovers get conned and who know pay off. De contract could be better...but abie gat foh always remember dat abie na put ONE cent foh tek am out. Me doubt dem Chinaman or Russia man go tek am out foh less...hey hey hey. Abie Guyanese a wan strange peopkle...like remittance condition abie foh believe everything free...hey hey hey. 

FM
Django posted:
Bibi Haniffa posted:

How long will it take Guyana to pay Exxon the $11 billion?

That's why me ask Laba to ask TK , to help out with the numbers. Looks like approx 12 yrs calculated ,$30 per barrel at 120,000 barrels a day.

Hey hey hey...dem bais seh how TK complete retire from makin free statement foh Guyana. De man write 10 plus column on dis issue...de forecast deh online pon SN if yuh look. De man retire...me hear dat when Jagdoe and Granger refuse to go parliament foh vote foh allow dual citizen foh serve...dat was de lass straw foh Mr TK me hear. No more free opinion and G$20000 foh column in SN...hey hey hey...dem bais asking de man foh seh something in SN about how Jordan and Ganga pull off de biggest con job...even bigger dan Trump con...pon de guyanaese peopkle lass week. Ayoo wait 5 years...yuh go see how much money go deh in de sovereign wealth fund...given what Jordan and Ganga do lass week. Ayoo remember dis day pon GNI. Hey hey hey...

FM
Baseman posted:

Why people so stupid!  All the Exxon upfront cost are not real debt.  Exxon likely registered it to safeguard their interests.  These are costs to be recouped with production!  It’s normal business, ring fenced within oil!

Bai dat is correct. Even me cane juice stan me had to pay dem cyarpenter bais foh mek am and de welder foh put up de metal grinder. All dat me up fron from meh bank book at Baroda. Den me sell cane juice and egg ball...even sweet cassava bread...foh pay back me bank book at Baroda...hey hey hey...meh expanding and meh buying wan truck now...meh go upfront de cost from meh baroda bank account...hey hey hey. 

FM
Labba posted:

Hey hey hey...de aile deh under de ocean bed. Nobady na seh dem go tek am out until Exxon seh abie go tek am out. Foh tek am out Guyana na pay one cent. Exxon up front de money foh pump am out. De peopkle gat foh get back dem cost. Na suh business does wuk?

Fof run me cane juice stan me gat to pay cost. Business gat cost...hey hey hey, na?

Bai...dem PNC/AFC one lovers get conned and who know pay off. De contract could be better...but abie gat foh always remember dat abie na put ONE cent foh tek am out. Me doubt dem Chinaman or Russia man go tek am out foh less...hey hey hey. Abie Guyanese a wan strange peopkle...like remittance condition abie foh believe everything free...hey hey hey. 

Dee cost izz two jill ah year fuh yuh cane juice stan; eh Labba.

FM
Gilbakka posted:
Django posted:
Bibi Haniffa posted:

How long will it take Guyana to pay Exxon the $11 billion?

That's why me ask Laba to ask TK , to help out with the numbers. Looks like approx 12 yrs calculated ,$30 per barrel at 120,000 barrels a day.

Why ask TK? You should ask economist Bharrat Jagdeo because his PPP/C government will have to poney up that mammoth amount of money.

The government don't have to pay , the investor take 75 % of oil extracted , to recoup investment cost,investor money spent for exploration and equipment to bring the oil from bottom of the ocean.

Here is a scenario ,If the investor stops production ,before recovering their cost , they are on their own , government don't owe nothing.

Django
Last edited by Django
Django posted:
Gilbakka posted:
Django posted:
Bibi Haniffa posted:

How long will it take Guyana to pay Exxon the $11 billion?

That's why me ask Laba to ask TK , to help out with the numbers. Looks like approx 12 yrs calculated ,$30 per barrel at 120,000 barrels a day.

Why ask TK? You should ask economist Bharrat Jagdeo because his PPP/C government will have to poney up that mammoth amount of money.

The government don't have to pay , the investor take 75 % of oil extracted , to recoup investment cost,investor money spent for exploration and equipment to bring the oil from bottom of the ocean.

Here is a scenario ,If the investor stops production ,before recovering their cost , they are on their own , government don't owe nothing.

Yuh sounds like a oil expert. 😁

Seriously, thanks for the explanation.

FM
Baseman posted:

Why people so stupid!  All the Exxon upfront cost are not real debt.  Exxon likely registered it to safeguard their interests.  These are costs to be recouped with production!  It’s normal business, ring fenced within oil!

Corporations borrow money to invest in projects. That is borrowed money that Exxon is investing in this project to get it started.  Borrowed money comes with interest. Is Guyana responsible for the interest accrued for the borrowed money invested to start this project.

Prashad
Last edited by Prashad
Prashad posted:
Baseman posted:

Why people so stupid!  All the Exxon upfront cost are not real debt.  Exxon likely registered it to safeguard their interests.  These are costs to be recouped with production!  It’s normal business, ring fenced within oil!

Corporations borrow money to invest in projects. That is borrowed money that Exxon is investing in this project to get it started.  Borrowed money comes with interest. Is Guyana responsible for the interest accrued for the borrowed money invested to start this project.

Exactly what’s the relevance of this?  Big corporations have billions of dollars of debt as a normal course of business!  What does that have to do with anything!  This is normal balance sheet gearing!

Ayuh throwing spaghetti!

Fact is, Guyana owes Exxon nothing unless Guyana terminates the contract. Exxon will recoup all cost through the partnership P&L!  And that has annual limitations!

Baseman
Baseman posted:
Prashad posted:
Baseman posted:

Why people so stupid!  All the Exxon upfront cost are not real debt.  Exxon likely registered it to safeguard their interests.  These are costs to be recouped with production!  It’s normal business, ring fenced within oil!

Corporations borrow money to invest in projects. That is borrowed money that Exxon is investing in this project to get it started.  Borrowed money comes with interest. Is Guyana responsible for the interest accrued for the borrowed money invested to start this project.

Exactly what’s the relevance of this?  Big corporations have billions of dollars of debt as a normal course of business!  What does that have to do with anything!  This is normal balance sheet gearing!

Ayuh throwing spaghetti!

Fact is, Guyana owes Exxon nothing unless Guyana terminates the contract. Exxon will recoup all cost through the partnership P&L!  And that has annual limitations!

Explain this Base .

Guyana commits to paying ExxonMobil’s loan interest irrespective of source of funds


Minister of Natural Resources, Raphael Trotman

– IMF highlights β€œgenerous” provision as potential risk for reduced profits for nation

By Abena Rockcliffe-Campbell

The International Monetary Fund (IMF) has noted that Guyana’s generosity to oil giant ExxonMobil creates perfect conditions for the company to engage in actions that can result in the country securing even smaller revenues than that which is expected.
Guyana has committed to paying all the interest on loans secured to fund operations at the Stabroek Block. The block is currently worth over US$320B.
The 2016 Production Sharing Agreement (PSA) that Guyana signed with ExxonMobil has made such β€œgenerous” provisions. The agreement states that ExxonMobil will be able to recover the cost of β€œinterest, expenses and related fees incurred on loans raised by parties comprising the contractor for petroleum operations and other financing cost provided that such expenses, fees and costs are consistent with market rates.”
The provision is very broad and covers any cost that ExxonMobil may incur for petroleum operations and even β€œother financing.”
IMF thinks that this provision can prove to be disadvantageous to Guyana.
The international body said that the treatment of interest expenses in the ExxonMobil/Guyana contract appears to be generous.
The fund said that the treatment of interest expense is important because β€œexcessive or abusive use of debt can have a detrimental impact on the amount of profit oil to be shared between the government and the contractor. The mission understands that in Guyana’s PSAs interest expenses, irrespective of the source of financing, are permitted to be recovered provided that such expenses are consistent with market rates.”
Moreover, IMF noted that interest payments are exempt from withholding taxes, providing yet another incentive for contractors to finance their costs with debt.
Further, IMF said that it is quite common to have limitations on interest deductibility.
Some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps on debt to equity ratios or earning stripping rules.
The international body said that other countries may prescribe that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs.
IMF pointed to Uganda’s model PSA, which allows interest on loans (from any source) to finance development operations only up to 50 percent of the total financing requirement. Interest on loans to finance exploration is not allowed.
β€œSuch a restriction could be supplemented with regulations or guidance defining the financing requirement as the cumulative negative cash flow, including tax paid but excluding other disallowed costs.
The mission understands that in Guyana, it is common to exempt petroleum and mining companies from withholding tax on interest payments. Therefore, limiting the amount of debt for cost recovery purposes or disallowing interest expense altogether in PSAs may be appropriate.
In many cases, oil companies, which form a consortium for a project would borrow from their parents companies. And there are innumerable case studies which show that it is in these instances, corruption takes place.
This dose of reality was recently provided by Local Content expert, Anthony Paul, to those who attended the enlightening Spotlight on Energy forum, which took place in Port of Spain a few weeks ago.
There, Paul said that oil companies are often borrowing funds, many times from their parent entities, at rates higher than bank rates and with administrative costs that are gold plated. The Chatham House Advisor who is the author of Guyana’s draft Local Content Policy, reminded that oil investors have one clear, simple goal; that is, converting the wealth of the people and taking it to their shareholders as quickly as possible.
Along the way, they will employ several strategies towards getting huge profits.
If the right systems of controls are not in place, Paul is on the record as stating that significant revenue to the state would be lost.

 
FM

Failure to define β€˜market rate’ in Exxon oil contract could cost Guyana billions of US dollars - Stabroek News

Dear Editor,

Guyana is responsible for paying the interest on the oil companies’ loans. This fact is buried in the Production Sharing Agreement (PSA) for the Stabroek Block (see Annex C, Section 3.1. part (l)). The interest rate to be paid is loosely noted as β€œmarket rate”. This flaw may cost Guyana billions of US dollars. It takes just over a billion US dollars to run the country every year. We cannot afford this mistake.

Why Guyana would agree to pay interest on loans that the oil companies negotiated with their bankers is puzzling.

Why would the oil companies want to avoid giving a precise meaning to β€œmarket rate”? One has to take note that the interest expense on their loans are part of cost recovery. Up to 75 per cent of oil revenue is set aside for cost recovery.

 If you scan the ExxonMobil Financial Reports, you would notice that Exxon has a credit rating of AA+. The credit rating gives you an indication of how safe it is to loan money to a company. Exxon has gold standard credit rating, on par with that of the US government. That is, if you loan Exxon money, you are guaranteed to get your money back with all interest owed. The market rate on currently traded Exxon loans are about 2 per cent.

Liza Phase 1 has a projected gross capital cost of US$3.7 billion and Liza Phase 2 has a gross capital cost of US$6 billion – with total combined production estimated at 1.05 billion barrels of oil. One should observe that going from 450 million barrels in Phase 1 to 600 million barrels in Phase 2 increased the capital cost per barrel by 20 per cent. However, one would expect, given the lessons learned from the first project, the cost per barrel for the second project should be less than the first. Instead, the difference in cost adds up to an additional US$1 billion!

Let’s scale the capital cost up to the currently confirmed six billion barrels: That would mean the projected capital cost could be US$55 billion or more given the anomaly noted in the previous paragraph.

 If we have a company like Exxon that is able to borrow money at low rates, then the β€œmarket rate” charged to Guyana should be low?

At 2 per cent interest, Guyana would be paying US$1.1 billion per year on a US$55 billion loan. If we used β€œAgreed Interest Rate”, defined in the PSA, at present that would be about 3 per cent higher than Exxon’s market rate. The interest would be US$2.8 billion. That would mean an extra US$1.7 billion going to Exxon instead of Guyana. But β€œAgreed Interest Rate” was not used in Annex C, where it was noted Guyana would have to pay the interest on loans taken out by the oil companies.

Would Exxon argue that Guyana needs to pay the market rate similar to that of small and risky oil companies?

 Here is the catch. The PSA was not signed with the AA+ rated Exxon but with Esso Exploration and Production Guyana Limited (Esso). Esso is a company with negative equity. Negative equity means if you liquidate all your assets you still won’t be able to pay off your current loans. Thus β€œmarket rate” (market interest rate for loans) that Guyana would be paying is not what would be charged for Exxon’s loans but Esso’s.

It may be highly unlikely that Esso, a company registered in The Bahamas and with negative equity, would be able to receive a loan in the market. This is where Exxon can leverage its low borrowing rate to its advantage. In a typical scenario with the big oil companies, Exxon can loan Esso the money. But what would be the β€œmarket rate” charged to Esso?

 Well, we should look at some of the small and risky oil companies to get an idea. One such company is California Resources; its debt currently pays a market rate of 30 per cent. Another is Weatherford International; its debt currently pays a market rate of 18 per cent. That is a big difference from the 2 per cent market rate on Exxon’s debt.

 What would a 15 per cent difference in market rate mean on US$55 billion? That would be an extra US$8 billion going to the oil companies instead of to Guyana. What about a 30 per cent difference? That would be US$16 billion going to the oil companies instead of to Guyana. Now, that sleight of hand not to use the β€˜Agreed Interest Rate’ in a section titled β€œCosts Recoverable Without Further Approval of the Minister” – doesn’t seem accidental but carefully planned by the oil companies.

The Bottom Line: Guyana is stuck not just with paying loans negotiated by the oil companies – but at gouging market interest rates. Could this be an US$8 or $16 billion mistake buried in the contract that officials of the Government of Guyana overlooked or never read?

Yours faithfully,

Darshanand Khusial

for the Guyana Oil and Gas Governance Network

FM
Prashad posted:

I once bought shares in Sherrit International at 14 dollars a share. Sherrit borrowed hundreds of millions of dollars and invested in a nickel  mine that was hit by declining nickel prices. Overnight Sherrit shares sink faster than Demerara Guy and Burnham can turn expensive hydro equipment into rotten scrap iron. Sherrit walk away from the mine leaving the government and partners holding the bag.  What safe guards does Guyana have if Exxon walks away from the project?

Wouldn’t That depend on whose name the loan is in?

Baseman
Baseman posted:
Prashad posted:

I once bought shares in Sherrit International at 14 dollars a share. Sherrit borrowed hundreds of millions of dollars and invested in a nickel  mine that was hit by declining nickel prices. Overnight Sherrit shares sink faster than Demerara Guy and Burnham can turn expensive hydro equipment into rotten scrap iron. Sherrit walk away from the mine leaving the government and partners holding the bag.  What safe guards does Guyana have if Exxon walks away from the project?

Wouldn’t That depend on whose name the loan is in?

Not the loan I am talking about but the stuff that is left behind like if the company runs away because of low prices.  Such as unpaid workers, environmental clean up and restoration, local unfilled contracts and ownership of unsold products left behind. Does the contract address these issues?.

 

Prashad

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