President Ali’s Al Jazeera interview

It is the third variable in his calculation (a government share of 40%) that may be most off the mark if, as is likely the case, revenue is shared between the Guyana government and the oil consortium based on the model agreement posted on the GGMC website. The terms to determine how production/revenues are split or shared are contained in an agreement known as a Production Sharing Agreement (PSA). The model PSA on the GGMC website covers the three main elements in the calculation. First, there is a cost recovery element. The model agreement stipulates that the oil company can keep up to 75% of oil production (referred to as cost-oil) to recoup the cost of its investment on exploration, development and production. After the company has taken off this production, the second element in a PSA, called production sharing, comes into play. Production sharing in our model PSA divides the remaining 25% of production (referred to as profit-oil) between government and company 50/50. Therefore, the government take is more likely to be around the 12.5% mark rather than Ramkarran’s 40%. From Liza’s projected daily production of 100,000 barrels, the government daily take will therefore be 12,500 barrels. Multiply that by whatever is the prevailing world oil price and you arrive (as a first approximation) at how much revenue the government can expect. ... As currently advertised, Guyana’s model PSA is considered highly attractive not only because of the nice elements it contains (75% cost recovery, 50/50 production sharing, low royalty and taxation) but because of the elements it does not include compared to typical PSAs worldwide. Excluded are such elements as sliding scales (to determine, for example royalty rates and production sharing), production bonuses (recurring payments to government by the company when cumulative production reaches set levels) and signature bonuses (a one-off payment to government on signing of a contract). Indeed, Minister Trotman did indicate in an interview with an online oil industry journal that he favoured the expansion of our PSA to include some of these terms. It should be noted that the government can sign different PSAs with different companies and even for different oil fields with the same company. The practice worldwide is for a government to demand a bigger cut in succeeding PSAs as it gains experience and clout. ... In June this year, a new PSA was reportedly signed between the government and the consortium led by ExxonMobil. The actual terms of the PSA remain to be seen. But chances are they will follow closely that of the agreement displayed on the GGMC website. The country will still earn a game-changing several hundreds of millions of dollars from the oil discovered so far. But I doubt whether the Liza field alone will be a yearly multi-billion dollar earner for the government. In this largely underexplored basin, revenues will approach Ramkarran’s estimate as more oil is discovered as it surely will.

Former Guyana Ambassador to South Africa and Professor Dr. C. Kenrick Hunte, along with Mr. Joseph Persaud and Mr. Darsh Khusial, argue that Guyana may have forfeited billions of United States dollars in oil revenue because it continues to allow broad cost recovery without ring fencing, even after the original investment costs of major projects have effectively been repaid. ... In a detailed analysis titled Ending the 75 Percent Cost Recovery: Examining the Investment Cost for the First Four Investment Projects, Liza 1, Liza 2, Payara and Yellowtail, the three authors, writing on behalf of the Oil and Gas Governance Network (OGGN), contend that Guyana could have earned approximately US$4.7 billion more between 2020 and 2025 had ring fencing been applied. ... The paper examines the operation of the 2016 Production Sharing Agreement (PSA), under which contractors may recover eligible petroleum costs from up to 75 percent of annual oil revenues before the remaining “profit oil” is divided equally between Guyana and the contractor. ... The paper contrasts that outcome with what the authors describe as the current no-ring-fencing arrangement. ... By comparison, they calculate that if ring fencing had been applied once the original investment was recovered, Guyana’s profit share would have increased to approximately US$12.4 billion, or about 20.2 percent of total revenue, a difference of roughly US$4.7 billion. ... Ring fencing is a fiscal mechanism commonly used in petroleum contracts to keep the costs and revenues of individual projects separate. In practical terms, it prevents the costs of developing new oil fields from being deducted against the profits generated by fields that are already producing. ... The authors argue that without project-by-project ring fencing, the introduction of new developments can continue to reduce Guyana’s profit oil even after earlier projects have recovered their original investments. ... They warn that as additional developments such as Uaru and Whiptail come on stream, Guyana could continue to receive a smaller share of profits than would otherwise be possible if costs from each project were accounted for separately. ... In addition to advocating ring fencing, the paper calls for stronger government oversight of the petroleum sector, including real-time auditing of recoverable costs and continuous monitoring of the point at which each project’s investment has been fully repaid. The authors argue that these measures would provide greater transparency, ensure each project bears its own costs and enable Guyana to receive a larger share of the profits once investments have been recovered.