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The new emerging oil and gas sector – short and medium-term implications for the…

first_imgGuyana is indeed a country blessed with rich natural resources. How these resources are managed and exploited, and the policies implemented in these regards, are what will determine the economic progress of a country. Strong leadership, a competent government, and an educated population with the carefully crafted conceptualisation of a bright vision at the national level for long term economic growth and prosperity are the prerequisites for the accomplishment of such goals.It would appear, however, that there is either a deliberate distraction, or an unknowing distraction out of pure excitement, by the Guyanese Government as it relates to all that is happening with this new impending resource. There are currently hot debates on what chunk of the revenues or profits Guyana is going to receive from the oil revenues. So far, having perused the existing literature in this respect, it is unclear what model the Government will employ/devise, and how the revenues earned will be utilised.I am tempted to quote a ‘mantra’ chanted by the Opposition Leader, wherein he posited that oil could either be a blessing or a curse to Guyana. While this might appear to be more of a political commentary, I must say this: it is an extremely meritorious assertion, putting all politics aside. It has so far been announced that Guyana will receive 2 percent royalty, and the profit from the oil revenues will be shared 50/50.It is very disappointing, if indeed Guyana will accept it, that the final deal on the percentage of royalty on the oil revenues is a mere 2 percent, when we are receiving 5 percent royalty on gold revenues. I concur with some analysts that the royalty should be revised upwards – minimum to be on par with that which is applied to gold earnings (5 percent) or maximum 10 percent. In fact, from manufacturing companies, royalty is charged at 5 percent, and from a trading company, it is 7 percent for the earnings received from gold. So why are we settling for a meagre 2 percent? Gold should be the benchmark, at least for a guide.It is also disclosed that the profits will be shared 50/50. This, from the standpoint of a vague reference, is a political diplomatic tactic that is really meant to add flavour to the announcement, so that it sounds all attractive, sound and good. But if one were to examine the technicalities of this, here is what one would find. First of all, I believe some clarity is needed on the model of profit-sharing. If my interpretation is correct, it has been disclosed that 75 percent of the revenues will go towards recovery costs to ExxonMobil. Now, this is how any major capital investment works, especially one of this magnitude and complexity.Normally, investments like these rake in profits years after they are made; which means that, for quite a number of years, they will have to be running at a loss. So the remaining 25 percent is what will actually be split in half, which means Guyana will only earn 12.5 percent. However, to my mind, based on what I have read and interpreted, major clarity is needed. I note with concern the terms “revenue” and “profits” are being used interchangeably. This could be grossly misleading, and cause severe damage in light of the lack of transparency of the policy framework and agreements of the complete oil & gas sector. It must be understood that “revenue” and “profits” are not the same thing. In simple understanding, profit is the remainder of revenues after deducting all expenses and financial costs.So if they are saying 12.5 percent of profit is 50/50 sharing, then Guyana is not going to realise this anytime. It may take probably five to ten years, or possibly twenty, before a profit is declared. Bearing in mind that ExxonMobil’s team of skilled financial experts could well design a model in which Exxon will not declare any profits, there may be a prolonged period of loss making, and there is also the risk of understating the profits. In these circumstances, Guyana will gain only the meagre 2 percent royalty. If, however, it is 12.5 percent of revenues, then yes, Guyana will earn this almost immediately after the first sale of crude oil. Hence some critical clarification is needed in this respect. Next week, I shall continue with this discussion.last_img read more

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