Home FinanceEnergy & Environment As Guyana’s oil business grows, could a possible new deal with Exxon emerge?

As Guyana’s oil business grows, could a possible new deal with Exxon emerge?

by YAR

Emily Pickrell, UH Energy Fellow

The small South American country of Guyana has been transformational for Exxon Mobil Corp. over the past decade, after the oil titan made the first in a series of mammoth discoveries off its coast.

As the country moves into its new role as a prolific oil producer, it is time for it to take the helm in managing these relationships.

Indeed, its current deal with Exxon and its partners, Hess and Chinese CNOOC, reveals the story of a country that was new to the game and inexperienced in negotiations several years ago.

This team first found oil in Guyana seven years ago and has since made a staggering 18 oil discoveries in its giant Guyanese Stabroek block.

These discoveries contain a bountiful wealth of fossil fuels: nearly 11 billion barrels of potentially recoverable oil and gas and counting, following the latest string of new discoveries in April. Exxon and its partners have invested more than $10 billion in production and plan to extract 1.2 million barrels of oil and gas per day from the block by 2027.

The challenges in discovering this oil should not be ruled out.

Before 2015, the Guyana coast was considered a high-risk border basin, despite its potential. Since 1965, 45 wells have been drilled in an attempt to find the sweet spot for success, and failed. It took Exxon’s technical genius, trust, and funding to finally hit the jackpot.

Still, the resulting 2016 terms on how to share this production have been controversial, as it is more generous to Exxon than many of Guyana’s peers have agreed to.

The current contract was negotiated in 2016 and takes up most of the terms of a 1999 deal. It splits oil production 50-50 between the government and Exxon, and gives Guyana a 2% royalty (the 1999 deal had a 1% royalty. The oil split reflects the costs and risks a company faces on any particular project and can vary significantly from country to country and by contract. In this light, a 50-50 split for a new producer isn’t especially unusual.

But it’s the extra terms in the deal where Exxon really benefits, according to Tom Mitro, a former Chevron executive with decades of experience negotiating international contracts. Mitro was also director of the Global Energy, Development and Sustainability program at the University of Houston.

Mitro pointed out that the many other negotiable clauses in the contract were settled in favor of Exxon, an approach that most Guyanese peers have not accepted.

For example, one provision allows Exxon to recover all interest on loans taken to finance the development of related oil projects. In practice, this means that the operator and its partners can charge Guyana for the cost of their affiliates’ loans without limits.

“Contracts usually have cost recovery mechanisms, but usually with limits,” Mitro said, explaining that without written limits, companies can abuse the number of loans they take out within the conglomerate.

Another provision allows Exxon not to have to pay any income tax on its share of profits, and for the government to provide a receipt that can be used for tax deduction purposes elsewhere.

There is a clause that allows Exxon the right to obtain cost-recovery oil up front, to cover future decommissioning and abandonment of the project at the end. These costs will not actually be incurred for several years.

“In this case, the government is giving Exxon something of value, oil, to cover Exxon’s future costs,” Mitro said, noting that it is unusual to prepay for a future expense due to the recognized time value of money. .

While Exxon’s experience and deeper understanding of the contracts probably strengthened its negotiating position, on the part of Guyana, domestic politics also played a role in the deal. The negotiations came just before a contentious election, and it was announced that the promised revenue offered a better future for Guyana.

It also came just before Exxon publicly announced that results from a second exploratory well indicated Exxon would recover more than double the amount of oil originally expected.

In hindsight, the biggest challenge for Guyana is the extremely short time frame for its transition from a non-oil producer to one with reserves rivaling Mexico or Angola. And to be fair, it has been Exxon’s vision that has led this change, with its discovery of oil from Guyana in 2015 and its subsequent investment in bringing that oil to market.

The oil and gas industry rewards risk and technical expertise. Exxon showcased both brilliantly, making a big bet on deepwater exploration with no guarantee of success in a country with no history of oil production.

Exxon has justified the contract by saying that the terms reflect those of a country with no record and therefore higher risk, which is reflected in the terms of a production sharing agreement.

“It offers globally competitive terms,” Exxon spokesman Casey Norton said in a 2020 interview with the Wall Street Journal. “It was done at a time when there was significant technical and financial risk.”

Julián Cárdenas, professor of energy law at the University of Houston, agrees, noting that Guyana is now in a better position to negotiate better terms with future investors due to its history of geological potential.

However, potential is no longer everything in the international oil game, as Venezuela illustrates. Guyana’s ability to attract future investment will depend on showing that it will respect its contracts and the rule of law.

“Guyana must take responsibility for those agreements, recognizing that these agreements also have an end date,” Cardenas said. “Of course, there is always room for mutual improvement and renegotiation. But this will not be Guyana’s only opportunity. They will be much better served if they focus on offering new rounds and making better deals.”

In fact, both sides have already benefited from the newly discovered oil.

Exxon began production in late 2019 and now pumps approximately 220,000 barrels of oil per day in Guyana, about 6% of its global production. The company says the production has created jobs for more than 3,500 Guyanese. The Exxon consortium and its direct contractors also spend more than $200 million on local suppliers each year. His current deal is expected to generate nearly $170 billion in revenue over the next few years.

It is a position that is also held by many in Guyana, as the country tries to find a balance between being seen as an attractive location for investment and ensuring that it is not the puppet of Big Oil.

“Remember that when the 2% royalty was agreed, we had just discovered oil and had not yet produced a drop,” Donald Singh, process coordinator for the Guyana Geology and Mines Commission, wrote in a 2019 letter to the editor of Guyana Chronicle responding to criticism of Guyana’s low royalty rate. “Guyana’s exploration success certainly merits an increase in royalty rates, but I think we should continue to aim to establish a track record as a reliable producer.”

On the other hand, that was two years ago, and now Guyana is seen as a major contributor to Exxon’s bottom line.

It is a good time for both parties to think about the long term. Guyana could, for example, identify points in current contracts where government approval is required and use that to adjust terms that some see as unduly favorable to Exxon at Guyana’s expense, such as gas flaring rights.

From Exxon’s side, its reputation would benefit if it did all it could to support Guyana’s ability to become a more mature oil nation, one that is known for its ability to balance its desire to do business with the needs of its people. for your long-term benefit.

emily pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy and the latest on Mexican climate change law. Emily has reported on energy issues in the US, Mexico and the UK. Prior to journalism, Emily worked as a policy analyst for the US Government Accountability Office and as an auditor for the international aid organization, CAR.


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