The terminology “foregone” means to “give up”. But the Government is not necessarily “giving up” revenue owing to the lack of ring-fencing. Rather, owing to the lack of ring-fencing, as this author argued in previous articles, the Government made a deliberate and intentional decision to ramp up production rapidly. Consequently, what proponents are referring to as “foregone” revenue, is in fact a “tradeoff”. The tradeoff is simply trading “short-term” gains to leverage maximized gains achievable in the medium-term. In so doing, the gains derivable in the long run will far outstrip the short-term gains. As regards the tradeoff on account of the lack of ring-fencing that chartered accountant Mr. Ram refers to as “foregone” revenue, which he contextually mischaracterized as equity―to lend credence to his notion that the Government is a de facto investor, is a false premise. To this end, it is not only the classification of the “tradeoff” or “foregone” revenue that one has to consider, one has to also consider the source of funding and “who” raised the finances. In this case, within the framework of the Petroleum Agreement (2016) and the Petroleum law, it is the oil companies’ (the Contractor) that raised the initial capital in the form of both equity and debt financing. Within this framework, it is the Contractor that assumes 100% of the financial risks, not the Government.
Considering the foregoing, from a pragmatic legal and technical standpoint, the Government is neither a de facto investor nor a direct investor in the Petroleum Exploration Activities. For the sake of drawing a relatable analogy that chartered accountant, Mr. Lalbachan Ram may better appreciate as an auditor; in the same manner that when private sector companies employ “creative accounting” or “window dressing” techniques in the preparation of their financial statements, designed to deprive the State of tax revenues, the Government is not referred to as a “de facto” investor in these instances. Similarly, the Government cannot be regarded as a de facto investor in the petroleum exploration activities, which is not provided for in the Petroleum Agreement (2016).
With respect to the investment of the NRF, the NRF Act prescribes the Fund’s investment mandate. In this regard, the NRF Act establishes that “the Fund shall be invested according to the principle of passive investment management…” and this is the responsible way to manage the Fund at this time.
Altogether, the Government is involved in the decision-making process, albeit at the policy level and not at the day-to-day operational level. Therefore to say that the Government is not included in the decision-making process is totally inaccurate and a false premise. More so, the notion that the Government is a de facto investor in petroleum exploration activities is at best a distorted, deceptively premised interpretation.
Introduction
In his column of December 15, 2023, chartered accountant, Mr. Lalbachan Chris Ram theorized that: “Guyana’s foregoing of profit oil necessarily adds to the windfall of the oil companies, allowing them the use of what is properly Guyana’s funds to finance petroleum activities. In other words, the government is putting up 50% of exploration investment―equal to the combined investment of Exxon, Hess, and CNOOC―in exploration, but has no seat at the table, and no say in the decision making. And guess what? The Government cannot extract a single change in the concessions available to the oil companies”. Then, in his column of December 22, 2023, he contradicted his own absurdly “superficial theorization” referenced above, by asserting that: (1) referring to the IMF and IDB reports…”it is not in the DNA of the PPP/C to prefer management to spending and one fears this is likely to happen in the final year and months of an election cycle”, (2) he finds it disturbing that the entire portfolio of the Natural Resources Fund (NRF) is held in cash and cash equivalents, and (3) he raises concerns about the impossibility to determine the NRF Investment Committee’s decisions made on an “appropriate portfolio that can maximize investment income while securing the investment”.
In a subsequent invited commentary by Kaieteur News (carried in their December 25th, 2023, edition), Mr. Lalbachan Ram reaffirmed his position that the Government is a de facto investor in the petroleum exploration activities with ExxonMobil, Hess and CNOOC. He further opined, in an apparent attempt to debunk a statement by the Vice President, Dr. Bharrat Jagdeo, where he (the Vice President) said that the Government has no borrowings in relation to the petroleum exploration and development activities in Guyana, therefore, not an investor. Ram then sought to counter this view by stating that there are two principal methods in raising financing, referring to shareholders equity and retained earnings… (which is incorrect… the two principal methods are in fact via debt financing instruments and equity financing instruments. Retained earnings, as Ram alluded to as one of the principal form, is actually a form of equity financing, i.e., an internal source of financing).
This article seeks to demonstrate how the above varying positions from the chartered accountant are contradictory in nature, hence, his contradictory dilemma. Moreover, this article seeks to provide readers with an alternative perspective grounded in an empirical discussion and analysis in relation to the aforesaid issues.
Discussion and Analysis
The notion that the Government is putting up 50% of the exploration investment but has no seat at the table and no say in decision making is an egregiously distorted and false narrative. The proponents of this view are premising this belief on the supposed “foregone” revenue attributed to the lack of ring-fencing, 50% of which should have been profits for the Government at the outset. The chartered accountant, Mr. Ram contended that this supposed “foregone” revenue is equivalent to “retained earnings” or equity. This concocted conception, however, is a matter of creative interpretation albeit flawed; as opposed to an analysis grounded in facts considering the policies and decisions of the Government; the framework of the Petroleum Agreement (2016); and the tradeoffs among other factors.
In strict terms, the terminology “foregone” means to “give up”. But the Government is not necessarily “giving up” revenue owing to the lack of ring-fencing. Rather, owing to the lack of ring-fencing, as this author argued in previous articles, the Government made a deliberate and intentional decision to ramp up production rapidly. Consequently, what proponents are referring to as “foregone” revenue, is in fact a “tradeoff”.
The tradeoff is simply trading “short-term” gains to leverage maximized gains achievable in the medium-term. In so doing, the gains derivable in the long run will far outstrip the short-term gains.
In that regard, this author demonstrated in several articles (recently) that all things being equal, the exploration/prospecting license pursuant to the Petroleum Agreement (2016) expires in 2027. Thus, with ExxonMobil Guyana aiming to bring online ten Floating Production Storage and Offloading (FPSOs) vessels by 2030, which will enable increased production to upwards of 1.3 million barrels per day, coupled with a short payback period of three-five years attributable to the 75% cost-recovery ceiling, the total exploration and development costs may be fully recovered by 2035. This means that, all other things being equal, the Government’s take by 2030 could reach an estimated US$4.7 billion annually (larger than the pre-oil GDP), and peak at around US$8 billion annually by 2035 and thereafter (all other things being equal). By then, the Government’s take will increase from 14.5% (during recovery period) to between 25%-30% (post recovery period by the year 2035) from the Stabroek Block, under the 2016 Petroleum Agreement.
It is worth noting that the size of the Stabroek Block is an estimated 26,806 km2, and to date, based on the size of the project development area (PDA) for all of the discoveries (46 discoveries), less than 2% of the Stabroek Block has been explored (after 24 years of exploration activities). Therefore, by 2027, when the 2016 Petroleum Prospecting License expires, not more than 3%-5% of the Stabroek Block will have been explored, thereby effectively placing the Government in a position to re-possess at least 95% of the Stabroek Block, following which the new fiscal terms, inter alia, the new model Petroleum Agreement (s) shall be applied to any new exploration and production licenses.
Moreover, the tradeoff on account of the lack of ring-fencing that the chartered accountant Ram refers to as “foregone” revenue, which he contextually mischaracterized as equity―to lend credence to his notion that the Government is a de facto investor, is another false premise. The fact is that it is not only the classification of the “tradeoff” or “foregone” revenue that one has to consider, one has to also consider the source of funding and “who” raised the funding. In this case, within the framework of the Petroleum Agreement (2016) and the Petroleum legislation, it is the oil companies’ that raised the initial capital in the form of both equity and debt financing, not the Government.
With that in mind, legally and technically, the Government is neither a de facto investor nor a direct investor in the Petroleum Exploration Activities. For the sake of drawing a relatable analogy that the chartered accountant, Mr. Lalbachan Ram may better appreciate as an auditor; in the same manner that when private sector companies employ “creative accounting” or “window dressing” techniques in the preparation of their financial statements, designed to deprive the State of tax revenues, the Government is not referred to as a “de facto” investor in these instances. Similarly, the Government cannot be regarded as a de facto investor in petroleum exploration activities, which is not provided for in the Petroleum Agreement (2016).
The Contradictory Dilemma of Lalbachan Chris Ram’s Contentions: Mr. Ram expressed his dissatisfaction with the current passive investments of the NRF and, according to him, the low returns yielded. Implicitly, it appears that Ram is advocating for a more aggressive investment mandate of the NRF (which means exposing the NRF to higher investment risks), to yield much higher returns. Yet, Mr. Ram has a problem with the tradeoff as expounded above, a tradeoff the Government has consciously undertaken to maximize the gains in the oil and gas sector, to the extent of earning annually the sum equivalent to twice the size of Guyana’s pre-oil GDP. This is a classic contradictory dilemma exhibited on the part of Mr. Ram.
That aside, one must be mindful that the NRF Act prescribes the investment mandate of the fund, which the investment committee has to be guided by. Importantly, it is not advisable to expose the NRF to high risks investments. Fortunately though, the NRF Act did not prescribe, as Ram is suggesting, that the NRF be exposed to any sort of high risks types of investment portfolio. That would be very irresponsible at this stage. Mr. Ram is perhaps unaware that section 26 of the NRF Act establishes that “the Fund shall be invested according to the principle of passive investment management…” and this is the responsible way to manage the Fund at this time.
Decision Making and the Government: Indeed, the Government is not involved in the day-to-day operations and operational decision making as this is not provided for given the framework of the Petroleum Agreement, whereby the oil companies are the Contractor. In other words, the oil companies are contracted by the Government of Guyana to conduct exploration activities, develop, and produce the resources provided that there are commercial discoveries. Henceforth, within framework of the Petroleum Agreement, the Contractor (s) assume 100% of the financial risks. Accordingly, however, from a policy decision standpoint, the terms and conditions contained in the Petroleum Agreement that governs the oil and gas industry activities, and that is the instrument through which the industry is managed and regulated by the Government, are in effect decisions of the Government in the first place. Further to note, other key decisions of the Government in relation to the petroleum industry can be summarized hereunder (which is not an exhaustive list) for Mr. Ram’s edification:
- The decision to implement a Local Content Legislation,
- The decision to develop and monetize the natural gas resources (the Gas-to-Energy project),
- The decision to maintain the momentum through the facilitation of rapid increases in production,
- The decision to impose enhanced and improved terms and conditions to the environmental permits that include additional penalties,
- The decision to repeal and replace the old petroleum legislation with a new modern petroleum legislation,
- The decision to auction new oil blocks,
- The decision to develop a revised Petroleum Agreement with new fiscal terms and conditions aimed at significantly increasing the Government’s take.
- The decision to impose higher upfront signing bonuses,
- The decision to aid and develop local capacity to conduct the cost oil audit.
Conclusion
Against these backgrounds, the Government is involved in the decision-making process, albeit at the policy level. Therefore to say that the Government is not included in the decision-making process is totally inaccurate and a false premise. More so, the notion that the Government is a de facto investor in petroleum exploration activities is at best a distorted, deceptively premised interpretation.