Author: Christopher Ram

Introduction

Two weeks ago in Toronto Canada, the organisation Caribbean Council of the Americas (CCA) in a public advertisement invited the Guyanese community and “other interested parties in the greater Toronto area to learn about all and gas exploration and development in Guyana.” The advertisement announced that the session would include an overview of ExxonMobil‘s recent exploration and operations.

The CCA, a membership organisation, describes itself as the principal private sector link between Canada, Latin America and the Caribbean with the primary objective to stimulate the expansion of Canadian commercial interests in the markets of the countries of the region. Its website notes that it strives to maintain a position at the centre of the issues that affect Canadian hemispheric trade and investment by hosting organising symposia on critical issues and advocating on major policy issues on behalf of our members.

Working in close collaboration with the Canadian Federal Department of Foreign Affairs, Trade and Development (DFATD), and with Provincial Governments, the CCA organises outreach business activities for Heads of State, Ministers and business leaders from throughout the Americas.

Punctual Guyanese abroad

Of the roughly four hundred and fifty persons who had registered for the event, over four hundred showed up. Atypically, as early as twenty minutes before the scheduled starting time, the hall was 3/4 full which says a lot about the seriousness with which Guyanese observe time once they leave our muddy shores!

The audience soon discovered that the CCA’s advertisement was not wrong but it sure was misleading. For all practical purposes the activity was an all Exxon affair. My report is that the two presenters were both folks from Exxon, one a senior VP named Michael Cousins and the other a Guyanese who had only come out of College a couple of years back with a bachelor’s degree. My report is that the presentation was not of a very high or informative standard and was punctuated by an old video lasting about five minutes.

The presenters noted that Exxon has had a 87% “success rate” compared to 10% for a typical frontier country; that Liza-1 will have 120,000 barrels/day ‘everyday’ while Liza-2 will have 220,000 barrels/day sometime around April 2022, and that by 2025 production will climb to 750,000 barrels/day. They also announced that Exxon, HESS and CNOOC/NEXEN are currently employing 1,357 Guyanese.

The Guyana press

The Guyana press came in for some not so honourable mention and, seeking to defend the fairy tale contract which Trotman gave ExxonMobil in 2016, one of the presenters claimed wrongly that the Agreement was similar to a contract awarded by Australia, showing a slide to illustrate that the 2016 Agreement was normal for a ‘Frontier’ country, a term used with recurring frequency during the presentation.

Sticking to the adage not to allow facts to spoil a good story, the presenter failed to mention that the 2016 Agreement is a post-discovery Agreement while the contracts by the frontier countries were all pre-discovery contracts. Cousins got a bit testy when a member of the audience challenged him about his label even after it has been announced that about six billion barrels had been established in a single area.

Seeking to pre-but another major criticism of the Trotman’s Agreement, Cousins loosely and glibly announced that Brazil had an oil contract that was never renegotiated and took the Granger line about “the sanctity of contracts.” Reports are that Cousins was no more informed or convincing about the risks and contingencies in case of an oil spill and about the threats to the environment and the planet from the exploitation of non-renewable sources of energy.

My source tells me that it was obvious that the audience felt misled about the whole event and could not understand why the advertisement by the Caribbean Council of the Americas was not more accurate about the event. After all, CNOOC/NEXEN has Canadian connections and probably a more positive image than ExxonMobil and the influence of and partiality to ExxonMobil was obvious. This apparently had some impact on the audience as shown by their reaction to some of the questions being asked and answered. For those who have read about ExxonMobil’s role in misinformation on many things, the report is certainly not surprising or unexpected. We will just have to expect to deal with more of this.

Mark knew there was oil decades ago

And for this 75^th. column a bit of levity from an interview given by Dr. Mark Bynoe to the United States Bloomberg Business News on August 13, 2019. The publication reports that Bynoe told them that when he was a boy, “he used to play cricket barefoot with friends in his village outside Georgetown. At the end of the day, his feet ‘would be shiny at the bottom’, and that ‘We knew oil was around’ ”.

Mark kept that secret for decades, never once hinting at it in any of the columns he wrote over many years as a contributor to Granger’s Guyana Review.    

Next week: The hidden cost of oil to be borne by Guyana.

Introduction

A couple of weeks ago Column 73 examined a statement by Dr. Mark Bynoe about the uplift of oil every eight to ten days and of his plans to independently market Guyana’s share of petroleum which we will earn by way of royalty and profit share. The column made clear that Dr. Bynoe’s estimate of Guyana’s entitlement bore no relationship with the actual gross production in the first thirty months or so of the production. Bynoe was clearly and even dangerously wrong but he does not appear to have felt any obligation to the public and his President to correct himself on such an important national issue.  

So what about our Minister of Finance Mr. Winston Jordan whose portfolio places him at least as high on the petroleum ladder as Bynoe with the added responsibility for the Natural Resources Fund? Except for his Ministry’s bumbling that exposed the diversion of the (legal fund) Signing Bonus out of Guyana and the Consolidated Fund, Jordan has been largely overshadowed by former Finance Minister Carl Greenidge in matters relating to ExxonMobil and petroleum. But as Column 73 noted, Jordan did make a couple of statements on the sector which are probably worthy of comments although hardly for any profound wisdom coming out of them.

The Dutch Disease and Jordan’s cure 

Those who have followed the national discussions on the petroleum sector must be aware of two downsides – the Dutch Disease and the Resource Curse. Dutch Disease is a term coined in the mid-seventies to describe the situation resulting from the dramatic growth of one sector often coming at the expense of other sectors and with consequences for the rest of the economy and the country. Such consequences can be devastating, with neighbouring Venezuela being an extreme case, but try as they might economists have largely found it difficult to see any positives coming out of or being associated with the Dutch Disease.

In fact, it is something which any country with the potential for falling to the virus, ought to formulate policies to prevent the phenomenon and to draw lessons from as many cases as possible. Not too long ago, the IDB featured a publication The Dutch Disease Phenomenon and Lessons for Guyana: Trinidad and Tobago’s Experience. It is unclear whether Jordan read the article but his take on the Dutch Disease was flippant, immature and unworthy of a Finance minister.

Jordan offered to the Stabroek News that Guyana knew about the Dutch Disease since the days when bauxite was king in Guyana. To use his words, “So in that case, we already had some kind of Dutch Disease”. Jordan was clearly making light of a very serious matter, even as he admitted what has been evident before on the lower East Bank of Demerara. While we have a right to be concerned about real estate prices and the potential for both gentrification and a housing crisis, the Minister did not seem to think that the fate of the workers of the seafood company BEV Enterprises Limited demanded concern and action.

In the same interview Jordan said not too very clearly that “one of the backbones of this economy so far is that we can produce (food) for that same growing petroleum sector”. That defies commonsense, logic and experience. Jordan must know that one of the consequences of the Dutch Disease is the appreciation of the local currency which will make our agricultural produce uncompetitive. To cap the unreality, asked what mitigation measures the APNU+AFC Government has in place, Jordan’s offer was the Green State Development Strategy. That must have been the first time that anyone associated with the Strategy heard that it is a cure for the Dutch Disease!

And back of the cigarette box projections

But that was not the only contribution by Jordan to helping Guyanese understand the petroleum sector. He was also talking about oil revenues although to his credit he sought to temper expectations about the income which the Finance Ministry projects coming from the petroleum sector within the next couple of years. His flippancy was of a slightly different order and according to him Guyana’s take in 2020 would probably be “two hundred and something million” and that what would be available to the Budget is one hundred and something million.”

Part of the duties of the Finance Minister is to include in the National Estimates medium term projections; if only for that reason one might have expected slightly more carefully thought out numbers. But all he volunteered to a paper of record is that “we did some figures the other day and we did that figure”. One might have expected that the Finance Ministry would be working closely with the Department of Energy both to help them with their maths and to coordinate with them on their projections, and to benefit from projections which the petroleum operators are required to share with the Government.

Finally on the Minister and the Petroleum Agreement which is commonly referred to as the Oil Contract, the Minister is quoted in the same paper dismissing everyone with the banal remark that “everybody was shooting in the dark”. Does Jordan not know that Exxon announced their major oil find in 2015 and that his Government signed the Petroleum Agreement more than one year later? I will never cease to remind everyone that the 2016 Agreement was a post-discovery Agreement which was a new ball game altogether.

If there was anyone in the dark it was Granger, Jordan, Trotman et al.

Introduction

It has been a week of headlines in the petroleum sector. First out was Dr. Mark Bynoe who told the Stabroek News about Government’s plans to market its share of crude oil. This was followed by a reported interview with the same newspaper in which the Minister of Finance disclosed that Guyana is likely to get US$200M in first oil year. Then came a report in Oil Now, a local internet news medium, in which the Norway-based business intelligence company Rystad Energy estimated Guyana’s total income from the Stabroek of US$117.5 billion. While Jordan and Rystad dealt with both quantity and value, the thrust of Bynoe’s statement was about marketing.

Each of the articles appears to have simply accepted whatever numbers without question and could build exaggerated expectations if they are not put into some context. This Column is most concerned about Bynoe’s statement because it appears to be a policy statement of some consequence and which therefore cannot be ignored.

Bynoe’s plan

According to Bynoe, the Government of Guyana will go to tender either during the current quarter or the next for “a fee-based marketing service” to market its share of expected crude oil production. In what is in fact a major policy pronouncement, Bynoe announced that the government will be selling its own share of exported crude and that it will issue a tender during the current (July 1 – September 30) or the fourth quarter of 2019 (October 1, December 31) for a fee based marketing service.  

Trading in crude oil is probably as complex as producing the stuff with its infinite number of variables and imponderables. In deciding to do its own marketing, the Government is assuming both risk and responsibility and it is therefore important that the possibility for errors is minimised and that key assumptions are rational and as far as possible grounded in facts. Of course, it is possible that Bynoe deliberately oversimplified the matter and that he fully understands that selling crude oil can involve spot price (immediate sale, purchase, price and payment) and future price market (future sale, purchase, future price and payment). Yet, his description of the transaction as a “fee-based marketing service” (what else can it be?) suggests that he thinks that this is some straightforward physical product, which it clearly is not.

Trotman’s catastrophe

The APNU+AFC Government left the negotiation of the Petroleum Agreement to Raphael Trotman with catastrophic long term consequences for the country. Now it seems to be leaving the disposal of Guyana’s share of petroleum under the Agreement to Mark Bynoe who according to his appointer, knew nothing of the sector. While Granger and his cohorts seek every subterfuge to perpetuate themselves into Government, they are leaving this singularly most important economic development for the future of the country in unqualified, inexperienced and inept hands. First Oil will soon be upon us and time is running out. Failure to act could be as consequential as Trotman’s nightmare without, thankfully, its permanence, since no marketing contract can have some of the asphyxiating clauses which exist in Trotman’s 2016 Agreement.  

One assumes that Bynoe is familiar with the provisions of Article 14 of the Petroleum Agreement under which not later than three months before the first scheduling of crude oil, the Contractor is required to propose to the [Government] offtaking procedures whereby the Parties will nominate and lift their respective shares of Crude Oil. The question is whether the Contractor and the Government have had any discussions on this matter since it seems to form the core of Bynoe’s plan. He would be aware too that Article 14. 2 (a) requires that lifting be carried out without interference to Petroleum Operations.

Short on details, wrong on facts

Bynoe did not go into details but it does appear that what he is proposing is to have is an agent negotiate Crude Oil sale on the Government’s behalf, a formidable tripartite arrangement. But as pointed out in the next paragraph, Bynoe has substantially overestimated Guyana’s share and whoever the buyer is will find the unit cost of transportation quite high. Worse, in the context of the more reasonable figures, it is unclear how and whether Bynoe’s plan is not dead on arrival. 

Let us look at his estimate. According to the Doctor, Guyana’s crude oil will be sold in “million barrel cargos” and a crude cargo lift will be used every eight to 10 days. Something is clearly wrong either with the reportage or the maths. Let us test Bynoe’s figures against the certainty that Guyana will receive only 14.25% of production for up to the fourth year. We know too that in the first and second years, production will be 120,000 barrels of oil equivalent per day. From this we can easily calculate that over an eight day period, production will be 960,000 barrels and over a ten day period, production will be 1,200,000 barrels. In other words, Guyana would have to take all the production to permit a one million barrels every eight days: and that is gross production, without deductions for petroleum used for fuel or transportation in the terminal system.  

Taking 14.25% of the eight days production, Guyana’s share is 136,800 barrels while its share over a ten day period will be 171,000 barrels. Put another way, for Guyana to earn 1 million barrels as its share of production, it would need to accumulate its share over approximately two months!

What is even more worrying is that Bynoe has an advisor who shadows him wherever he goes. Not only do Bynoe’s numbers and his plan not make any sense: it is also embarrassing to leave then out there as part of Government’s policy. 

Next week: A look at Jordan’s and Rystad’s projections.

Introduction

Column 71 published last week included a summary table of the Statements of Financial Position (the Balance Sheet) of the three oil companies which will lead Guyana to First Oil projected to take place during the first quarter of 2020. Noting that the financial statements audited by the same firm reflect significant differences in their content and presentation, Column 71 pointed to the value of expenditure incurred by the companies – more than G$500 billion – as at December 31, 2018, more than one full year before First Oil. As is now well known, the Petroleum Agreement provides for the recovery of costs before sharing Profit Oil equally between the oil companies and Guyana, subject only to a 75% of revenue limitation. In US Dollar terms, at December 31 the expenditure was approximately US$2.5 billion.

This expenditure falls into the category of pre-production costs which also includes pre-contract costs, including the amount of US$460 million stated in the Petroleum Agreement as having been expended to December 31, 2015. For completeness it is worth noting that this Column disputes this amount as being overstated by a not insubstantial amount when measured against the financial statements of the three companies. Of course, recoverable contract costs also include annual operating costs once production begins, usually measured by reference to a barrel of oil. The oil companies have not given any indication of what that cost is likely to be and one wonders at the basis of projections used by the Ministry of Finance and the Guyana Revenue Authority.

In all the Oil and Gas Columns so far, I have used a per barrel cost of production figure of US$35, inclusive of capital costs. However, in a recent presentation at Moray House, Dr. Tulsi Singh, a Texan-Guyanese who has been involved in the sector for decades, has used a figure of US$35 plus US$7 for capital expenditure. One would have expected that by now, some light would be shed on this important number and inevitably, one wonders whether the Energy Department itself has any idea of the likely number and how it has been derived.

Balance Sheet

The Summary table published last week did not disclose the Balance Sheet items by companies, an omission which I will now touch on briefly for two of the more significant items – Inventory and Property, Plant and Equipment. The December 31, 2018 total inventory of $14 billion is made up entirely of inventory held by Esso ($10.9 billion) and Hess ($3.1 billion). It is more than passing strange that CNOOC reports no inventory at that date and raises the question of a real time supply chain one hundred and twenty miles offshore, either directly or through its co-contractors which would more than likely be Esso. CNOOC has in fact not reported any Inventory over the past three years and Hess has only done so in 2018. 

As expected Property, Plant and Equipment (PPE) is by far the most significant item in each of the three Balance Sheets. The financials of Hess and CNOOC have two classes of PPE – Exploration and Evaluation Assets and Development Assets – while Esso has three classes – Buildings and Vehicles, Wells, and Plant and Equipment (Work in Progress). Combined PPE at year end 2018 mounted in total to G$490 billion in 2018, up from G$247 billion in 2017 with the highest growth being Esso (108.9%), CNOOC (93.9%) and Hess (89%).

Income Statement

I now turn to the summarised Statement of Profit and Loss and Other Comprehensive Income extracted from the separate financial statements of the three companies.

Source: Compiled from audited financial statements.

There are three lines to which special attention needs to be paid and these are highlighted: Net Profit/loss before income taxes, Net profit/(loss) for the year and the Net Loss and Comprehensive Income, end of the year. I noted last week that both content of and disclosure in the financial statements are inconsistent but there is another matter that raises a different question altogether which appears in Hess’ books. In this latter case, Hess reports a charge of G$5,685 Million for Operating and exploration expenses from Esso but there is no similar item in CNOOC’s financial statements. This raises a few questions:

1. Does this mean then that Esso’s operating relationship with Hess is different from that with CNOOC?
2. Is CNOOC doing its own exploration while Hess merely bears part of Esso’s exploration cost?
3. Has the Minister or the person delegated by him to carry out his functions aware of and given express or implied approval of this arrangement?
4. If Hess’ financial statements reflect costs assigned by Esso, why is there no corresponding transaction in Esso’s books showing it has recovered that sum and reduced its own expenditure?

And no surprise that Esso’s accounting and disclosure are different from that of CNOOC as the Table shows with Esso reporting items like Dry Hole, Seismic and Geological and Geophysical while CNOOC has a single block figure for Exploration.

Standing out in Esso’s Income Statement however, is an $8,085 million charge for Office and General Expenses which compares with $339 Million by CNOOC. Hess’ statement does not have such a line item but its administrative expenses could possibly be found in line Item Other Expenses ($19 Million), or in Intercompany charges ($51 Million).  Esso’s 2018 financials also show Legal and Professional expenses incurred in 2017 of $450 million but none in 2018. 

Esso’s $8,085 million charge for Office and General Expenses in 2018 and $450 million in Legal and Professional expenses in 2017 are not insignificant sums and these will probably all have to be borne by the Guyana taxpayer, one way or another.

Conclusion

Not too long ago everyone seems to have been auditing the financial statements of the oil companies for purposes of the Petroleum Agreement but months later, nothing is being heard. Oversight is not an episodic matter but one of sustained vigilance.

There is nothing that the Granger Administration has done in relation to the Stabroek Block that suggests anything but the greatest deceit and incompetence that continues to this day. It seems fair to say that the oil companies having been handed a lifetime gift in the form of the 2016 post-discovery contract is being fortified by a dangerously weak oversight. Let us pray.

Next week’s column will consider Petroleum Czar’s plans to uplift Guyana’s share of oil every ten days.