Introduction
Today’s column looks at what is called Cost Oil, both in the petroleum industry around the world and in the Petroleum Agreements signed by Guyana with contractors. Generally the term is used to mean the expenditure which the operator can charge against income in arriving at what is called profit oil. Cost oil falls under Article 11 of the Model Petroleum Agreement which carries the broader heading “Cost Recovery and Production Sharing”. A comparison of the Model Agreement and the 1999 Agreement signed by Janet Jagan with Esso Exploration and Production Guyana Limited (Exxon) shows that the two are identical, give or take the capitalisation of a few letters!
Here are two of the opening paragraphs extracted from the Agreement.
“11.1 Subject to the terms and conditions of this Agreement, the Contractor shall bear and pay all contract costs incurred in carrying out petroleum operations and shall recover contract costs only from cost oil as herein provided.
“11.2 All recoverable contract costs incurred by the Contractor shall, subject to the terms and conditions of any agreement relating to Non-Associated gas made pursuant to Article 12, be recovered from the value, determined in accordance with Article 13, of a volume of crude oil (hereinafter referred to as “cost oil”) produced and sold from the contract area and limited in any month to an amount which equals [seventy-five percent (75%)] of the total production from the contract area for such month excluding any crude oil used in petroleum operations or which is lost. “Recoverable contract costs” means such costs as the Contractor is permitted to recover, as from the date they have been incurred, pursuant to the provisions of Annex C.
Limits to cost oil
The percentage in square brackets above is the only difference between the Model Agreement and the actual 1999 Agreement and so appears because that percentage is in fact negotiable. In other words, the Government and the Operator would usually haggle over the percentage ceiling which is placed in the Agreement to ensure that the host country receives an acceptable amount of profit oil. The Operator would probably prefer the percentage to be as high as possible while the host country would want to set it at the lower end. If the percentage of recoverable cost is set at 60% of the value of production, it means that 40% of the value of production would be available for sharing. If it is 80%, it means that only 20% of the value of production is available for sharing. As we have learnt from the Exxon contract, the percentage ceiling on cost oil is limited to 75% of the value of production. With profit oil shared in equal parts, it means that in any month, Guyana will receive 12.5% of the gross revenue of production.
We will look at Articles 12 Associated and Non-Associated Gas and Article 13 Valuation of Crude Oil in later columns and for now turn to Annex C. This Annex is titled Accounting Procedure and comprises ten sections of which three are identified below.
Deductions
Section 1. General Provisions: This part addresses matters like Definitions; Documents required to be submitted by the Contractor; Language, Units of Account and Exchange, with the books kept in both Guyana Dollar and US Dollars but with the latter “prevail[ing] in case of conflict”; Payments and the Audit and Inspection Rights of Government.
Section 2. Classification, Definition and Allocation of Costs, Expenses and Expenditure broken down into Exploration Costs, Development Costs, Operating Costs, Service Costs, General and Administrative Costs and Annual Overhead Charge. Each of these is further broken down into scores of types of costs so that exploration costs include aerial, geophysical, geochemical, paleontological, geological, topographical and seismic surveys and studies which should give a fair idea of the depth to which costs are defined and accounted for. Or in the case of general and administrative costs and annual overhead costs, such costs to relate to all general and administrative costs in respect of the local office or offices. The annual overhead charge relates to services rendered outside of Guyana and not otherwise charged. In fact, 3.6 of this Section specifically provides that there shall be no duplication of charges or credits to the accounts.
Section 3. Costs, Expenses, Expenditures and Credits of the Contractor. This section provides that certain costs are recoverable without further approval from the Minister such as all costs attributable to the acquisition, renewal or relinquishment of surface rights acquired and maintained in force for the contract area. Other costs under this sub-category include labour and associated labour costs of employees including those whose time is only partly dedicated to the petroleum operations, in which case only a pro-rated portion of applicable wages and salaries will be charged. Some of the items of note are personal income tax owing to Guyana paid or reimbursed by a Party comprising the Contractor and abandonment costs calculated in accordance with the Agreement.
Section 3.2 identifies those costs which are recoverable only with the approval of the Minister. Interestingly, donations and contributions to organisations in Guyana fall under this paragraph suggesting that such donations are influenced by the Minister’s generosity.
Section 3.3 expressly provides that certain costs are not recoverable under the Agreement including costs of arbitration and the sole expert and costs incurred as a result of wilful misconduct or gross negligence of the Contractor or failure to insure where insurance is required under the Agreement or where the Contractor has elected to self-insure.
Conclusion
Hopefully by this stage readers will realise that so far as the rules of deductibles are concerned, the Agreement is particularly detailed and it is difficult to see by what stretch of the imagination Minister Patterson, an oil spokesman for the Government can sensibly say “that the Ministry of Natural Resources has several proposals, including hiring persons to act on behalf of the Government so as to decide with ExxonMobil, what can actually be charged as cost recovery.” Mr. Patterson who embarrassed the government with his failure to read and or understand the GGMC Map or the law which breaks the country and the offshore into blocks is now proving once again how little informed he is about the law and the petroleum sector. It is troubling that we may have to tolerate this level of cavalier incompetence in a sector which three years down the road will contribute one out of every three dollars to the public revenue.