Sliding scale method touted for govt’s future oil licensing

Source OilNOW

DPI, Guyana, Tuesday July 23, 2019

The Government is being advised to ensure a thorough and careful approach when it decides to increase the royalty rate in its production sharing agreements (PSAs).

This advice comes from Alessandro Bacci, Upstream Oil and Gas Analyst at GlobalData, a data analytics and consulting company based in the UK.

Commenting on a recent statement made by Director of the Department of Energy, Dr. Mark Bynoe, that the country was preparing to raise the take of the government in future oil licenses, Bacci said increasing the royalty rate should be approached with caution particularly if the country wanted to retain its regional competitiveness.

“If Guyana goes ahead with its plan of increasing the royalties in its production sharing agreements (PSAs), the scope for adjustment will be limited if it wishes to retain its regional competitiveness,” Bacci advised, adding that under the current contract structure, Guyana may push its royalties up to a five percent rate from the current 2%.

“Beyond that threshold, it may diminish the attractiveness of the country’s petroleum fiscal framework for investors,” Bacci cautioned.

In the meantime, on the subject of “royalty increase” Dr. Bynoe, at an industry conference in London recently, had stated that an examination of this was likely. “Royalties will all have to be examined.” … “We expect them to be higher than they currently are,” he said.

Bacci reiterated that raising the royalty rate anywhere above 5% would make Guyana less competitive than its neighbours Brazil and Suriname.

However, royalty is not the only source of the government’s take.

According to Bacci, the PSA model has a 75% cost recovery with the remaining 25% profit oil equally split between the licensees and Guyana.

The minimum effective royalty rate paid to the government is 14.25% of the gross revenue. He added that for Liza Phase 1, there is an expectation for free cash flow for the government higher than 50%.

The UK analyst suggested that a sliding scale option for royalties is one that can be contemplated for licensing in the future. He noted that Guyana could marginally increase the royalty rate while maintaining the current PSA structure or introduce the sliding scale which will see royalties increasing with profits.

“The current attractive framework attracted major oil companies such as ExxonMobil, Total, Tullow, Hess, Repsol and Anadarko, but, if fiscal changes make the regime less competitive, it could limit future exploration,” he said.