Stabroek block oil contract not up for renegotiation
The Stabroek block production sharing agreement (PSA) is not up for renegotiation.
This is the policy of the People’s Progressive Party Civic (PPP/C) Government, grounded in principles of respect for contract sanctity and the value investors bring to Guyana.
There has been considerable public discourse about the terms of this contract over the years. While it has accepted that the government of the day could have secured better terms when the contract was signed in 2016, the PPP/C Government will employ better contract administration, not renegotiation, to maximise value from Stabroek block operations.
Here is why renegotiation is not an option.
The Stabroek block PSA contains a clause at Article 32, called the Stability Agreement.
The Article states “Except as may be expressly provided therein, the Government shall not amend, modify, rescind, terminate, declare invalid or unenforceable, require renegotiation of, compel replacement or substitution, or otherwise seek to avoid, alter, or limit this Agreement without prior consent of the Contractor.”
It goes on to state that the Government shall not increase the economic burdens of the Contractor by imposing any new petroleum related fiscal obligation, such as new taxes, royalty, duties, fees, charges, value-added tax (VAT) or other imposts.
If there is a change in Guyana’s laws or its tax code that has a materially adverse impact on the economic benefits of ExxonMobil and its co-venturers under this agreement, the Government would have to take action to restore their losses. The Government would be obligated to exempt ExxonMobil and its partners.
Stabilisation clauses serve the purpose of protecting significant investments made by international oil companies (IOCs), which typically are in the billions of US dollars. IOCs typically enter into agreements on the basis that the government will not arbitrarily change the terms of the agreement, especially considering the magnitude of their investments.
If the government unilaterally amends the terms, it would not only jeopardise billions of dollars of investments from the Stabroek block consortium. It would send a signal to prospective investors that Guyana does not respect contract sanctity, jeopardising Guyana’s chances of attracting investments in the future.
It was the responsibility of the government of the day to get the best advice, and secure beneficial terms for the people, in the first place. It was former Minister of Natural Resources, Raphael Trotman who signed the PSA in 2016 with ExxonMobil’s Guyana subsidiary, Esso Exploration and Production Guyana Limited (EEPGL), and the subsidiaries of its partners, Hess Corporation and CNOOC Limited.
ExxonMobil had held exploration rights to the block since 1999 under an exploration licence, and had benefitted from favourable terms. However, those terms were necessary at the time, so the company could be incentivised to explore an area in which there was little excitement.
When the new contract was signed in 2016, Guyana’s bargaining power had grown significantly because ExxonMobil made the first discovery one year prior. But the previous administration did not utilise this bargaining power.
To respond to public discontentment over the terms of the contract and the circumstances under which it was signed, Trotman had hired a United Kingdom firm called Clyde and Co. to prepare a report on the matter.
The report stated that getting a better deal for the Stabroek block was not a priority for the Government of the day. The former Minister was more concerned about preserving Guyana’s relationship with ExxonMobil, as a mechanism to rally United States support against Venezuela’s baseless claim to Guyana’s territory. The result is a contract, for which relentless negative focus has concentrated on its 2% royalty rate, 50/50 profit sharing agreement, and effective waiver of all taxes.
One argument proffered by some proponents for renegotiation of the Stabroek PSA is that government should leverage its regulatory authority so that ExxonMobil and its partners agree to grant Guyana more favourable terms.
Some proposed that, if ExxonMobil approached the government for a licence, the response should be that approval would be granted on the condition that the new project would feature a higher royalty. Such calls were made last year, as Guyana reviewed ExxonMobil’s field development plan for the Payara project.
Addressing this argument during a press conference in October 2020, Vice President Dr. Jagdeo said “It’s wishful thinking that you could have done that…”
Reeling from the Russia-Saudi Arabia oil price war and the fallout from the COVID-19 pandemic, scores of oil companies went bankrupt in 2020. ExxonMobil lost US$22 billion, one of its worst performances in decades.
Dr. Jagdeo had explained that, while there are proponents for renegotiation, the effect that period has had on the industry gave government cause to consider how sensible it would be to renegotiate a deal in such economically perilous times.
He said he has spoken to several persons in the industry, and they pointed to the fiscal conditions Guyana offers as a major reason why ExxonMobil and its partners are in Guyana. Even proponents for renegotiation, Dr. Jagdeo said, that the low breakeven costs to extract Guyana’s oil, its quality and the fiscal conditions, put Guyana at the top of the investment pile for any IOC. Guyana intends to preserve its place as one of the most competitive investment destinations in the world for the oil industry.
Dr. Jagdeo indicated earlier this month that Guyana could be one of the last holdouts in the industry, as the world transitions to different energy sources. He pointed out that in a landmark report published earlier this year, the International Energy Agency (IEA) proposed a scenario for the world to achieve net-zero emissions by 2050 – and even by then, there would be a global demand for oil of 24 million barrels per day.
“We have to develop this sector for even in 2050; there will be a demand for fossil fuels.”
The Government has committed to managing the oil and gas sector transparently and in a manner that maximises value for Guyanese. It has committed to providing a strong regulatory framework for petroleum operations, local content laws that reserve opportunities for Guyanese, and a sovereign wealth fund that ensures intergenerational equity.
The Government committed in its manifesto to secure better deals for new PSAs, if more discoveries are made in other blocks. The Government also intends to auction relinquished oil blocks by the third quarter of the new year, and will seek better terms.