Govt admits it solicited traders to sell crude oil on spot market
– claims it consulted with Public Procurement Commission before inviting traders
The Energy Department has finally broken its silence after a Bloomberg report exposed the Government’s plans to approach traders directly and have them buy Guyana’s oil and sell it. According to the Department, the arrangement is not a long term but rather an interim one.
In a statement issued on Sunday, the Department said that the arrangement was only meant to last for the first three crude lifts. The Department noted that because of Guyana’s relative inexperience, the decision was made to have others buy and sell the oil first, while the Department watches and learns.
The Department said that its uncertainty about the quality of the crude and the cost to refine it was another factor in this decision. This is despite Exxon consistently announcing that the crude it has found in the Liza Field is of high quality. According to the Department, however, it will take several lifts to establish the quality of crude.
“Guyana’s main incentive in taking this approach is to establish a norm in terms of quality standard and quantity availability so as to prevent any possible down-pricing. What the DE is seeking to accomplish with the short-term approach is to allow for stabilisation and standardisation to prevent our Liza crude from being priced downwards due to uncertainty of the quality.”
“Upon careful consideration of all advice and exigencies of this moment, the DE initiated a conversation with a selected group of companies for a potential placement of only the first three cargoes of Guyana’s entitlement. This allows Guyana to sell its crude directly to the selected operators,” the Department said.
A novel approach
The Department admitted that this may be considered a “novel” approach, a point that was made by the Bloomberg article. However, the Department defended the unusual situation by noting that learning from the traders was a strategic move that has precedent. Moreover, it claimed to have consulted with the Public Procurement Commission (PPC) before deciding on this course of action.
“This strategy was employed upon serious consideration of advice given by an international team external to the DE. The advisory team consists of the following persons, a Crude Marketing Specialist, a Commercial Specialist and an external Legal Adviser, among others.”
“The logic is that given Guyana’s inexperience and the impending early date of the first lifts, an introduction phase of the grade was more advantageous to Guyana at this time,” the Department also said.
But while the Department claims it will be relying on the traders to ‘hold Guyana’s hand’ and show it how to sell its oil, a source knowledgeable about the oil sector has pointed out to this publication that the oil industry is never as black and white as the Department seems to believe.
According to the source, traders will not surprisingly get a better price due to their connections with most global refineries. According to the source, refiners of crude and oil companies are known for having conflicts of interest.
In fact, the government has every intention to sell oil on spot market in an attempt to show the electorate oil funds before the March 2, 2020 Regional and National elections.
Meanwhile, the Energy Department also said that a Request For Proposals (RFP) will be issued next month, which will initiate the process to procure a marketing firm on a long-term basis to sell Guyana’s crude in the open market. This process, according to the Department, could take three months.
It was only last week that Opposition Leader Bharrat Jagdeo denounced plans to sign a long-term contract to market Guyana’s crude, before the General and Regional Elections that are due on March 2, 2020.
Jagdeo was at the time speaking at his weekly press conference and his comments came after a Bloomberg article revealed that companies from the United States, Switzerland and England would be paying Guyana a visit to vie for the opportunity to buy and sell Guyana’s oil.
“They are busy trying [to procure companies],” Jagdeo had revealed. “They called a company, asking if they can put in a proposal, to lift our share of profit oil. But they don’t really want that company.”
“They want to say they consulted widely, because, behind the scenes, they are working on a deal to tie up a long-term contract for the lifting of our share of the oil. And we’re never going to accept that.”
While Guyana will eventually be going the route of outsourcing the sale of its oil, there are, in fact, a number of methods that are used around the world to sell oil. In some cases, a national oil company representing the oil-producing country will negotiate a long-term contract with a buyer. In the contract, the price is usually pre-determined with a benchmark.
There are also methods like on the spot sales, where oil cargoes are sold on an individual basis and prices determined on the spot. This is, in fact, the method being used by the Energy Department in the short term. Then there are hybrid sales, where an oil producer can use both term contracts and the spot market.
There are also delivery agreements where producers with stakes in refineries can create a safe market for their crude and control their prices according to the costs incurred during the refining process.
Refineries are usually a preferred option to sell oil to, since they offer protection and reduced risks. Selling directly to traders comes with its own challenges, especially if traders aggressively negotiate the sale terms and pressure the country, in this case, Guyana, for favourable treatment… something Guyana knows all too well from the Production Sharing Agreements (PSAs) it has already negotiated.