Licence in line with frontier exploration standards – Tullow
1% recoverable royalty
…cites previous costs from failed Jaguar well, exploration risks
…at least 12 other countries have average 10% royalty rate
In the wake of reports that Tullow will be recovering the one per cent royalty it pays to Guyana through cost oil, the British oil firm has defended itself by pointing to international licence standards and the previous losses it took on a failed exploration well.
In an interview with this publication, Tullow’s Head of Media Relations, George Cazenove reminded that back in 2012, Tullow and its partners spent and lost over US$100 million on a failed exploration well in Guyana.
“What I can say is that our licence is entirely in line with licences around the world in frontier exploration areas. Don’t forget that the Jethro well had a one in four chances of success at our risk. And we know what it’s like to lose money in exploration – we and our partners spent $185M USD in Guyana in 2012 on the Jaguar well and, as per our licence, got nothing back,” Cazenove said.
Experts have argued for some time that that Guyana Government has not done enough to include ring-fencing provisions within the oil contracts it signed with operators. Ring-fencing terms ensure that liabilities (losses) associated with a company’s asset, in this case a previous well, cannot be transferred and the costs recouped from another well.
The one per cent royalty, itself, has been criticised in recent times for its very amount. It falls short of the two per cent ExxonMobil has to pay to Guyana. When compared to oil producers around the world, however, the rate falls even shorter.
While some oil producers did start with low royalty rates similar to Guyana’s, their respective governments had the foresight to include provisions in their contracts for a sliding scale that would ensure the royalty rate went up as oil production increased.
The Global Legal Research Centre in the Library of Congress of the United States (US) did a study on royalty rates a few years back, in which it cited the rates various countries imposed on companies.
A comparison of the rates for just 12 of these countries— including Venezuela, Algeria, Argentina, Columbia and Ecuador— shows an average royalty rate of 10 per cent. Cazenove reminded, however, that it was still early days for the company and Guyana as an oil producer.
“It’s very early days for Tullow in Guyana. We’ve drilled one well so far that has been successful… which is great news, but we are a long way from reaching production. We need to drill more exploration wells and appraisal wells as well as completing technical analysis before our licences become production licenses,” Cazenove said.
It was announced on August 12 that Tullow discovered oil in commercial quantities at the Jethro-1 exploration well in the Orinduik Block. This is the first discovery in the Orinduik Block, which is located in close proximity to the Stabroek Block – where United States oil giant ExxonMobil had already made 13 lucrative oil discoveries.
The Jethro-1 well was drilled by the Stena Forth drillship to a total depth of 4400 metres in approximately 1350 metres of water. According to a statement from the company, evaluation of the logging data confirmed that Jethro-1 comprises high-quality oil-bearing sandstone reservoirs of Lower Tertiary age, which simply means they date back to millions of years ago.
According to the statement, the well encountered 55m of net oil pay, which indicates a recoverable oil resource estimate that exceeds Tullow’s pre-drill forecast of 100 million barrels of oil.
News of the find created waves in financial centres around the world, as well as international news outlets. That very day, Tullow’s shares jumped by over 19 per cent on the London Stock Exchange to become the biggest gainer on the index.
Not long after, however, reports emerged in sections of the media in which it was alleged that the one per cent royalty that Tullow agreed to in its deal with the government, can be recouped as costs. A report prepared by Hannam and Partners (Advisory) LLP was cited in the article.
Already, the contract exempts Tullow from paying a range of taxes and duties. Section 15.1 of Tullow’s contract states that “subject to Article 32 and except as provided in Article 15.2, 15.8 and… Article 15.1, no tax, value added tax, excise tax, duty, fee, charge or other impost shall be levied at the date hereof or from time to time thereafter on the contractor or affiliated companies in respect of income derived from petroleum operations or in respect of any property held, transactions undertaken or activities performed for any purpose authorized or contemplated hereunder”.
The only exceptions are import duties at rates set out in the Customs Act and subject to Article 21 of the contract; income unrelated to what is derived under the agreement and rent owing to the government for any land rights granted or assigned.
And it was only this year that the government passed a motion in the National Assembly, moved by Finance Minister Winston Jordan, to confirm tax waivers for the British oil company. The activity was boycotted by the Opposition because of its caretaker status.
Tullow Guyana BV is the operator of the Orinduik Block, with a 60 per cent stake. Total E&P Guyana BV holds 25 per cent with the remaining 15 per cent being held by Eco (Atlantic) Guyana Inc.
It was recently announced that Qatar’s state oil company is looking to enter into Guyana’s oil market with a farm-in deal through total that could see them obtaining stakes in both the Orinduik and Kanuku Blocks.