Exxon has been kind enough to share with the nation the initial decommissioning costs that have been put aside for the work to be done 20 to 30 years from now.
What His Excellency Bharrat Jagdeo is proposing has its merits; however, I would suggest a further look at the range of royalty rates for such an operation. Providing flexibility with price movement would also allow for continued profitability at the lower end of the price spectrum.
Another alternative option for His Excellency to consider in addition to the proposed management structure of the decommissioning funds would be to hold the funds in a shared, transparent trust account where the funds can be grown at a rate equivalent to Exxon’s weighted average cost of capital (WACC), which is currently 9.55%. This rate surpasses that of the inflation rate being experienced in the USA.
We should also make these funds available for reinvestment by Exxon during the 20 to 30 years remaining on the wells that they have been set aside to decommission. Thus, the funds would continue to grow faster than inflation over the long term, and also provide additional interest earnings for the country.
In addition, Guyana would be able to reduce the cost of Exxon’s operations in our oil sector.
If, near the end of the productive life of the well, Exxon chooses to sell to another party, we can stipulate in the contract that Exxon would transfer its rights over the shared trust account to the new owner, who would also be bound by the terms of the initial contract, which ensure that the funds would be used for the decommissioning process.
The established trust account must be used for all additional wells, with all future costs being placed within the account, which would continue to earn interest at a minimum rate that is equivalent to the internal WACC of Exxon. This will become the benchmark rate throughout the existence of the shared trust account.
This is what Exxon can do if they have exclusive rights over the funds during the 20-to-30-year period. The proposed alternative approach would allow them to continue to have access to the funds, but the interest earned would benefit the people of Guyana, while also guaranteeing full coverage of the predetermined future decommissioning costs.