No provisions to exclude decommissioning costs from “cost oil” – consultant
Oil and gas consultant, Charles Ramson Jr has pointed out a glaring oversight on the part of the Guyana Government, when it renegotiated an agreement with oil company ExxonMobil back in 2016. According to Ramson, it is an oversight he contends can contribute to costing Guyana massive amounts of potential revenue.
According to the consultant and former parliamentarian, the agreement is void of any position on decommissioning an oil well once the oil and gas is extracted. This, he noted, means Guyana will lose out because oil company can claim these expenses as part of its “cost oil” cut.
ExxonMobil is expected to use revenue from its production in order to make back its capital investment. This will be categorised as “cost oil”. Whatever remains of this is the ‘profit oil’ Guyana will have to split between the oil company and its associates.
Ramson related that back in 1999, when the original agreement was entered into before any commercial quantities of oil was discovered, the importance of decommissioning was not recognised as a priority.
“The focus was on exploration and production and how to get more revenue which is very similar to the Guyana situation at the moment. Globally, that has now changed significantly especially for mature basins.”
He added that decommissioning involves the safe plugging and abandonment of the hole drilled in the earth’s surface from which oil and gas is extracted and the safe disposal of the equipment used in production.
In offshore production, such as where Guyana’s well is located, the costs can range in the region of a few million dollars to over US$500 million per oil and gas reservoir for which plugging, and abandonment is one of the highest cost factors – representing about 60 per cent of the total decommissioning cost.
The attorney referenced a United Kingdom (UK) oil and gas authority report published in 2017. According to Ramson, the decommissioning costs in the UK continental shelf are estimated to be approximately US$80 billion, exceeding net tax revenues.
“Given that production from the Stabroek Block is expected to be from an FPSO (Floating Production Storage and Offloading Unit, which is a ship modified for production and processing of hydrocarbons, and for the storage of oil), the decommissioning costs will be relatively less but still very large when considering that the first development phase of Liza development will see 17 wells and the second phase will see another 35-40 wells,” Ramson added.
He said the decommissioning costs for the Liza production alone will be in the hundreds of millions of US dollars at minimum, adding that the cost can then run into billions if the other discoveries like Turbot and Ranger come on-stream. The absence of the decommissioning term in the contract, he said, will mean ExxonMobil can write off any decommissioning costs as expenses and that will lessen significantly future revenue for Guyana or ExxonMobil will seek partial funding from the Guyana Government to offset that cost, as is being done in the UK.
Ramson also alluded to Guyana missing out on a chance to have a stake in the venture, as a partner with Exxon. He noted that because of this, the country had lost revenue, not to mention a chance to be recognised at an international level.
In a report it did last year on the oil sector, the International Monetary Fund (IMF) had urged Guyana’s Government to start auditing all exploration and development costs being racked up by ExxonMobil as soon as possible.
When he presented the 2018 Budget last year, Finance Minister Winston Jordan had spoken of the impending establishment of an oil and gas unit in the Guyana Revenue Authority (GRA). According to the IMF, the establishment of this unit should become a priority of the Government.
The Stabroek Block is 6.6 million acres. Esso Exploration and Production Guyana Limited is the operator and hold a 45 per cent interest in the Stabroek Block. Hess Guyana Exploration Ltd holds a 30 per cent interest, and CNOOC Nexen Petroleum Guyana Limited holds a 25 per cent interest.