The analysis of Tom Sanzillo, Director of Financial Analysis at IEEFA, is fundamentally flawed, ill-informed, and contextually misleading (Part 1)

Today’s article is a direct response to Tom Sanzillo, a so-called financial expert, with the title “Director of Financial Analysis at the Institute for Energy Economics and Financial Analysis”, a seemingly globally unpopular institute. The institute appears to lack any credible, globally-respected reputational ranking with respect to the work it produces – hence the characterisation of it as a globally weak and unpopular institute. With this in mind, today’s piece is extremely necessary in the interest of public debate, since Tom Sanzillo, it would appear, is being utilised for whatever professional reputation he holds to lend credibility to a position of a certain section of society, which is given growing media coverage by a certain section of the media as well. To this end, there is a daily narrative – perhaps with good intent, but ignores many other crucial elements of the subject matter it seeks to champion, inter alia, Guyana’s oil deal.
Firstly, this author acknowledges that indeed the current Production Sharing Agreement (PSA) with Exxon is inherently weak in many areas, and could have been better. This author would have also, over the last three years since the PSA was released to the public, authored many pieces pointing out the weakness of the PSA. One must also acknowledge that the Government of the day has acknowledged this fact, and when it was in Opposition, did highlight many loopholes that could be corrected going forward with future contracts. However, it is not an entirely bad deal, where Guyana earns absolutely nothing, as it is being made to seem. Guyana’s net take from the current PSA is 14.5% which includes 2% royalty and 50% from profit oil.
More so, one must also acknowledge that the Government of the day is showing positive indications and actions to honour its commitment to the people of Guyana in that regard. In fact, the Vice President recently availed himself on a radio segment with the publisher of Kaieteur Radio to address those concerns and outline the Administration’s plans to deal with those matters going forward – in terms of securing a better deal for Guyanese, and not only from the perspective of the oil deal itself, but to benefit from the petroleum sector as a whole. The Vice President addressed these issues rather comprehensively, and therefore, it is not necessary to rehash the contents of that discussion here.
Now, let’s turn to the so-called US financial expert Tom Sanzillo, who has taken some bold positions on some issues that are fundamentally misinformed, and where he appears to be absolutely clueless about what he is veering into.
The first issue has to do with his position on the Guyana Gas-to-shore project, where he asserts that it is a recipe for bankruptcy. Based on his argument, he is comparing this on the basis of the technical competence of the Government to negotiate complex deals – using the badly negotiated PSA under the previous regime as the pillar of his argument.
Someone of his stature should know, though, that you cannot compare apples with oranges. It is evident that the previous regime, and more particularly the negotiating team for the PSA, was a world class incompetent and weak group of negotiators.
The current regime, on the other hand, has a demonstrable track record of the highest intellectual competence and some of the best financial experts of international quality dominating almost all quarters of the Government apparatus. There is no shortage of financial and economic expertise in Guyana – both within the Government and in the Private Sector.
The second atrocity of Tom’s position is that it is intellectually and academically imprudent of Tom Sanzillo to make such assertions on the gas-to-shore project without even having critical information before him to inform his analysis. For example, information regarding the investment cost, cost structure, revenue streams/structure, value added products, and the overall economic benefits to the economy are currently being worked out.
In the absence of such crucial information, such a project would not be a recipe for bankruptcy – hypothetically speaking. In a subsequent article, this author will present some analysis, inter alia, scenario analysis with its underlying assumptions and extrapolatory techniques. This is the kind of techniques analysts and academics utilise when there is limited information for such analytical work. Amusingly, Tom Sanzillo did not even attempt to use any such techniques whatsoever – which is quite an unfortunate embarrassment to his professional integrity, if indeed he is the expert he claims to be.
Another issue this column wishes to address is contained in an article in which he asserted that the Guyana Government will owe Exxon some $20 billion by 2025, suggesting that the Government will have to borrow money to repay this debt. This view, however, is contextually incorrect.
It is not a case where the Government somehow have to find US$20B by 2025 to pay Exxon. The investment itself will repay the investors their capital investment and will yield a profit which will be shared between the Government and the oil company. The PSA has a 75% cost recovery threshold from which the contractor will recover its investment cost. The projected capital investment for both Liza Phase 1 and Liza Phase 2 over the life of the project is US$60B, and the life of the project is 30 years.
So, if we divide US$60B by 30 years, that’s $2B per year X five years = $10B; plus, pre-discovery cost and investment to date is about $10B by now, that’s how Tom arrived at US$20B figure by 2025 – which is based on Exxon’s projected investment.
In other words, what Tom is saying is Exxon’s projected investment by 2025 would be US$20B, but what he did not say is that Exxon will recover that investment from production and the revenue generated therein – of which there is a 75% cap.
Further, it is Exxon shareholders’ funds being invested ($20B), which will be recovered from the investment itself – not the Government of Guyana’s funds or those of the people of Guyana.
The Government gets a profit share which works out to 12.5% + 2% royalty = 14.5%, and this is a guaranteed 14.5% until the end of cost recovery period. To be continued….

About the Author: JC. Bhagwandin is an economic and financial analyst, lecturer and business & financial consultant. The views expressed are exclusively his own and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]