– What does this mean for Guyana within the framework of the Production Sharing Agreement between the Government of Guyana and the multinational oil company?
Having concluded the Sovereign Wealth Fund series last week, in a coherent manner, today’s topic sought to extend on the broader oil discussions and analysis, a topic that is seemingly fuelling endless commentaries and public debates with respect to Guyana’s Production Sharing Agreement (PSA) with the multinational oil company, in particular. However, this article seeks to examine this topical issue in a more scholastic manner, such that a more comprehensive analysis shall be presented herein (and to be continued next week) – viz-á-viz – by examining some of the fundamental elements and the peculiarities of the changing dynamics of global oil economics.
First of all, it is acknowledged by this columnist that the PSA could have been better on the part of Guyana but, we ought not to place the blame solely on ExxonMobil. In fact, this columnist is of the view that ExxonMobil is not to be blamed at all for the poorly negotiated contract. Instead, the blame lies solely at the feet of the Government of Guyana (GoG) because it would appear – quite logically – that there were no technically competent professionals on the negotiating team when the contract was being renegotiated. The team should have included a financial economist, an investment professional and/or a team of very experienced accountants – this view was also shared by a fellow columnist of another local newspaper, who is a Professor of Economics, Tarron Khemraj.
It is therefore established that the Government erred in this regard but as was pointed out in last week’s article, we need to move on and shift our focus on how the revenues will be utilised to advance massive developmental projects that are needed to enhance the country’s national competitiveness and improve the quality of life of the citizenry. Also, one can only hope that the GoG learned from this lesson and as new opportunities arise in which other oil companies may express interest in Guyana’s oil industry, better negotiated contract (s) should be forthcoming.
Secondly, one cannot ignore the subtle (unwritten) rule when it comes to the negotiation of any contract between any parties (not just a government) and that is, the balance of power dimension. The reality of the world we are living in is such that the dominance of the most powerful always takes precedence. It is only now very few global leaders have endorsed the concept for having a more win-win situation with regards to establishing trade policies and any other form of contracts – and whether it is multilateral and bilateral arrangements. But even in a win-win scenario, such a situation does not guarantee equality in the distribution of the economic benefits because often times when deals are made there is hardly any defined measure designed to accurately establish an equally distributed economically beneficial arrangement. Instead, it is more or less, hinged upon what is perceived to be fair by the parties involved before cementing the finality of an agreement.
To this end, it is a known fact that Guyana has been seeking investors to explore for crude oil for more than two decades now. But only now there has been success in this regard. The reason for this is (perhaps there are others) but the primary reason from an analytical perspective is that these types of exploration and investments are extremely high risk. As such, companies were reluctant to come. Fast forward to today when we have discovered that there is in excess of three billion barrels of recoverable crude oil – up to 2015 – ExxonMobil capital investment was about US$4.0 billion. By 2020, this figure, based on this columnist’s estimation may reach probably US$5 – US$6.0 billion – or possibly less or even more. The important thing is what this figure really means? And it is this that is crucially important. Guyana’s Gross Domestic Product (GDP) as at the end of December 31, 2016 was $711 billion which is equivalent to roughly US$3.4 billion. This means that ExxonMobil’s investment is by far greater than the GDP of Guyana and this alone tells two things (1) it reinforces the humongous power of ExxonMobil in terms of its financial capacity and (2) the enormity of the risk it has undertaken – hence the theory of finance dictates that the greater the risk undertaken by firms – the greater the risk premium – this theory is not just viewed as a mere theory in finance but it is also viewed as being rational, logical and common sense. (To be continued next week)
The author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions and Banking from a UK university of international standing.
