The concerns of an oil spill, and moreso the cost, was first raised by several prominent commentators in the press not too long ago, and that primarily inspired this special series in this regard. The main contention of some observers, as far as an oil spill is concerned, is that it was not catered for in the oil contract between the Government of Guyana (GoG) and ExxonMobil. As such, several commentators have questioned who will bear the cost should such an event occur. In fact, it was noted in one of the previous articles that, evidently, oil companies are generally unwilling to compensate the financial costs of any oil spills. After some bit of probing from the media (as it would appear), the Honourable Minister of Natural Resources subsequently informed the public that the Government will set aside a portion of the oil revenues to respond to an oil spill (Newsroom, March 28, 2018).
While the minister did not quantify what proportion of the oil revenue Government intends to put aside for this, the section that follows examines this model to determine whether this would be feasible and/or sensible in the interest of Guyana.
Based on information in the oil contract, one can simulate a simple mathematical model of the potential net revenues Guyana is poised to earn, as is demonstrated in the illustrations above. There are, however, a number of assumptions that were necessary to factor in the computation, given that some of the cost elements that would affect Guyana’s net earnings are unclear. These are: (1) it is embedded in the contract that Guyana agreed to pay the corporation tax of the exploration company from Guyana’s share of profit oil, as is illustrated in table 2; (2) the second assumption is: according to the contract, Exxon reserves the right to deduct from total production of oil whatever amount is needed for their operations, which means that, of 100,000 barrels produced per day, Guyana will not benefit from royalty for the total production, neither would the full production be sold. To this end, it is unclear how much barrels Exxon will need to deduct for their operations; (3) the third assumption is that, according to the contract, Guyana will have to bear the transportation cost to ship its share of profit oil onshore, another cost component that is uncertain.
Therefore, based on the foregoing, one can reasonable ascertain that Guyana will safely net about $30 – $60 billion annually in oil revenues, and should there be a large scale oil spill — which could exceed about US$4 billion (GYD$826B) in damages and costs to the economy, this would be equivalent to 12 years of total net revenues. Clearly Guyana could not afford it, and it is thus not financially sensible on the part of Guyana. The oil exploration companies need to take full financial responsibility for an oil spill, not Guyana!
*The Author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.
