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Guyana got “low” royalty, signing bonus from ExxonMobil – US energy analyst. Trotman: “best arrangement” in the circumstances

FLASH BACK: ExxonMobil’s Country Manager Rod Henson (left) receiving the Production License from Minister of Natural Resources Raphael G.C. Trotman.

Guyana has been short-changed in the amount of the important royalty on oil sales and the controversial US$18 million signing bonus from ExxonMobil but overall the 2016 Production Sharing Agreement (PSA) is quite a routine deal taking into consideration the risk factors, says a United States (US) energy industry analyst.

“The thing to focus is the royalty rate is low. It’s two percent royalty rate; that’s pretty low to be honest. Typically, host countries get higher royalty,” Leo Mariani, who covers explorers and producers at the New York and Texas-based NatAlliance Securities, told Demerara Waves Online News. He said royalty rates are generally five, seven or 10 percent.

“Two (percent royalty) is one of the lowest I have seen. The royalty is low and the royalty is very, very, very, very valuable because you receive the royalty prior to any deduction of costs that comes off of the revenue stream so a higher royalty will benefit Guyana quite a bit more,” said Mariani, a former Wall Street analyst for RBC Securities.

Minister of Natural Resources, Raphael Trotman on Thursday, January 25, 2018 reiterated that the 2009 contract between ExxonMobil and Guyana had provided for zero percent royalty because it was “really a one percent royalty paid for by government from its 50 percent share so in essence the royalty was only in name”.

“That was something the government felt was not tenable and that it was important that we get a royalty given the fact that this was taken out of what was already there- that is a zero rated royalty. There was, of course, some back and forth and I know that some people say that the royalty should have been ten percent, that it should have been fifteen and forty but bear in mind that we are already receiving fifty percent profits which is not an ungenerous amount…fifty percent of 3.2 billion barrels is a lot of oil and the value of it so in the circumstances … that the government felt that in the total array of circumstances, that it got the best arrangement it could get in those circumstances,” he said when asked by Demerara Waves Online News.

While the US$18 million was “a little bit low by signing bonuses standards” and presumably that was fixed when oil was” about US$30-odd dollars per barrel, the energy analyst said it is the royalty that has much higher value. “That worth much, much more than the signing bonus. The signing bonus is insignificant compared to the royalty in terms of future revenue potential,” he said.

Mariani is a former Equity Analyst at Jefferies & Company, Inc. where his man responsibility was on oil and gas exploration and production as well as the energy commodity markets.

Trotman last week also explained that the signing bonus that has been deposited into a special account at the Bank of Guyana was set to the amount of US$18 million taking into consideration the amount of money that Guyana had gotten for the settlement of its maritime boundary dispute with Suriname at the United Nations Tribunal on the Law of the Sea. At that time, Canadian-headquartered oil explorer, CGX Energy, had helped finance the legal fees.

Mariani said despite key factors that might have influenced the signing bonus such as the low world oil price at the time, size of the concession, and investment in exploration and maybe the signing bonus could have been between US$25 million or US$50 million.

“It could have been a little bit higher, I suppose, but it’s not totally out of bounds because you know the risk is high whenever you go into a new area whenever there is no existing oil and gas production so the value of these things is never really in the signing bonus; it’s in the royalty and it’s in the government share of profit oil,” he said.

ExxonMobil appeared to have walked away with a “probably get a pretty good deal” in the context of Guyana not having found oil in commercial companies before and low world oil prices in 2016.

“Typically, whenever you have people come into a country whenever there is no previously discovered oil resource or producing oil and gas; you typically get a good deal when you are the first person to come in there and spend money,” he said.

A key factor, he said, at the time the contract was re-negotiated was the fact that oil prices in 2016 were at a multi-year low. That year ended with an estimated US$45 per barrel of Brent Crude, with the lowest being US$27.67 per barrel . “With these contracts, when times are bad, usually the producer- in this case Exxon and some other partners, Hess and Nexen- typically you allow them to get a better deal,” Mariani said.

Mariani further observed that the 50-50 split in the 25 percent profit oil is standard but he flagged concerns that the 75 percent recovery of cost of investment. “That’s probably a bit higher than I have typically seen. Maybe, numbers are in the 60 percent range so that number (75 percent) is a little more favourable for Exxon, I would say, so overall I would say it’s a favourable contract for Exxon,” he said.

With regards to risks, the energy analyst acknowledged that exploration is risky and ExxonMobil was prepared to take those risks which might have led to that company acquiring rights to 75 percent cost oil recovery. Mariani said the unsettled Guyana-Venezuela border controversy “is a probably a reason why Exxon is getting a better deal”.

The American energy expert stressed that the major features of a contract are the royalty and profit oil, while in the case of the Guyana contract the others related to tax concessions, tax caps and local content/local investments/ local jobs are “very standard language in these contracts”.

Commercial oil production is expected to begin offshore in 2020 and is estimated to rake in an estimated a minimum of US$1 million per day.