Dear Editor, CRITICISM and scrutiny are necessary elements for helping our institutions in Guyana enhance their abilities so that they are prepared to effectively manage the country’s oil and gas industry.
The media plays a critical role in this regard and must be commended for its vigilant coverage of events and activities related to the country’s preparation for oil production. Like all aspects of life, along with great expectations, come great responsibility and media reporting is no exception.
Rocio Higuera Venezuela
A recent report in the media examined a report by Chatham House, a UK-based think tank, and put forward the notion that the group supports contract renegotiations in frontier countries. As we all know, this has been a topic of great interest in Guyana over the last year in particular, and reports such as these from international experts are valuable tools for furthering our knowledge.
Rocio Higuera Globovision
**As Guyanese become more familiar with the deal the country negotiated with ExxonMobil, determining a course of action depends on the population being privy to accurate information. On the subject of contract renegotiations, Chatham House says, “New geological information can increase a country’s attractiveness to investors. New discoveries, in-country or even nearby, can lead to a surge of exploration interest from oil companies. These new data may prompt governments to seek to revise the terms of investment to their advantage. Similarly, companies sometimes come to governments to ask for a revision of terms to reduce the taxation or operational obligations they face during periods of economic difficulty. This is happening today in many countries.”
This paragraph has been corroborated by a recent media report. But I would like to draw attention to important information in the next sentence, which was left out of media reports: “However, as Flavio Rodrigues, government relations and regulatory affairs director for Shell Brazil, points out, it is good practice to modify the terms of future licensing rounds rather than changing the terms of existing agreements. “Unilateral change of conditions and contract terms drives business away. Industry recognies that a good fiscal system is progressive in nature, able to accommodate different production levels, reserve sizes or oil prices.”
This context is important, as it explicitly cautions against the renegotiation of existing contracts. Even more so, the report echoes what so many have already said: Unstable business conditions and improper economic management can and will drive foreign investors away. We must consider and weigh the positives and negatives of any action we take regarding the contract. The Chatham House report also examined causes and cases worthy of renegotiation. The Chatham House report says,
“Against the backdrop of a high oil price in May 2014, our group debated the legitimacy of renegotiating an existing agreement. A near consensus emerged that renegotiation was sometimes necessary in order to maintain a long-term partnership between oil companies and governments, because the refusal to review terms could be destabilising and unfair to some countries.”
In this instance, the Chatham House Group found that there was reason to renegotiate when oil prices increased beyond the existing contract’s fairness. However, the mention of ‘high oil price’ is critical to this analysis. Chatham House is not making a blanket endorsement for breaking solidified contracts, nor is it an endorsement for Guyana to seek renegotiation
In fact, we have a completely different agreement. Unlike countries whose revenue is based on a fixed price per barrel of oil, Guyana’s revenue is based on profit. We get 50 per cent of the profit, plus a 2 per cent royalty on total revenue. Therefore, if oil prices rise, so does our take; if oil prices fall, so does our take. Our arrangement is far different from the scenario Chatham House is referencing, and once again we must consider this when we discuss the possibility of renegotiations
Whether at the level of government or the average citizen, decision-making requires being armed, not with some, but ALL of the information. There is plenty of academic guidance on thorny issues in extractive industries, and groups like Chatham House publish a lot of literature on these topics. It is crucial that we learn from this guidance, and use complete information to effectively weigh potential benefits against potential pitfalls of any course of action that impacts our new energy industry. The media has a critical role to play in ensuring all the information is provided and not just aspects that represent specific narratives
Regards Selwyn Paul