# Computations

In this week’s  installment from the GBJ we address the question of revenues from the impending oil production. In an earlier post we noted that the main direct effect of the oil sector on the domestic Guyanese economy will be through the addition of revenue in the GOG’s treasury.  We pointed out then that under the revenue sharing agreement, seventy five (75) percent of oil production will be initially allocated to “cost recovery” to ExxonMobil and its partners. The remaining twenty five (25) percent will be considered “profit oil” and this will be shared 50-50 with the GOG. The revenue sharing agreement sets a royalty of two (2) percent on gross earnings, which brings the initial GOG share to 14.5 percent, i.e one half of the 25% designated “profit oil” plus another 2% of the “profit oil” for royalties,  of total oil revenues.

One of our GBJ readers, Lancelot King of Georgetown Guyana,  questioned the accuracy of our first formula. Specifically Lancelot questioned whether or not the 2% royalty was computed on the “profit oil”. A bit of research revealed that this was indeed a GBJ error.  However, it is true that  “Stabroek’s fiscal regime is relatively straightforward. The key revenue stream for the government is a 50% split of profit petroleum, which is derived after costs have been recovered, up to a ceiling of 75% per year of turnover, and a royalty of 2% has been subtracted”.

So let’s try to explain this, in the simplest of ways, once more. We once again thank Lancelot King for pointing this out to us. It does matter on which amount we compute the 2% royalty. Suppose, on say June 22, 2020, the very first day of production, the well, produces 100,000 barrels of oil, and let’s suppose further that the cost of oil on June 22nd is \$55 per barrel,  how much money will the GOG receive? If we sell 100,000 barrels at \$55 per barrel we, EXXON and GOG, will receive \$5,500,000 in total revenues. The GOG derives monies from two streams: (i) Royalties; and (2) The 50-50 split of “Profit Oil”.

Let’s first compute the royalty payment. The royalty payment is addressed in Article 15.6 of the 2016 Petroleum Agreement. It says, “

Royalty = 2% of all Petroleum sold, i.e., 2% of \$5,500,000 = \$110,000. This leave us with \$5,390,000. Until Exxon’s exploration and setup expenses are recouped, Article 11.4 of the 2016 Petroleum Agreement specifies that up to 75% of these monies go to “cost recvovery”.  I.e., 75% of \$5,390,000 =  \$4,042,500 is allocated to Exxon for “cost recovery”. This leaves us with \$1,347, 500 which is designated “profit oil”. This amount, as stipulated in Article 11.4 of the 2016 Petroleum Agreement: is divided 50-50 by Exxon and the GOG. So the GOG will receive \$673,750 from the “Profit Oil”. In total GOG  will collect from the \$5,500,000, \$673,750 from “Profit Oil” and \$110,000 in royalties = \$783,750.

It is important to understand that the GOG’s share, while initially small will increase substantially once cost recovery on the initial investment is met.  The graph below gives a sense of current estimates of the growth and decline of GOG revenues over the life of the field.

Exonn’s cost recovery will be met by the late 2020s and from that point onwards almost all of the production will consist of “Profit Oil.” Even under the most conservative assumptions Guyana will be transformed. Baring unforseen circumstances GOG revenues are likely to hit a billion dollars a year by 2024.  It is estimated that the field will be viable through 2040.

Yes, it is true that ours is not the best deal. The research demonstrates that ours is perhaps the least competitive of recent agreements of this type. See below for a comparison of the Guyanese deal to others with similar features signed recently.  Having said this, this is where we are, it is a better place than most and it is up to us to write the ending of this story. We are, conservatively, very likely to receive,  over the course of the life of this field \$8 billion. This is as good a start as we can ask for. We have a chance to jump the gap, let’s be smart and get this done.