Head of UG's School of Business not sanguine about 'up front' cash from oil and gas industry
“While the front-loading of contracts and the securing of large contracts might be politically popular it might prove to be economically disastrous, University of Guyana Business Professor Leyland Lucas has said in an article that seeks, in part, to respond to the popular argument touting the virtue of so-called front-loading, that is, the drawing down of significant cash amounts of as yet unearned income from the oil and gas industry.
Lucas, who is serving as Visiting Professor at UG’s School of Entrepreneurship and Business Innovation (SEBI) says in his article that there could be pitfalls associated with the popular “up-front” or front-loading argument that has been steadily gaining traction among ordinary Guyanese.
While alluding to what he says is “an interesting argument to the effect that Guyana would be better off “receiving a sizeable bonus rather than waiting for later disbursements through royalties”, Professor Lucas argues that such an option is not without its potential dangers and pitfalls. He argues that while the “numbers” being touted in the front-loading argument “vary from the well-reasoned to the pie-in-the-sky estimates,” there is need to examine the domestic realities.
“We are a nation with various needs from education to infrastructure. To address those needs we will require a significant influx of financial resources…..however, if that influx is not regulated it will cause inflationary pressures” which pressures, he argues, will not only precipitate “massive inflationary pressures” that are likely to further damage the country’s economy but lead to a further decline in living standards.
Whilst the announcement by Exxon Mobil of the discovery of oil, offshore Guyana, just under three years ago has triggered expectations of a swift and miraculous economic transformation amongst the uninitiated Lucas cautioned that a massive influx of cash does not speedily correct the errors of previous decades. “Engineers, scientists, agricultural experts and doctors are not created overnight. It takes years of training to acquire these skills. If the nation is to acquire these skills then it must be done over time.”
An alluding to the volatility of the global oil market, Professor Lucas raised the question as to where the resources will come from “when an engineer needs specialized training in five years but the bottom has fallen out of the oil sector.”
And in concluding his position on front-loading Professor Lucas contended that “a massive unregulated inflow of cash through a significant bonus may entice policy makers to undertake massive investment projects which the economy cannot embrace with its limited skills inventory. Instead, a gradual inflow of expenditure might prove more beneficial to the nation in the long run.”
In his article the Guyanese academic also weighs in on the subject of the controversy that has arisen over the Exxon Mobil contract including the call in some quarters for a re-negotiation of the agreement. Lucas argues that the controversy associated with the current contract cannot ignore the fact that a contract previously existed. How do we renegotiate this contract?…Moves and counter-moves will only make sense if one party has something that is vital to the other and can force the latter to respond to the actions of the former. In this case we have a product that the world wants but does not need. Any moves by our negotiators can be easily ignored. Consequently, it makes no sense to renegotiate a contract from a position of weakness…We do not own the wells, we do not have the skills necessary to exploit them and we do not have the technology to provide the value-added products. In fact, truth be told, at this stage we are struggling to meet Local Content requirements. One cannot renegotiate a contract from a position of future possibilities, but must do so within the current context. So any conversations of renegotiation will take place from a position of weakness rather than one of strength,” Lucas declared.
The Oil Contract Debate
By Dr Leyland M. Lucas
In the late 1990s, Guyana signed an Oil and Gas exploration agreement with Exxon’s subsidiary, EEPGL. That agreement not only permitted significant activity by Exxon, but also provided Guyana with a small subsumed royalty of no more than 1%. The agreement was also in clear contravention of Guyana’s laws, which stipulated the number of blocks that could be offered to a single entity. Though there were clear violations in law, Guyana has chosen to honour that obligation rather than raise it in other forums or attempt to invalidate it. As a nation, our word has been our bond.
Fast forward to our current situation where we find much being discussed regarding the current contract, and whether or not the nation’s best interests have been considered. In fact, in the past few months, we have been privy to an ongoing debate around the contracts signed by the Government of Guyana and Exxon. This debate has gotten so intense that some have even questioned the integrity and negotiating ability of governments in other developing countries, where the exploration of oil and gas is ongoing. Yes, in the case of Guyana, there is a great deal of evidence to suggest that better could have been done. But, who are we to question the outcome, when we were absent from the process? As my grandmother would often say when a family member chose to criticize others ‘make sure that your house is clean before telling someone else that theirs is dirty.’
In an earlier article on local content, I made the point that oil is no longer a critical commodity. There is an abundance of oil in the global market, prices are highly volatile, and the world has begun a gradual process of shifting from fossil fuels to renewable sources of energy. These are realities that cannot be ignored. For example, within our hemisphere, we see significant declines in oil and gas production, yet very little evidence of a major impact in the global marketplace. Likewise, the Kingdom of Saudi Arabia, a major oil producer with one-fifths of the world’s reserves, has also begun the process of delinking its economy from oil-dependency and looking for newer ways to stimulate growth and development. The Kingdom of Saudi Arabia has determined that, given the volatile prices, oil revenue can no longer be the foundation of economic development. Instead, the Kingdom has shifted towards renewable energy sources and undertaken significant activities towards transforming the foundation upon which the future economy will stand. Guyana, as a country, has also committed itself to a policy of sustainable development and, in so doing, must balance issues of production and protection. Afterall, we exist in a very fragile ecosystem.
Having made these observations, I’d like to proceed with a small contribution to this debate. As one of my former bosses, Mr. Clarence Ellis, would say ‘no matter what the situation, if you are seen to be truthful, reliable, and honest in your dealings, people will work with you.’ Therefore, my contribution to this debate for the most part will center on the words reputation and position. These words should be at the heart of any conversation about contracts and the subject of renegotiation. I hope that the importance of these words will be reflected and help to either advance or bring some closure to the debate.
The Oil Contract
To some extent, what we are dealing with here is a Prisoner’s Dilemma. In a simple tit-for-tat version, players attempt to match/better one another’s moves, with the hope that the victor will emerge with the Lion’s share. However, research has shown that such strategies seldom succeed. Eventually, parties come to recognize that continuous moves and countermoves are less productive, and that mutual cooperation works best. In essence, let’s find a middle ground rather than try to be the ultimate winner. This is an important point in the ongoing debate around the Exxon contract, because continuous negotiations and renegotiations will yield no fruitful results. Hence, the situation becomes one of finding an acceptable position of compromise, from which both parties can gain some benefit and continue to operate with mutual respect.
As we focus on the current contract, one cannot ignore the fact that a contract previously existed. How do we renegotiate this contract? Within a Prisoner’s Dilemma framework, moves and countermoves will only make sense if one party has something that is vital to the other and can force the latter to respond to the actions of the former. In this case, we have a product that the world wants but does not need. Any moves by our negotiators could be easily ignored. Consequently, it makes no sense to engage in efforts to renegotiate a contract from a position of weakness.
Moves and countermoves also influence one’s position. Subsequent moves by a party only makes sense if this is being done from a position of relative strength. Hence, I pose the question ‘What is our strength?’ The simple answer to this question is nothing. We do not own the wells, we do not have the skills necessary to exploit them, and we do not have the technology to provide the value-added products. In fact, truth be told, at this stage we are struggling to meet Local Content requirements. One cannot renegotiate a contract from a position of future possibilities, but must do so within the current context. So, any conversations of renegotiation will take place from a position of weakness rather than one of strength.
This brings us to the issue of reputation. What does it say about a country that signs an agreement and then seeks to change it? Over time, governments and countries develop reputations as either reliable or unreliable bargaining partners. Each reputation comes with costs and benefits. If Guyana develops a reputation for being an unreliable partner, then all options for future development are lost. As a nation and as a government, we must realize that our word is our bond. If we cannot be relied upon to honour our obligations, then there is no place in the world of nations for us.
Recently, some have suggested to me that we can do this on our own. As I listened to these suggestions, I sensed subtle tones of nationalism and nationalization. While such suggestions are laudable, one must admit ‘that boat has sailed.’ Guyana and the rest of the developing world are full of examples of the consequences of nationalization, in the absence of an appropriate skill set. While it served its political purpose, the benefits of so doing left much to be desired. Oil, like sugar and bauxite, are primary products with volatile prices and much of the value-added downstream.
One of the issues that has been raised in this oil contract debate surrounds the product quality. Yes, there is a great deal of literature that suggests the crude is of an exceptionally high quality. Like an exceptionally well-tailored suit, superior quality commands a high price, provided that a market exists. Hence, one must ask the question ‘can quality command a high price in a saturated market?’ The simple answer to this question is no. As we know, primary product prices fluctuate quite significantly. So, a high price today might hit rock bottom tomorrow. For those of us old enough to recall, Guyana sold its sugar at a high price on the world market in the 1970s rather than honour its obligations to existing contracts. Not too long after, the bottom fell out of the world market. As a nation, we were profitable in the short-term, but suffered in the long-term, particularly with respect to our reputation.
Moreover, the wells are not owned by the Government of Guyana. They are owned by Exxon and its partners. How do we exact additional tribute from these companies simply because we have a product of exceptional quality, when the owner opts to not sell it? Guyana cannot force Exxon and its partners to pay a higher premium when they can choose to not pump oil and gas from the wells. Not doing so provides the government and people of Guyana with zero revenue. Hence the need to be cautious in one’s approach to renegotiating of contracts.
Placing this issue of quality into the Prisoner’s Dilemma framework, how do two players arrive at a mutually beneficial position, when one player ceases to participate? More specifically, how does one arrive at mutually beneficial positions when the dominant player withdraws? The fact is, under these circumstances, the game ends and there are no winners. It’s like that childhood experience where the owner of the ball runs home with it because he is unhappy with some decision. What we have left is a group of disgruntled children who grumble and look for something else to do. Unfortunately, Guyana has very few options and even fewer resources that can be summoned into action.
An interesting argument has recently been raised that Guyana would be better off receiving a sizeable up-front bonus, rather than waiting for later disbursements through royalties. While those numbers vary from the well-reasoned to the pie-in-the-sky estimates, one needs to look at the domestic reality. We are a nation with various needs from education to infrastructure. To address those needs, we will require a significant influx of financial resources. However, if that influx is not regulated, it will cause significant inflationary pressures. Such pressures will further damage the economy and leads to a significant decline in living standards. With a massive influx of cash, one does not speedily correct the errors of the previous decades. Engineers, scientists, agricultural experts, and doctors are not created overnight. It takes years of training to acquire these skills. If the nation is to acquire these skills, then it must be done over time. Let’s not forget that we are dealing with a product whose price is highly volatile. Where will the resources come from when an engineer needs specialized training in 5 years, but the bottom has fallen out of the oil sector? Yes, this may happen anyway. But, at least we would not recreate the conditions for another massive brain drain, as was experienced in the 1980s when resources for scholarship recipients were scarce.
Let me use a simple example to further elaborate on this point. Think of someone in the desert with no food or water for an extended period of time. He/she is rescued and immediately placed in front of a large quantity of food and drink. If that person consumes everything without control, then he/she dies. How-ever, if he/she consumes in moderation, until the body is once more accustomed to consuming solids etc, then there is a greater likelihood of survival. The point I am making here is that a massive unregulated inflow of cash through a significant bonus may entice policymakers to undertake massive investment projects, which the economy cannot embrace with its limited skills inventory. Instead, a gradual inflow and expenditure might prove more beneficial to the nation in the long-run. So, while front-loading of contracts and securing large bonuses might be politically popular, it may prove to be economically disastrous.
In some circles, it has been suggested that Guyana deserves a larger bonus because of its contribution to Exxon’s bottom line. At least one commentator has made the point that, since the discovery of oil and gas deposits off the shores of Guyana, Exxon’s book value has increased significantly. In my humble opinion, to use book value as a basis for renegotiating a contract is not a sound position. Book values change on a daily basis. In fact, Exxon’s stock price like so many others in the market has been on a rollercoaster ride. One year ago, its common stock price was $82.83; today, it is $76.27; last month, the stock price reached a high of $89.07. Which stock price should we use as the basis for asserting book value and renegotiating this contract? Should both parties make offers and counteroffers? Following a pattern within a Prisoner’s Dilemma game, such uncertainty cannot be tolerated. Instead of embracing such uncertainty, both players will be forced to arrive at a mutually beneficial point. Moreover, how reliable a negotiating partner is a government when its position appears to change with every market fluctuation? Clearly, other nations and firms will not take us seriously, since stability is essential to the capitalist system of trade and exchange.
Over the past decade, commentators have noted a change in global relations. That change has seen a decline in nation states and the rise of the corporate state. That corporate state takes the form of transnational corporations, which have been able to influence global politics through their actions. For instance, in the US, we see massive amounts of money being poured into political campaigns by individuals and companies such as the Koch Brothers, George Soros, and the professionals on K Street. Why is this important within the Guyana context? The emergence of corporate states is important because they have the ability to alter things within a nation and change the balance of power. As stated by former British Prime Minister Lord Palmerston, and later expressed by Henry Kissinger, ‘friends and enemies are not permanent, but interests are.’ In this case, the interests are Oil and Gas.
Understanding the permanence of interests is important within the context we are examining. Although there may seem to be a disagreement between Venezuela and the US, any perceived reluctance on our part to abide by negotiated agreements could significantly alter the regional balance. If Exxon or any other transnational deems it favourable to reengage with the Venezuelan government, then they will do so. A reliable bargaining partner is always better than an unreliable one. Who then will take up the mantle on our behalf if Venezuela flexes its military might against us? Are we to expect support from the US administration when we have acted against the interests of an American corporate giant? I think that an examination of history would reveal that the answers to these questions are not favorable.
Oil and gas have been found and they have the potential to offer a great deal of wealth to our beloved Guyana, if appropriately managed. This is already reflected in the International Monetary Fund (IMF) reports suggesting a change in our economic classification. Although we may argue about the royalty and signing bonus, it is merely an exercise in futility. We are in a Prisoner’s Dilemma, having originally negotiated a very bad deal. As a bargaining partner, one does not change the rules of the game unless one comes from a position of strength. Unfortunately, such strength does not exist in our case. We have a product that the world wants, but does not need; We lack the skills base and infrastructure to pursue this venture on our own; There is a global shift away from oil and gas towards renewable and sustainable sources of energy. As such, we are approaching all such negotiations from a position of relative weakness rather than strength.
As a nation, there is an expectation that we will honor our word. Our word is our bond and, as such, we must strive to establish and maintain a good reputation. Even within a Prisoner’s Dilemma framework, some reliability is expected. If a move is made, that player is expected to honour the consequences of that move, rather than default. When countries default on their obligations, their ability to reengage with other parties is seriously hampered. Particularly as a small and young country, we must strive to uphold a positive reputation, irrespective of the consequences. Good reputations are hard to come by, can be easily lost, and extremely difficult to regain. Let us focus on playing the hand we have been dealt, rather than continually questioning its validity. Maybe, for future generations, there is a lesson to be drawn from this experience. A nation should always focus on establishing high educational standards and building its skills base, lest it be found wanting.
Article adapted from: https://www.stabroeknews.com/2018/business/03/23/the-oil-contract-debate/
Guyana's oil sector should fund 'green economy' ; divert fossil fuel cash to climate change resilience - experts
Guyana’s oil revenues should be used to finance the development of renewable energy sources and cash normally spent on fossil fuels should be fund systems that can resist the impact of climate change, say top local and regional officials.
“Anticipated earnings from the oil and gas sector should fund Guyana’s transition to a ‘green economy’ and provide a mechanism for a greenhouse gas set-off to compensate for greenhouse gases emanating from this sector,” Presidential Adviser on the Environment, Retired Rear Admiral Gary Best told a University of Guyana (UG)-organised forum titled “Climate Change: The Guyana Imperative for Prospering in a Climate Altered World.”
He said Guyana would require significant “obligated” public and private financing to address climate change adaptation and mitigation. Best noted that Guyana was on track to ensuring that sufficient funds are made available in this regard, “given the endless debate on what constitutes new and additional financial resources.”
He argued that climate adaptation measures do not yield significant profits and climate financing institutions have not provided new and additional cash, as mandated by the United Nations Framework Convention on Climate Change, causing many countries count overseas development assistance as climate finance contributions.
Best also took issue with the recently introduced insurance mechanism to cover most vulnerable persons against the the “most adverse” effects of climate change. “This is now an insurance mechanism driven and controlled by the developed countries. It is not new and additional climate finance. This is another control mechanism and deviation from public funding of adaptation efforts,” he said.
He noted that an Adaptation Fund, which should have been funded by public funds as a key adaptation bank, has been overtaken by a Green Climate Fund now being capitalised through significant private sources.
The Caribbean Community’s (Caricom) Programme Manager for Energy, Dr. Devon Gardner added that Guyana and other Caribbean countries should not depend need to generate a renewable energy plan that could allow them to divert a lot of their fossil fuel expenses to developing infrastructure and other systems that can resist the impact of climate change.
Gardner he said Guyana has the capacity to produce bio-energy at 12-13 US cents per kilowatt hour, solar energy and small hydro-power stations. “A system that is properly planned and a system that is suitably designed can in fact just not just mitigate greenhouse gas emissions but really derive a greater benefit, that of adaptation,” he said.
Gardner agreed with Best that the region could no longer depend on the international community to pay for climate adaptation. “We must find ways of means of being able to raise resources from within our internal structures that can support some of our adaptation plans and the place to find much of those resources is in the energy sector because the energy sector is where most of our economies bleed,” the Caricom Secretariat official told the 10th Turkeyen Tain Talks named after UG’s campuses in Georgetown and Berbice.
The Caricom Programme Manager on Energy noted that energy costs are up to 29 percent of Gross Domestic Product (GDP) in some countries, and in the case of Guyana, energy imports last year accounted for 24 percent of GDP.
He also highlighted the vulnerability of the Caribbean to higher oil prices as a result of hurricanes that slam the Gulf of Mexico, further depleting the region of much needed foreign exchange that should be spent on social sector development, salaries and develop infrastructure that could withstand the effects of climate change. “If the system is properly designed, those numbers can in fact go down to the extent where much of that money that is being spent on energy imports could be channeled elsewhere to design the kind of agricultural systems that are more adaptable to climate change to improve some of the coastal infrastructure to make them more resilient to climate change to the flooding that is likely to come and to the countries of the Caribbean where hurricanes are obviously an issue,” he said.
Finance Minister, Winston Jordan, in delivering his 2018 National Budget speech last week in the House, said already the installation of solar photovoltaic panels on 70 government buildings, including ministries, schools, and health centres, has resulted in a 1.86 gigawatt of power savings. Last year, government also installed 10,427 LED lamps and 3,766 motion-sensors across 46 buildings
Government intends to next year install more panels on 74 additional buildings and an additional 10,610 lamps and 1,486 motion sensors, all of which Jordan said could save taxpayers GY$45.5 million per year in energy costs.
In conclusion, Gardner said the region needs the 3Ps- Prioritization, Planning and Partnership- to build energy resilience.
Turkeyen and Tain Talks: Guyana's Emerging Oil & Gas Sector
The University of Guyana’s Turkeyen and Tain Talks held its seventh meeting in New Amsterdam, Berbice on Wednesday, on Guyana’s emerging oil and gas economy.
Present at the talks were Director of the University of Guyana, Berbice Campus and Vice Chancellor of the University of Guyana, Professor Ivelaw Griffith and Minister of Natural Resources Raphael Trotman among others.
According to GINA, Minister Trotman told the students and other persons gathered for the Turkeyen and Tain talks that the potential they have heard that Guyana has is real. The Minister noted that the oil which was discovered in 2015 is estimated to have a minimum of 800 million barrels and a maximum of 1.4 billion barrels of oil.
Minister Trotman also made those gathered aware that in addition to the first discovery of oil, there have been two more which may not be as large as the first, but are considered to have a significant amount of oil. Production of the oil is expected to begin in 2020 by ExxonMobil, Hess Corporation and Nexen companies.
Strengthening legal framework
Minister Trotman noted that with the discovery of such a large quantity of oil and gas, the government thought it necessary to strengthen its legal framework. The Minister pointed out that unless there are systems in place, Guyana would not be in a position to handle production and benefits of oil production. Hence, Minister Trotman noted that the government has begun the process of reviewing Guyana’s Petroleum Act of 1986 which he said is quite dated.
Minister Trotman also pointed out that in addition to reviewing the Petroleum Act; the government is creating new laws. Two new laws have already been created, he said. This includes the Sovereign Wealth Fund which is with the Minister of Finance, and the Petroleum Commission Bill which was recently read for the first time in the National Assembly.
Kiran Mattai, Oil and Gas Attorney stressed the importance of having the necessary laws in place that relate to the oil and gas sector. According to Mattai, with Guyana being an emerging economy and oil and gas economy, it needs to be able to appreciate the ownership of its resources while encouraging international relationships. Legal training she said “must account for the host country discovering the oil and the company exploring for oil.”
She highlighted, “For legal training, the lesson in preparing for oil and gas is recognising that oil and gas is only a piece of the puzzle; there must be complementary interdependence to achieve sustainability.”
According to GINA, Professor and Director of the Institute of Applied Science and Technology, Suresh Narine stressed the importance of training. He noted that while training may take five to seven years, with Guyana expecting to receive oil by 2020, it is something that must be pursued.
According to Professor Narine, nothing is wrong in accepting that Guyana has poorly trained business people, engineers and scientists. In order to fully benefit from the wealth expected to come, Guyanese have to divorce themselves from thinking that all roads to success are paved with intentions on oil and gas.
“We have to ourselves, begin to train our students, advice our children, create our businesses in ways that look at those other sectors of the economy,” Narine explained.
However, Dr. Narine pointed out that there is (the) need for effective policies that will give the necessary guidance. He stated that, “without policy that allows the oil revenue to be channelled in an equitable, thoughtful fashion, the capital to ensure that those sectors of our economy which are more sustainable than oil is created, is not going to be wisely spent.”
- The University of Guyana