Talking Dollars & Making Sense…
Jan 13, 2025
Talking Dollars & Making Sense…
Welcome back to Talking Dollars & Making Sense. After taking a much needed mental break to rebalance and re-centre, I am thrilled to reconnect with you as we dive into a critical chapter of Guyana’s history– its journey from an oil exploration hopeful to a major oil-producing nation.
Let’s explore the history of oil exploration in Guyana before 1999, compare the 1999 and 2016 Petroleum Agreements, and discuss what the 2016 deal means for Guyana’s future.
Guyana’s Oil Exploration Before 1999
For decades, Guyana’s oil potential was more hope than reality. From the 1950s to the 1990s, international oil companies conducted seismic studies and drilled exploratory wells, both onshore and offshore. Despite these efforts, no commercial discoveries were made. The lack of proven reserves, coupled with the challenging offshore environment, made Guyana a high-risk country for oil exploration. To attract investment, Guyana offered generous terms to incentivise companies to take a chance on its potential.
In 1999, Guyana signed a Petroleum Agreement with ExxonMobil’s subsidiary, Esso Exploration. The agreement’s terms reflected the high-risk nature of oil exploration in Guyana at the time. The government offered a 1% royalty, allowed a 75% cost recovery limit, and shared profit oil 50/50 after cost recovery. These terms were reasonable given the absence of proven reserves and the need to attract foreign investment.
The Game-Changer: Liza Discovery in 2015
Everything changed in May 2015 when Exxon announced a massive oil discovery at the Liza-1 well in the Stabroek Block. With an estimated 700 million barrels of oil equivalent (BoE), Guyana’s risk profile transformed overnight. The discovery proved that Guyana had oil in commercial quantities, significantly reducing the risk for future exploration and production. When Exxon’s consortium discovered first oil on 20 May 2015, Exxon’s stock traded at US$57.25. Fast forward to 10th January 2025, the company’s stock closed at US$106.93 – an 88% increase. The Guyana Offshore project, alongside the Permian Basin project, stands as one of Exxon’s crown jewels.
The 2016 Petroleum Agreement
Despite the Liza discovery, the 2016 Petroleum Agreement retained many of the same terms as the 1999 agreement. While it introduced a 2% royalty, a signing bonus of just US$18 million, and provisions for training and local content, the core terms remained unchanged:
- Cost Recovery: Still capped at 75%.
- Ring-Fencing: Not included, allowing costs from one project to offset profits from another.
- Taxes: The government agreed to pay the income taxes for Exxon and its partners, Hess and CNOOC.
Comparing the 2016 Petroleum Agreement with East Timor and Malaysia Agreements
The 2016 Petroleum Agreement in Guyana retained many of the same terms as the 1999 agreement, but how does it compare to agreements in other oil-producing nations like East Timor and Malaysia?
East Timor emphasizes national benefit through strong government control. Royalties range from 5-10%, with a production-sharing model ensuring higher state revenue. Malaysia offers 10% royalties and caps cost recovery at 50%, providing more immediate benefits to its government. Both nations enforce ring-fencing to ensure project-specific accountability. Guyana’s 2% royalty and 75% cost recovery cap contrast sharply, offering significantly more favourable terms to oil companies.
Today, Guyana produces approximately 660,000 barrels of oil per day. Starting in the second quarter of this year, production is expected to surpass 900,000 barrels of oil per day, solidifying its status as a major player in global oil markets.
A Missed Opportunity
In my view, the 1999 agreement made sense for its time. Guyana was a high-risk exploration country, and the terms reflected that. However, the 2016 agreement failed to adjust to Guyana’s new reality as a proven oil producer. The government had significant leverage to negotiate better terms but settled for an agreement that left billions on the table. Had the government reduced the cost recovery cap to 60%, insisted on a signing bonus of US$800 million, implemented ring-fencing, demanded a 5% royalty, and ensured Exxon’s consortium paid its own taxes, Guyana could have gained at least an additional US$6.5 billion in oil revenues between 2020 and 2024. This conservative estimate highlights the lost opportunity to maximize the nation’s benefit from its resources.
Accountability Matters
The responsibility for this oversight lies with former Minister Raphael Trotman, who signed the 2016 agreement. His failure to hire international experts or leverage the Liza discovery represents an egregious error in judgment. This decision should be remembered as one of the most significant acts of incompetence in Guyana’s independent history. To be clear, Exxon and its partners were doing their job. Their responsibility is to their shareholders, and they negotiated a fantastic deal for themselves. However, the Guyanese people deserved better representation at the negotiating table.
Looking Ahead
Until political leaders acknowledge this mistake, apologise to the Guyanese people, make amends for this colossal error in judgement, they should not be trusted with public support. If they continue to defend the 2016 agreement, it’s a sign that they prioritize other interests over the nation’s welfare.
Between 2020 and 2024, Guyana earned around US$6.5 billion from oil production. However, if it weren’t for the 2016 petroleum agreement fiasco, the country would have received at least US$13 billion, double the amount earned during that period. As oil production ramps up, this lost revenue is not just a short-term setback but could amount to tens of billions of U.S. dollars in long-term losses.”
In our next article, we’ll examine how oil proceeds are managed in the Natural Resource Fund and whether the government is investing and spending them wisely. For now, let’s remember: the decisions made today will shape Guyana’s future. Leaders must negotiate from a position of strength, ensuring that our natural resources benefit the people. As always, feel free to share your thoughts and questions. Until next time, keep thinking critically about how we can make the most of our nation’s wealth.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions and beliefs of this newspaper and its affiliates.)
(Talking Dollars & Making Sense…)
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