Dr Jagdeo – Larger profit share for Guyana, more competitiveness with new PSA

14 oil blocks offshore Guyana, has been granted approval by Cabinet for auctioning, according to Vice President, Dr Bharrat Jagdeo on Thursday during a press conference at Office of the President.

It was noted that the auction was initially slated for the end of September, however, the Dr Jagdeo said that extensive preparatory work had to be completed. Government hired IHS Market as the lead consultant for this process.

The Natural Resources Ministry, at a later time, will issue the new date for the auction. The VP assured that prospective bidders will be provided with the terms of the auction “long before” the auction is formally launched.

The VP explained that government has decided to auction 14 blocks ranging from 1,000 to 3,000 square kilometres each, with the majority measuring closer to 2,000 square kilometres. Eleven of these blocks will be located in the shallow area, while the other three will be in the deep-sea area. As such, Dr. Jagdeo said that the new fiscal regime which will not only govern the award of the contracts with the successful bidders, but also subsequent Public Sharing Agreements (PSAs) for any other exploration that is already taking place in the other areas including Kaieteur.

“So, the 50/50 profit sharing will be retained… the royalty rate will go to 10 per cent. There shall be a corporate tax of 10 per cent. The maximum for any given year going to cost oil will be 65 per cent. These are the key fiscal conditions. “Now the PSA, we have the consultants working to strengthen the PSA to be ready before the auction is concluded, because we have to strengthen the PSA in many areas. The PSA will be amended to reflect these new fiscal terms,” he said.

VP Jagdeo said the overall PSA will be strengthened and the laws of the country will also be amended to reflect, where necessary these amendments. “For example, the Petroleum Act, if there is anything inconsistent in the Petroleum Act, with what I just mentioned, that will be amended,” he clarified.

Dr. Jagdeo said one of the main objectives of the new fiscal regime is to ensure a greater profit share for Guyana. The other aim was to ensure that the country remains globally competitive in the context of net zero. “We looked at the spectrum of countries and total government take, starting with those that have very small take and those that have major ones. We opted for a simple formula with fixed royalties. Some countries have variable royalty depending on the internal rate of return on the project etc.

“So, we did not go down a complex system because it’s hard to monitor those, the fixed quality also protects you against the downside when oil prices drop. See you get as if you have a variable royalty, and when oil prices drop, you lose.” Further, the VP said the consulting company, IHS market, which conducted most of the simulations, has assured the government that the 10 per cent royalty and the 10 per cent corporate tax, will ensure that the country remains competitive.

He explained that, “Under the current PSA the gross revenue every year, at the beginning of the contract, this is before you fully cover costs, 75 per cent goes to cost oil and 25 per cent to profit oil, of which we [Guyana] get 12 and a half per cent and then we get another two per cent on royalty, so we get 14 and a half per cent.

“The company now in the early years, they get 10 and a half [per cent] that takes you up to 25 per cent available for distribution as profit and royalty, under the current scenario with a cap of 65 per cent, 35 per cent remains to be divided, so at a 50/50 profit share, you get 17 and a half per cent of the gross and then another 10 per cent royalty, so you get 27 and a half per cent of the gross, at the beginning and then you have the 10 per cent on the profit. So, this is how it will work so it shifts significantly.”

As such, to make the bidding process more competitive, government has also decided to allow local and international companies to bid, with minimum technical and financial qualifications to be met.  However, the qualifications will be more stringent for the three blocks in the ultra-deep area. “We are putting in there, a minimum signature bonus of $20 million per block in the ultra-deep area and it will be $10 million in the shallow area. So, that will be a financial minimum,” Dr Jagdeo stressed. 

Government has also decided to limit the award to a maximum of three blocks to any given company. Each bidder will be required to put up a work programme since the criteria for assessing the bids will be weighed against the price and the work programme.

In addition, the government will be tightening relinquishment provisions, “In the deep, because of the complexity, you’re going to have 10 years. So, first the initial three years for both shallow and deep for the seismic…when you move on to phase two now, after the first three years, you will have to relinquish 50 per cent of the block.”

It was noted that following this, companies will be given two extensions of one year each for the shallow areas, taking the company to five years before moving on with the work programme. Additionally, the vice president said this is being done to ensure a faster turnover rate.