Emily Pickrell, UH Energy Fellow

The small South American country of Guyana transformed Exxon Mobil Corp. over the past decade after the oil titan made the first of a series of mammoth discoveries just off its coast.

As the country enters its new role as a prolific oil producer, it is time for it to take the lead in managing these relationships.

Indeed, its current deal with Exxon and its partners – Hess and China’s CNOOC – reveals the story of a country that was new to the game and inexperienced in negotiations several years ago.

This team first discovered oil in Guyana seven years ago and has since 18 Amazing Oil Discoveries in his giant Guyanese block Stabroek.

These discoveries conceal a generous fossil wealth: nearly 11 billion barrels of recoverable oil and gas potential and counting, following the latest wave of new discoveries in April. Exxon and its partners have invested more than $10 billion in production and plan to pump 1.2 million barrels of oil and gas per day from the block by 2027.

The challenges of finding this oil should not be ignored.

Prior to 2015, offshore Guyana was considered a border basin at risk, despite its potential. Since 1965, 45 wells had been drilled in an attempt to find the sweet spot of success – and had failed. It took the technical genius, confidence and financing of Exxon to finally hit the jackpot.

Even so, the resulting 2016 terms on how to share that production have been controversial, as they are more generous to Exxon than many Guyanese peers have accepted.

The current contract was negotiated in 2016 and replicates most of the terms of a 1999 agreement. It splits oil production 50-50 between the government and Exxon, and gives Guyana a 2% royalty (the agreement of 1999 provided for a royalty of 1%). Oil allocation reflects the costs and risks a company faces in a particular project and can vary significantly from country to country and contract to contract. With this in mind, a 50-50 split for a new producer is not particularly unusual.

But it’s the additional terms of the deal that Exxon really benefits from, according to Tom Mitro, a former Chevron executive with decades of experience negotiating international contracts. Mitro is also a former director of the University of Houston’s Global Energy, Development and Sustainability program.

Mitro pointed out that for many other negotiable clauses in the contract, they were drawn in Exxon’s favor – an approach that most of Guyana’s peers did not accept.

For example, a provision allows Exxon to recover all interest on loans borrowed to finance the development of related oil projects. In practice, this means that the operator and its partners can charge Guyana the cost of borrowing from their affiliates without any limit.

“Contracts usually have cost recovery mechanisms, but usually with limits,” Mitro said, explaining that without written limits, companies can abuse the amount of borrowings they make within the conglomerate.

Another provision allows Exxon to not have to pay income tax on its share of profits, and that the government will provide a receipt that can be used for tax deduction purposes elsewhere.

There is a clause that gives Exxon the right to get cost recovery oil upfront, to cover future decommissioning and abandonment of the project at its end. These costs will not actually be incurred for several years.

“In this case, the government is giving Exxon something of value – oil – to cover Exxon’s future costs,” Mitro said, noting that it’s unusual to prepay a future expense because of the recognized time value of money.

While Exxon’s experience and deep knowledge of contracts likely strengthened its negotiating position, on the Guyana side, domestic politics also played a role in securing the deal. Negotiations took place just before a contentious election and the promised revenue was heralded as offering a brighter future for Guyana.

It also came just before Exxon publicly announced that results from a second exploration well indicated Exxon would recover more than double the amount of oil originally expected.

Looking back, the biggest challenge for Guyana is the extremely short time frame for its own transition from a non-oil producer to a reserves competing Mexico or Angola. And to be fair, it was Exxon’s vision that drove this shift, with its 2015 discovery of Guyana’s oil and subsequent investment in bringing that oil to market.

The oil and gas industry rewards risk and technical experience. Exxon has shown both of these elements brilliantly, making a huge gamble of deep-sea exploration with no guarantee of success in a country with no history of oil production.

Exxon justified the contract by saying that the terms reflect those of a country with no track record and therefore higher risk, which is reflected in the terms of a production sharing agreement.

“It offers globally competitive conditions”, said Exxon spokesperson Casey Norton in a 2020 interview with The Wall Street Journal. “This was done at a time when there was significant technical and financial risk.”

Julian Cardenas, a professor of energy law at the University of Houston, agrees, noting that Guyana is now in a better position to negotiate better terms with future investors because of its track record of geological potential.

However, potential is no longer everything in the international oil game, as illustrated by Venezuela. Guyana’s ability to attract future investment will depend on its ability to demonstrate that it will honor its contracts and the rule of law.

“Guyana must take responsibility for these agreements, recognizing that these agreements also have an end date,” Cardenas said. “Of course, there is always room for improvement and mutual renegotiation. But this will not be the only opportunity for Guyana. They will be much better served by focusing on offering new rides and doing better business.

Indeed, both parties have already benefited from the new oil.

Exxon began production in late 2019 and is now pumping around 220,000 barrels of oil per day in Guyana, or around 6% of its world production. The company says the production has created jobs for more than 3,500 Guyanese. The Exxon Consortium and its direct contractors also spend more than $200 million with local suppliers each year. His current deal should pay off nearly $170 billion in revenue in the years to come.

It’s a position many in Guyana also hold, as the country tries to strike the balance between being seen as an attractive investment location and ensuring it’s not Big Oil’s stooge.

“Recall that when the 2% royalty was agreed, we had just discovered oil and still hadn’t produced a drop,” wrote Donald Singh, process coordinator at the Guyana Geology and Mines Commission, in a 2019 letter to the editor of the Guyana Chronicle responding to criticism of Guyana’s low royalty percentage. “Guyana’s exploration success certainly deserves an increase in royalty rates, but I think we must continue with the goal of establishing a track record as a reliable producer.”

On the other hand, that was two years ago, and now Guyana looks like a major contributor to Exxon’s bottom line.

Now is a good time for both parties to think long term. Guyana could, for example, identify points in current contracts where government approval is required and use that to change terms that some see as unduly favorable to Exxon at Guyana’s expense, such as gas flaring rights. .

On Exxon’s side, its reputation would be well served by doing everything possible to support Guyana’s ability to become a more mature oil nation – a nation known for its ability to balance its desire to do business with the needs of its residents, for their long-term benefit.

Emily Pickrell is a veteran energy journalist, with over 12 years of experience covering everything from oil fields to industrial water policy to Mexico’s latest climate change laws. Emily has reported on energy issues in the US, Mexico and the UK. Prior to journalism, Emily worked as a policy analyst for the US Government Accountability Office and as an auditor for the international aid organization CAR.