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Can oil contracts be renegotiated?

Can oil contracts be renegotiated?

Dear Editor,
There are calls for renegotiation of the Exxon contract signed in 2016, which gives Guyana 2% royalty and 12.5% profit-sharing, for a total of 14.5% paid in oil at site of exploration.
Guyana has to get market, negotiate price, and transport the oil, further reducing the benefits to the country. Contracts with other oil companies give Guyana less than 14.5%.

The preceding percentages have to be adjusted for cost of sale of the oil; profit taxes of the companies, which may be about 5%; and other costs. After adjustment of these expenses, actual amount is substantially less than 10%. In terms of dollar value, for six months, Guyana received US$90M, and the projected oil revenues for the remaining six months of the year is another US$60M, for a total of US$150M; of which, after deduction for estimated associated costs, Guyana may net about US$120M, which is hardly enough to cover capital costs of infrastructure investments for various planned industries.

The international standard for royalty and profit-sharing is about 40% net, and the companies pay all the expenses, plus taxes. This means Guyana gets about a third of global trends. Guyana should be getting about three times the amount it presently receives from Exxon if the right percentages were demanded, negotiated, and agreed upon by APNU+AFC. The regime did not seek expertise of its diaspora, and the country has to pay a hefty price for Government’s arrogance.

Global Eyewitness says Guyana stands to lose US$55B from a bad contract negotiated by the preceding APNU+AFC regime. Those numbers present a compelling reason why the contract should be renegotiated. But can the contract really be renegotiated, having been signed and consummated? And if so, how? What precedents exist for renegotiation?

Those of us who study economics or constitutional law would know that citing low royalty and profit-sharing numbers is not enough to get Exxon or any oil company to the renegotiation table. An agreement is a binding compact or accord. One cannot simply ignore it, or throw it out the window and say we want renegotiation. Unless an agreement contains provisions for further agreements or actions, which should have been included in the pact, the text is legally binding.
Had the Government consulted those of us who studied the behaviour of multinationals, Guyana would not have found itself in this fix.

To renegotiate a business agreement between Government and a private multinational corporation like Exxon, which has tentacles all over the world, one has to cite relevant law or practice or precedent. One cannot just demand a renegotiation and expect Exxon to agree to the request. The law does not work that way. Those of us who study international law, or even domestic law, know it is almost impossible to break a signed agreement unless one wants to be an outlaw country like our neighbour or countries in the Middle East or Africa.

The Government can request renegotiation, citing at a minimum the one-sidedness of the contract. But Exxon does not have to agree; it wants the best agreement and maximum revenues for shareholders.
According to international law, if it can be shown that Exxon misled the Government negotiators, or withheld information, or was involved in some illegal or underhand activity, or acted in bad faith, a legal case can be made for renegotiation. None of these claims was made by pressure groups calling for renegotiation.

There was an agreement in 1999 for 1% royalty by the PPP Government; it was unknown what was under the ocean and therefore excusable. But in 2016, after it was announced that over 12 billion barrels were found, the coalition Government was granted an opportunity to reset the contract when Exxon came to the table for negotiation for a final deal. The Government settled for 2% royalty and 12.5% profit. Why? What took place in Houston? Oil Minister Trotman said he was instructed to sign the contract. By whom? Were there other factors at play? Could those be sufficient reason to seek renegotiation? The Government could have demanded up to 15% in royalty and 25% in profit.

The public was not consulted about the arrangement, or informed about the deal until a year later. Information came to light inadvertently in 2017 and then the public applied sustained pressure, forcing the Government to make public details of the contract. The Government defended its secrecy by claiming it agreed to Exxon’s request that the public should not be informed about the contract. That is a violation of the spirit of open, responsible governance that was promised in 2015.

Had the public been informed, the country may well have received close to 40% of recovery of oil or $450M this year and billions every year thereafter when extraction increases beyond the present 120K barrels a day. Exxon production is expected to go pass 1M daily in two years’ time, and a similar amount by other companies is expected.

Guyana stands to lose some US $100B in total over the course of extraction of the discovered oil. That is only in oil; it does not include gas revenues.
Under what legal clause are pressure groups asking the Ali-led Administration to seek renegotiation?

Yours truly,
Vishnu Bisram

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