Failure to define ‘market rate’ in Exxon oil contract could cost Guyana billions of dollars

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Mr. Editor,

Guyana is responsible for paying interest on loans from oil companies. This fact is buried in the Production Sharing Agreement (PSA) for the Stabroek Block (see Annex C, Section 3.1. Part (l)). The interest rate payable is loosely referred to as the “market rate”. This loophole could cost Guyana billions of US dollars. It takes a little over a billion US dollars to run the country every year. We cannot afford this mistake.

Why Guyana would agree to pay interest on loans that oil companies have negotiated with their bankers is puzzling.

Why would oil companies want to avoid giving a precise meaning to “market rate“? It should be noted that the interest charges on their loans are part of cost recovery. Up to 75 percent of oil revenues are earmarked for cost recovery.

If you browse ExxonMobil’s financial reports, you will notice that Exxon has a credit rating of AA +. Credit score gives you an indication of the safety of lending money to a business. Exxon has a benchmark credit rating, comparable to that of the US government. In other words, if you lend money to Exxon, you are guaranteed to get your money back with all interest due. The market rate on currently traded Exxon loans is approximately 2%.

Liza Phase 1 has a projected gross investment cost of US $ 3.7 billion and Liza Phase 2 has a gross investment cost of US $ 6 billion – with total combined production estimated at 1.05 billion barrels of oil. It should be noted that the transition from 450 million barrels in phase 1 to 600 million barrels in phase 2 increased the investment cost per barrel by 20%. However, based on lessons learned from the first project, one would expect the cost per barrel of the second project to be lower than the first. Instead, the cost difference is an additional $ 1 billion!

Scale the capital cost up to the currently confirmed six billion barrels: this would mean that the projected capital cost could be US $ 55 billion or more given the anomaly noted in the previous paragraph.

If we have a company like Exxon that is able to borrow money at low rates, then should Guyana’s “market rate” be low?

At 2% interest, Guyana would pay US $ 1.1 billion per year on a loan of US $ 55 billion. If we were to use the “agreed interest rate” defined in the PSA, it would currently be around 3% above the Exxon market rate. The interest would be $ 2.8 billion. That would mean an additional $ 1.7 billion would go to Exxon instead of Guyana. But the “agreed interest rate” was not used in Annex C, where it was noted that Guyana would have to pay interest on loans taken out by oil companies.

Would Exxon argue that Guyana has to pay the market rate similar to that of risky small oil companies?

Here is the trap. The PSA was not signed with Exxon rated AA + but with Esso Exploration and Production Guyana Limited (Esso). Esso is a company with negative equity. Negative equity means that if you liquidate all of your assets, you still won’t be able to pay off your current loans. Thus, the “market rate” (market interest rate for loans) Guyana would pay is not the one that would be charged for loans from Exxon but that from Esso.

It is highly unlikely that Esso, a company registered in the Bahamas with negative equity capital, will be able to secure a loan in the market. This is where Exxon can take advantage of its low borrowing rate. In a typical scenario with the big oil companies, Exxon can lend money to Esso. But what would the “market rate” be charged to Esso?

Well, we should take a look at some of the risky junior oil companies to get a feel for it. One of those companies is California Resources; its debt is currently paying a market rate of 30 percent. Another is Weatherford International; its debt is currently paying a market rate of 18 percent. This is a big difference from the market rate of 2 percent on Exxon debt.

What would a 15% difference in market rate mean on US $ 55 billion? It would be $ 8 billion more for the oil companies instead of Guyana. What about a 30 percent difference? It would be $ 16 billion for the oil companies instead of Guyana. Now this sleight of hand of not using the “agreed interest rate” in a section called “Recoverable costs without further Ministerial approval” – does not seem accidental but carefully planned by the oil companies.

Conclusion: Guyana is not only obliged to repay loans negotiated by the oil companies, but also exorbitant interest rates on the market. Could this be an $ 8 billion or $ 16 billion mistake buried in the contract that Guyanese government officials overlooked or never read?

Yours faithfully,

Darchanand Khusial

for the Guyana Oil and Gas Governance Network


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