Guyana’s Department of Energy has announced that it plans to increase the government take by raising royalties payable on oil and gas production in the future licensing round in Q3 2020, Alessandro Bacci, Upstream Oil & Gas Analyst at GlobalData, offers his view on what this means for the country’s future competitiveness in this field.

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“If Guyana goes ahead with its plan of increasing the royalties in its production sharing agreements (PSAs), the scope for adjustment will be limited if it wishes to retain its regional competitiveness,” Mr Bacci remarked. “Under the current contract structure, Guyana may push its royalties up to a five-per-cent rate from the current two per cent. Beyond that threshold, it may diminish the attractiveness of the country’s petroleum fiscal framework for investors.

 

“GlobalData assessed the profitability of a Guyanese offshore development at the two-per-cent royalty rate applied to ExxonMobil-operated Stabroek license, and at increased royalty scenarios of five per cent, 10 per cent and 15 per cent. This assessment shows that raising the royalty rate above five per cent could make potential returns under Guyana’s fiscal regime significantly less competitive than under the regimes of regional rivals, such as Brazil and Suriname,” he continued.

 

The pitfalls of a high royalty rate

 

Since initial negotiations with ExxonMobil, much attention has been focused on the royalty rate, as if this were the only source of government take, Mr Bacci observed. “However, this is a misrepresentation of the PSA structure. The reality is that the PSA model has a 75-per-cent cost recovery with the remaining 25-per-cent profit oil equally split between the licensees and Guyana. The minimum effective royalty rate paid to the government is 14.25 per cent of the gross revenue. For Liza Phase 1, we expect to have a free cash flow for the government higher than 50 per cent. 

     

“If Guyana wants to have a royalty rate in line with the average PSA royalty rate across the globe – i.e., between 10 and 15 per cent, it must change the structure of the current PSA so it doesn’t lose competitiveness. Alternatively, it might slightly increase the royalty rate while maintaining the current PSA structure or introduce a sliding scale with royalties increasing with profits.” 

 

The favourable framework in place at present attracted major oil companies such as ExxonMobil, Total, Tullow, Hess, Repsol and Anadarko. However, as Mr Bacci warned, “If fiscal changes make the regime less competitive, it could limit future exploration.”