https://www.bloomberg.com/news/features/2019-08-13/guyana-isn-t-ready-for-its-pending-oil-riches-but-exxon-is
Guyana is investigating oil leases at a rocky political moment.
By Kevin Crowley
The Caribbean beats of reggae and soca ease
into American hip-hop at a roadside bar in Georgetown, Guyana. Outside,
teenagers hoot as they whiz past palm trees on mopeds. But for Gavin
Singh, a 36-year-old investment banker, this is no time for play or
relaxation. “People out there don’t really get it,” he says, pushing
aside his mojito to emphasize his point. “We have a tsunami coming.”
A tsunami of what?
“Of cash. Of opportunity.”
This tiny nation on the north coast of South America is about to
become the world’s newest petrostate—and potentially the richest. In
2015,
Exxon Mobil Corp.
made what one of its executives described as a “fairy tale” discovery
in the vast Stabroek exploration block off the Guyanese coast. Since
then, it’s found so much oil that by the mid-2020s Guyana, with a
population of about 778,000, will probably produce more crude per
citizen
than any other country.
Crucially,
however, Guyana—a poor former colony, first of the Dutch, then of the
British—is unprepared for what’s coming. Its petroleum laws were written
in the 1980s. The Department of Energy has an annual budget of $2
million. Five years after Exxon’s discovery, the country still hasn’t
finished crafting relevant new laws or even established a regulatory
body to oversee exploration and production. Last year the government set
up a sovereign wealth fund to soak up as much as $5 billion in oil
revenue per year by 2025, but there are no plans for how to spend it.
Even as the windfall approaches, more and more questions are being
raised about how the country sold exploration rights off its coast—not
just to Exxon, but also to other outfits that followed in the
supermajor’s wake. The State Assets Recovery Agency (SARA), an
anticorruption unit looking into the leases, hasn’t named any targets.
It’s too early for that, says its director, Clive Thomas. “We’re
building up a case,” he says.
Guyana’s oil age is dawning at a rocky political moment in this
still-evolving democracy. The current president, David Granger, who
heads a coalition government, lost a no-confidence ballot by a single
vote in Parliament last December, triggering an election that as of late
July hadn’t been scheduled. The parliamentary rebuff was a stinging
reversal for Granger, who took office in May 2015, and the election
could pave the way for the return of the People’s Progressive Party
(PPP), which had held power for 23 years, including when Guyana first
sold off its oil rights.
Then there’s the specter of Venezuela,
which borders Guyana to the northwest and has historically laid claim to
part of its rich offshore fields. Last year, Venezuelan gunboats sailed
in to hinder Exxon’s activities,
but drilling carried on to the south in the Stabroek block. So far Guyana has managed to weather its
neighbor’s interference—no doubt aided by the cratering economy and widespread unrest that’s preoccupied Nicolás Maduro’s regime in Caracas.
When Mark Bynoe, the director of Guyana’s
Department of Energy, was a boy, he used to play cricket barefoot with
friends in his village outside Georgetown. At the end of the day, his
feet “would be shiny at the bottom,” he remembers. “We knew oil was
around.”
Bordered by Venezuela, Brazil, and Suriname—all
producers—Guyana always held the promise of oil. But for decades after
independence from Britain in 1966, explorers drilled nothing but dry
holes. “We were practically begging people to take a block offshore,”
says Jagdeo. “Nobody wanted to come.”
Then along came Exxon. It
was 1999, and Jagdeo was heading the government. Guyana and Exxon signed
a production-sharing agreement that covered a 26,800-square-kilometer
(10,348-square-mile) deep-water area spanning virtually the entire width
of the country’s maritime borders. Given all the unsuccessful
exploration, Exxon secured the rights to Stabroek under terms so
generous that they would come back to haunt the country.
The early
years were frustrating for Exxon. Border disputes with Venezuela and
Suriname impeded exploration. After the Suriname quarrel was settled in
2007, Exxon began gathering data and conducting seismic imaging along
the eastern reaches of Stabroek. Then, in 2013, the Venezuelan navy
boarded and for four days detained an exploration vessel contracted by
Anadarko Petroleum Corp., another U.S. producer that was surveying in
the area.
Exxon plowed on. In 2014 oil prices crashed, and its partner in
Stabroek, Royal Dutch Shell Plc, pulled out. Unwilling to shoulder the
financial risks on its own, Exxon remained the operator responsible for
exploration but brought in New York-based
Hess Corp. and China’s state-backed Cnooc Ltd., handing them 30% and 25% stakes, respectively, in exchange for sharing drilling costs.
When
Exxon began drilling the wildcat well Liza-1 in March 2015, Guyana was
just a couple months away from a general election. On May 20, four days
after Granger emerged as the surprise winner, Exxon announced it had
struck oil.
The timeline would later prove controversial and
become a focus of the SARA investigation. But one thing was clear: Oil
was coming.
When Mark Bynoe, the director of Guyana’s
Department of Energy, was a boy, he used to play cricket barefoot with
friends in his village outside Georgetown. At the end of the day, his
feet “would be shiny at the bottom,” he remembers. “We knew oil was
around.”
Bordered by Venezuela, Brazil, and Suriname—all
producers—Guyana always held the promise of oil. But for decades after
independence from Britain in 1966, explorers drilled nothing but dry
holes. “We were practically begging people to take a block offshore,”
says Jagdeo. “Nobody wanted to come.”
Then along came Exxon. It
was 1999, and Jagdeo was heading the government. Guyana and Exxon signed
a production-sharing agreement that covered a 26,800-square-kilometer
(10,348-square-mile) deep-water area spanning virtually the entire width
of the country’s maritime borders. Given all the unsuccessful
exploration, Exxon secured the rights to Stabroek under terms so
generous that they would come back to haunt the country.
The early
years were frustrating for Exxon. Border disputes with Venezuela and
Suriname impeded exploration. After the Suriname quarrel was settled in
2007, Exxon began gathering data and conducting seismic imaging along
the eastern reaches of Stabroek. Then, in 2013, the Venezuelan navy
boarded and for four days detained an exploration vessel contracted by
Anadarko Petroleum Corp., another U.S. producer that was surveying in
the area.
Exxon plowed on. In 2014 oil prices crashed, and its partner in
Stabroek, Royal Dutch Shell Plc, pulled out. Unwilling to shoulder the
financial risks on its own, Exxon remained the operator responsible for
exploration but brought in New York-based
Hess Corp. and China’s state-backed Cnooc Ltd., handing them 30% and 25% stakes, respectively, in exchange for sharing drilling costs.
When
Exxon began drilling the wildcat well Liza-1 in March 2015, Guyana was
just a couple months away from a general election. On May 20, four days
after Granger emerged as the surprise winner, Exxon announced it had
struck oil.
The timeline would later prove controversial and
become a focus of the SARA investigation. But one thing was clear: Oil
was coming.
When Liza-1 struck oil, Lars Mangal, one of
Guyana’s foremost petroleum professionals, knew exactly what to do. He’d
spent two decades working in oilfield services around the world for
Houston-based Schlumberger Ltd. before ending up in the U.K. Now he
needed to pack up his belongings, get back to Georgetown, lease a
dockyard, and bid for the Exxon services contract. “This is the big
one,” Mangal, who turns 54 in August, recalls thinking.
He was
right. His company is now one of the lead local investors in Guyana
Shore Base Inc., which acts as Exxon’s main service hub in Georgetown.
He has no doubt that Guyana needs to embrace Exxon’s plans for Stabroek
oil. “Damn it,” he says. “Get it out of the ground.”
Somebody has
written a message on a whiteboard at Guyana Shore Base that reflects
Mangal’s attitude. It reads, “Don’t obsess over who’s baking the cake.
Figure out how to get a slice.”
Lars’s younger brother, Jan, would almost certainly take issue with
that. Jan Mangal, who also has a long track record in the oil industry,
has become a leading critic of exploration deals that Exxon and other
companies cut with the government.
Jan, 49, worked at Chevron
Corp. for 13 years after earning a doctorate in engineering at the
University of Oxford. He became Granger’s energy adviser in 2017. From
the start, he clashed with ministers who unsuccessfully resisted his
call to have all of the country’s oil contracts published and open to
public scrutiny. He didn’t last long in the role, leaving after a year
when his contract wasn’t renewed. He’s now a consultant.
“Corruption is the main reason why countries like Guyana fail with
oil and gas,” Jan says. “It undermines everything.” He says that Guyana
didn’t get a fair deal from Exxon—he calls it a dated, “colonial
contract”—and that other leases have been awarded without due process,
potentially costing the country billions of dollars in lost revenue and
exposing vulnerable Guyana to the so-called
resource curse.
Exxon’s
manager in Guyana, Rod Henson, disagrees. He says the contract reflects
the high risk of drilling the first well. In any case, he says, “the
revenues that are going to be generated from that give Guyana the
flexibility and the opportunity to be anything they want to be.”
The months before Exxon struck oil in 2015
were an unsettled time in Guyana. Then-President Donald Ramotar had
clashed with Parliament over government spending. Fearing a
no-confidence vote and the end of his party’s 23-year rule, he dissolved
the legislative body and called a general election for May.
At
the same time, unbeknownst to the wider world, Exxon was getting ready
to drill Liza-1. Other companies, smelling oil, were circling Guyana’s
waters.
On March 4, Ramotar signed an exploration lease for the
6,100-square-kilometer Canje block with Mid-Atlantic Oil & Gas, a
little-known company run by Guyanese businessman Edris Dookie. The next
day, Exxon, whose Stabroek block abuts Canje, began drilling.
On
April 28, Ramotar signed over another exploration lease, this time with
the partnership of Tel Aviv-based Ratio Petroleum Energy Ltd. and
Toronto-based Cataleya Energy Ltd. It covered the
13,535-square-kilometer Kaieteur block, also adjacent to Stabroek.
On
May 7, then-Minister of Natural Resources Robert Persaud announced that
Exxon had struck oil. The general election was four days later, and on
May 16, Granger, leader of the then-opposition, was sworn in as
president. Four days after that, Exxon confirmed the discovery to the
stock market.
The award of oil leases in developing countries is
one of the most secretive, competitive, and contested corners of the
industry. Before oil is discovered, governments typically offer royalty
rates and tax incentives that are favorable to exploration companies. As
soon as a discovery is made, unsold leases nearby become extremely
valuable overnight, allowing governments to set higher rates for them.
This binary before-and-after phenomenon opens the door to abuse by
people acting on inside information.
As Bloomberg News first
reported in May,
SARA is now probing the deals Guyana cut with oil companies over the
years. “We’re investigating the issuance of the licenses, for example,
and the various blocks,” says SARA chief Thomas. He stresses that the
postmortem is in the very early stages, so he can’t disclose much except
to say the investigation is focused on the runup to the 2015 election.
“There
are so many red flags,” Jan Mangal says, looking back at that period.
He says the government could have commanded much more favorable tax and
royalty rates if the Canje and Kaieteur leases had been sold after
Exxon’s Stabroek discovery was announced and not before. “The country
could have got 10 or 100 times what it got for these massive, massive
blocks,” he says.
Ramotar says he didn’t know about the Exxon find
when the Canje and Kaieteur deals were signed, adding, however, “I was
told that the indications were good.” He says that the SARA
investigation is “politically motivated” and that contracts signed under
the current government should be looked at as well.
He says he welcomes “any impartial international inquiry.”
Persaud,
the natural resources minister at the time, says focusing on the
election timeline suggests “a wrong narrative.” He says the Canje and
Kaieteur leases had been all but signed, sealed, and delivered in 2013.
But then the Venezuelan navy boarded the Anadarko-contracted exploration
vessel, spooking Guyanese authorities. Not wanting to provoke Venezuela
further, Persaud says, the government put the contracts on hold.
The Canje lease, which was published on government websites,
could be interpreted as backing this version of events: “2013” has been
crossed out and replaced with a handwritten “2015.”
Representatives
from Mid-Atlantic, Cataleya, and Ratio Petroleum concur with Persaud’s
timeline. “We were working away steadily in good faith for many, many
years,” Cataleya Chief Executive Officer Michael Cawood says. “This
wasn’t something that popped up all of a sudden.”
About a year
after the leases were signed, Exxon took a 50% stake in Kaieteur and a
35% stake in Canje and became the operator of both blocks. Cawood says
his group took “no cash consideration” from Exxon for the stake in
Kaieteur. Dookie says there were “terms” agreed to with Exxon for its
Canje stake but declined to say what there were. Exxon wasn’t the
recipient of the Canje and Kaieteur blocks initially and had nothing to
do with the talks at the time. Exxon declined to comment on terms. All
the companies involved say they have acted entirely properly.
In 2016, Exxon had a problem. Its deal with
Guyana was 17 years old, and under the complex terms of the agreement,
the supermajor was running out of time to find more oil. This was an
opportunity for Guyana’s new government, now led by Granger, to update
the 1999 contract and extract better terms. Such negotiations are a fine
balancing act for governments: Push too little, and you get too little;
push too hard, and the company might walk away.
Natural Resources
Minister Trotman took a different route: no negotiation at all. He says
Guyana was worried, once again, about Venezuela, fearing Exxon’s
discovery would rile its prickly neighbor; neither Exxon nor the
government wanted to get into a protracted negotiation.
Instead, in October 2016, the government and Exxon modified the terms of the existing 1999 deal.
This
was a missed opportunity of epic proportions, says the PPP’s Jagdeo,
the opposition leader and former president. “They had 3 billion barrels
of proven reserves,” he says. “One would have thought you would have
gotten a better contract.”
Trotman counters that the government’s
overriding concern in the Exxon talks was finding “security in what it
had.” That included getting an $18 million signing bonus that, Trotman
says, “we believed we should use for … the prosecution of our case”
against Venezuela to settle territorial claims.
There was one
hitch—a big one. The bonus was kept secret from the public for what
Trotman describes as “national security” reasons. The 2016 contract that
modified the terms of the original wouldn’t be made public until 2017
(following the intercession of Jan Mangal), but in the small world of
Guyana, it wasn’t long before word leaked out and caused an uproar. “If
this is what they do with $18 million, what will they do with all the
billions to come?” says Charles Ramson, 35, a PPP politician.
Bynoe, the current energy director, says it was a mistake not to be
more open about the $18 million. In retrospect, Trotman agrees. “We
should have confided in the people much earlier,” he says. In addition
to the signing bonus, according to Exxon’s Henson, the government got
more “rental type payments,” royalties, and commitments of local content
as part of the deal. But, crucially, the modified terms also allowed
Exxon more time to explore and develop Liza. Henson says that without
the 2016 modifications he’s “absolutely certain we would not be
producing oil in 2020.”
The controversy surrounding the 2016
contract doesn’t end there. According to an analysis of the agreement by
Rystad Energy AS, an Oslo-based consultancy, Guyana will take about 60%
of the oil’s profits, with the remainder going to Exxon, Hess, and
Cnooc.
That’s considerably lower than the global average of 75% for offshore
projects, Rystad said in a 2018 report. However, it also pointed out
that countries in the early stages of oil and gas development, such as
Mozambique and Mauritania, are often forced to “sweeten the pot” for the
exploration companies. “Clearly we have to make a profit,” Henson says.
“We understand there are benefits to us and our partners, but we truly
want this to benefit the country.”
Bynoe takes a Goldilocks view
of the whole affair. “Is it the greatest contract for government? I
would say no,” he says. “Is it the worst contract? I would still say
no.” Over time, he says, Guyana can “incrementally improve the
conditions.”
With that in mind, he says, it’s time to look
forward. “We have been looking back about the contract,” he says.
“There’s been too little attention in how will we treat these resources
when they begin to flow to us.”
At Exxon’s Investor Day meeting at the New
York Stock Exchange in March, Guyana took center stage. It’s not hard to
see why. Senior Vice President Neil Chapman—the exec who’d once
described the Stabroek find as a “fairy tale”—pointed to a chart
featuring
estimates from Wood Mackenzie Ltd.,
an Edinburgh-based energy consulting firm. It showed that Exxon’s
Guyana wells will be the most profitable of all new deep-water projects
by major oil companies.
Exxon expects the first Stabroek oil to
flow to the Liza Destiny, a storage and offloading vessel, in early
2020, with production quickly ramping up to 120,000 barrels a day and
rising by 2025 to 750,000 a day (roughly on a par with last year’s daily
output in Indonesia, which has a population of 264 million).
As
for Guyana, the government estimates the Exxon deal will bring in $300
million in 2020, or about a third of the country’s entire tax revenue,
and surge to $5 billion by 2025.
“They say Guyana will be one of
the richest countries in the world,” says Melissa Garrett, a waitress
who supplements her income by selling potatoes, eggplant, and plantains
at a stall at Georgetown’s century-old Bourda market. “People are in the
mood for change. They want it now.”
They also need to come to terms with the massive transformation
coming their way, says Singh, the investment banker lingering over his
mojito at the roadside bar. “Sitting back and doing nothing can be the
worst mistake they can make,” he says.
Georgetown—its crumbling
colonial buildings set amid canals built by the Dutch in the 18th
century—resembles a developing-world Amsterdam that’s faded in the harsh
sunlight. On its bustling narrow streets, Guyanese descendants of
Indian indentured laborers and African slaves live and work side by
side, shop at the same markets, and dream the same dreams of wonders
coming their way thanks to oil.
Guyana’s political elite is torn
over how to spend the money. The Granger government has said it wants to
use the windfall to reshape the economy, pumping money into health and
education, into the country’s vast natural resources, and into rail,
road, and port projects that could provide an important pathway to the
Atlantic for northern Brazil. Thomas, the head of SARA, favors bypassing
government altogether in favor of a universal basic income-like stipend
of $5,000 per family.
First things first, says Jan Mangal.
“Guyana really needs to fix all of its existing problems now before the
oil money flows,” he says. “If it doesn’t, the oil money will exacerbate
the existing problems and make them worse.”
Chris Ram, a lawyer
and former newspaper columnist (he broke the news about the $18 million
signing bonus), worries that, rather than taking a leap forward
propelled by oil, Guyana could slip backward. In the 1980s, under
left-wing strongman Forbes Burnham, Guyana shared many traits with
today’s Venezuela. Although democracy took root in the 1990s, Ram fears
for its fragility.
“We don’t have a culture of democracy,” he says
over a meal in one of Georgetown’s many Indian curry houses. “The
constitution is weak and open to abuse. Problems are swept under the
carpet. It’s frightening. All the elements of a resource curse are
there.”
Crowley covers oil for Bloomberg in Houston.
