September 23, 2017

Oil profits could be used to fill gaps in Govt’s budget, says financial expert

By Samuel Sukhnanan

Sasenarine Singh

With production set to begin in mid to late 2020, Guyana is poised to make huge profits from the oil industry, with the country projected to produce an estimated 100,000 barrels of oil per day.

Annual profits, based on an average price of US$50 per barrel, could reach some G$45 billion annually, says overseas-based Guyanese financial analyst and columnist, Sasenarine Singh.

Singh said this figure was based on his assessment of the recent International Monetary Fund (IMF) report on Guyana, which stated that the revenue-sharing agreement sets the Government’s share at 50 per cent of “profit oil”.

The IMF has further stated that 75 per cent of total oil revenues will initially be allocated for cost recovery, and the Government’s share will be 12.5 per cent. Singh said based on his understanding of how the oil recovery mechanism would work, this can be the status quo for approximately 10 years.

While admitting that it may be difficult to predict what the price for oil would be in the next 10 years, Singh told this newspaper that based on demand and supply trends, the price of oil would not change significantly unless there was a major war, for example in Syria or Korea, in which the United States put boots on the ground.

At present, the supply of oil remains high even with the recent cuts by the Organisation of the Petroleum Exporting Countries (OPEC). However, the potential supply of oil is not under threat because of the current expansion in the fracking industry in the United States, Singh said.

He acknowledged that the demand for oil was stagnant and was expected to decline, because most of the developed countries were now moving towards converting from petrol-fuelled motor vehicles to hybrids. In fact, many countries, particularly in Europe, have set serious targets to convert to hybrids starting from 2019.

Singh, a former executive member of the Alliance For Change (AFC), also noted that the demand for fossil fuels in general was stagnant. “So, this is why I am convinced that the price for oil at US$50 is not an alien price albeit it is difficult to predict the price for oil 10 years from now….”

However, he also stressed that the law of demand and supply dictated that the price for oil would not return to US$100 in a long time.

But Singh says while Guyana will profit from this new sector, he is convinced that Guyana may not be able to use those funds effectively based on several factors.

“So, if all of our traditional sectors, or as we call it the six sisters, were working as per normal, then that would have been a bonanza for Guyana. But the mere fact that by the end of 2020, the sugar industry is going to bring in less than US$40 million to the Treasury compared to the US$148 million it brought in, in 2007 illustrates that this gap of over US$100 million that has to be plugged,” he added.

“In 2014, rice brought in US$250 million; this year it will be about US$175 million. Again, this gap of US$75 million has to be filled. Luckily, gold has been very stable, but it has now plateaued so there will not be much additional help from those quarters going forward, unless the Granger Administration break its investment jinx and bring some new investors into the sector or any sector for that matter.”

Filling gaps

On that note, Singh criticised the coalition Government for its inability to expand and bring any new value-added investment to these traditional sectors such as new distilleries, ethanol factories and so on. If these were happening, Singh said, the oil money would have been a real back-up for the down times. But because of the alleged mismanagement of the economy by the Government, these oil funds will have to be depleted from day one to fill the gaps in future budgets.

He said when the Government speaks of a Sovereign Wealth Fund, it is just an academic proposition, because the administration is unclear on many issues with respect to managing any oil funds.

Further, he said that the coalition Government “is making a huge mistake in not bringing stability and expansion to the traditional sectors and the emerging economy”.

Clarity

Guyanese have been paying keen attention to the discussions about the oil sector. Singh said there must be some clarity on the issue from the Natural Resources Ministry so that the normal Guyanese man and woman could understand what Guyana would gain and what the company would gain from the oil industry.

He emphasised that based on the agreement signed between Government and ExxonMobil, the US oil giant would recover its investment upfront. In fact, there are two sets of funds that will be taken out of the oil revenues before Guyana can actually get its share – “the depreciation cost for the initial investments and the current operating cost for rigs”.

“All that money has to be fully recovered by ExxonMobil by something called a depreciation model,” Singh said.

According to the IMF 2017 Staff Report, 75 per cent of total oil revenues will be extracted by ExxonMobil for those costs. Of the 25 per cent left for distribution, based on the 50/50 sharing agreement, Exxon will get 12.5 per cent and Government 12.5 per cent.