Arguing That Local Contact Policy Will Recoup What Guyana Is Losing, Is Not Grounded In Reality And Logic

By Darshanand Khusial

News Americas, NEW YORK, NY, Thurs. Jan. 27, 2022: In a press release this past Saturday, Jan. 22nd, the government of Guyana admitted that the Stabroek Block contract is lopsided.

The Department of Public Information article further states, “…with the passage of the local content legislation, Vice President Dr. Bharrat Jagdeo said the law now recoups the benefits lost from the Exxon deal.”

It is astounding that the government believes the local content policy can claw-back anywhere close to the US$91 billion that we are losing on this contract.

The press release further states that in a year Guyana could supply US$400 million to US$600 million in goods and services. The services cited include janitorial and laundry. The goods cited include food supply. That is an enormous of food the foreigners will be eating and making a mess in Guyana for us to recoup on average US$500 million a year.

We estimate that Guyana is losing about US$91 billion on the current Stabroek Contract. This figure is based on using the Global Witness analysis spreadsheet and adjusting for 10 billion barrels of oil at US$80/barrel.  The 10 billion barrels is conservative because it doesn’t include the latest discoveries in the Stabroek Block. But if we suspend reality, and assume we can gain US$500 million a year from local content, then we will need 182 years to recoup what we are currently losing. Generations yet to be born will be sweeping floors and washing clothes to recoup this money.

Last year, it was reported that Guyana was building 20 new hotels with an additional capacity of 3,450 rooms, thus doubling the country’s capacity. If we assume that we will have 3,450 new foreigners that we didn’t have before, then we will be required to wash their clothes and feed them. Assuming US$200/day per room includes laundry and food services and 80% capacity that would mean in a year we would earn about US$200 million which is about 40% of the US$500 million.

But the local content policy seems to ignore the fact that the world has sped up its adoption of remote work during these times of Covid. And, given Guyana’s lack of adequate medical infrastructure, how many foreigners would risk coming and staying in Guyana for extended periods of time in a country where the virus rages?

Why would an oil executive in Texas fly down to Guyana when they can see all the oil production data quicker in Texas versus Guyana, given our unstable internet service? Not to mention Zoom meetings have become a norm of doing business, removing the need for frequent face to face interactions.  Thus, even the US$200 million seems doubtful until the Covid virus is contained, and it appears it will be years before that is the case.

While the government has pinned its hopes on the Local Content Act to recover the lost money, its general record of enforcement of our laws and contracts leaves little hope that Guyanese would recover US$500 million per year. The government has allowed the oil companies to flare gas at Liza 1 in violation of the terms of the EPA permit. It has upheld the Stabroek Contract that compels it to write tax receipts on behalf of the oil companies that didn’t pay taxes. Both of these violations are now being challenged in court by members of civil society, not the government. Thus, when in the press release it says, “The local content law is very strong”, that doesn’t garner much hope when the government’s record of enforcement around violations of existing laws is weak.

Additionally, there is concern about the government’s willingness to employ Guyanese. In May 2018, Chris Ram, an accountant, raised the issue that Stabroek Block’s pre-contract costs were overstated by US$92 million. The government eventually employed a UK firm, IHS Markit, to audit the pre-contract costs. There was no mention of whether Ram’s firm, or any other Guyanese firm, was engaged at all to help with the audit. That would have helped to build local capacity by learning from IHS Markit. Two of our brightest minds in the Oil & Gas field, Dr Vincent Adams and Dr Jan Mangal, are not employed in helping Guyana in any capacity.

Given the Liza 1 capital cost initially stood at US$4.4 billion and eventually was reduced by US$900 million to US$3.5 billion, the government could probably recover more than US$500 million in a year by verifying and auditing the capital costs of Liza 2, US$6 billion, and Payara, US$9 billion. Liza 2 and Payara are probably overstated by US$3.75 billion if we use the computation from the article here.

Arguing the Local Contact Policy will recoup what we are losing from the Stabroek Block Contract is not grounded in reality and logic. The government should use Yellowtail as leverage to renegotiate the Stabroek Contract to recoup the US$91 billion we are losing.

EDITOR’S NOTE:  Darshanand Khusial is part of the non-profit Oil and Governance Network and a financial researcher with qualifications in management accounting and securities. He is also an IT expert who once served as the lead designer on the engine behind some of the largest retail sites in the world. He holds a Masters and Bachelors in Computer Engineering from University of Toronto. He has 15 patents granted in eCommerce software, augmented reality, retail, and dental fields.