GPG Looking for Oil

The ruling New National Party (NNP) has finally admitted that the Russian outfit, Global Petroleum Group (GPG) is the contractor searching for possible hydrocarbon products in Grenadian waters.

The disclosure from Communication, Works and Public Utilities, Gregory Bowen during a post-Cabinet press briefing on Tuesday ends months of speculation surrounding an unknown ship seen on the horizon conducting tests.

Bowen who signed an oil and gas agreement with GPG in 2008 informed the media that the much-talked about ship “is under the auspices of the group GPG who has a licence to explore.”

The senior government minister, who was previously embroiled in controversy and legal disputes regarding drilling rights and the country’s possible natural resources pointed accusing fingers at the previous administration of ex-Prime Minister Tillman Thomas for preventing GPG from undertaking its research under his four and a half year tenure.

“Four years they (GPG) have been prevented from doing this, so they’re simply continuing where they left off under the NNP administration,” Bowen told the media.

He said that GPG is presently conducting tests and await results to determine if commercial products lies within the island’s territorial waters but it could take the next six years before any design systems can be finalised for possible production.

According to Minister Bowen, Government expects to receive a report from GPG regarding its findings in January 2014.

The works minister assured the nation that the undertakings by GPG is not costing Grenadians any money,

He said: “However if they do find something, obviously the people (GPG) would obviously want to recover their monies … and if they find nothing, my Lord, they have lost millions.”

A Texas-based Group known as Dynamic Global Advisory Company had reviewed the agreement signed with the Russians and had advised the Congress government to find a way to bring an end to it since it was weighed too heavily in favour of GPG.

THE NEW TOOK has been looking at some of the findings of Dynamic Global in its 26-page report:

 

It diverges to such an extent that it suggests conscious manipulation of the terms to obtain economic benefits in favour of GPG, which far exceed those that might be in older and now out of favour Royalty/Tax Systems.

 

The economic and fiscal terms of the GOG-GPG PSA were reviewed in detail and compared with terms in other PSAs with which we are familiar. A simple economic model was developed to capture the significant terms of the PSA and provide inputs for basic economic values arising from a successful exploration program and subsequent development activities such as exploration costs, development capital costs, operating costs, amortisation, gas prices, production rates and gas quantity discovered (reserve size).

 

The model was used to evaluate economic outcomes for certain development scenarios. The primary outcome of interest is the Government Take, the ratio of the government’s cash flow divided by the gross project cash flow expressed as a percentage.

 

Government Take from the GOG-GPG PSA was compared to Government Take for many countries’ PSAs

 

Findings

 

In Article 3 of the GOG-GPG PSA, government participation is achieved via a purchase. More typically, the government’s interest is carried until a predetermined point after which, if the government exercises its option to participate, the government becomes a working partner. The provision for the government to farm in versus being carried is to the favour of the contractor.

 

In Article 5 the Advisory Committee is established, which is quite typical. However, in its first meeting, the Advisory Committee appears to function as a decision making body with the de facto power to modify the Work Program and insurance requirements. Such modification can have a material impact on the economic outcome, and in the case being considered, in favour of the contractor.

 

Article 6 provides for a minimum exploration expenditure of US$10 million via an attached Work Plan. This was modified in the first meeting of the Advisory Committee and no updated Work Plan was provided.

 

Article 7 defers Relinquishment to the Petroleum Regulations which have no material constraints on the contractor. While not strictly an economic issue this constrains the government from re-offering relinquished blocks and thereby potentially benefiting economically.

 




Article 12 states the royalty is to be 6%. This is low compared to other PSAs which typically carry

 

royalties of 15-20%.

 

Article 12 provides the term of profit split between the government and the contractor. The gas scheme split is 70% contractor and 30% government for the first 5 years of production. After the first 5 years, and every 5 years thereafter, the split is increased by 5% in favor of the government. This is an unusual scheme and also anomalously low. More typically the profit split is based on an “R” value tied to rate of return or the level of contractor profits.

 

The use of “R” value schemes mitigates windfall profits due to extreme commodity price increases and allows the government to benefit from project upside. Best practice PSAs are progressive meaning that the government’s share of profits increases as the profitability of the project increases.

 

The GOG-GPG PSA is neither progressive nor regressive but flat (sometimes termed a “ratioed” system) because the royalty and profit split is held relatively constant. This type of approach is atypical today.

 

Article 17 on Abandonment is bizarre in that it specifies the government shall purchase the production facilities whose cost has already been recovered by the contractor. This is an absurd provision because it would most likely be of little impact in reality since the value of depreciated assets would be negligible. But, then again, considering any price dispute would go to the Advisory Committee and, if unresolved, to arbitration, it is unclear what the economic impact might be.

 

Not included in the PSA is any provision for ring-fencing, the practice of restricting expenses and costs to a specific field versus allowing costs from one field or block to be recovered from profits on a different field or block when calculating profit share or cost recovery.

 

Annex 4 Section 2.3(d) indicates that development project capital costs are to be recovered using straight line depreciation (SLD) over the life of the project with competitive interest rates on the unrecovered capital being treated as operating costs.

 

This is unprecedented in our experience and is perhaps the only case of terms favourable to the government; no experienced contractor would brook such a term due to its negative impact on the contractor’s rate of return (ROR) and net present value (NPV).

 

 

Economics

 

Arising from a successful exploration program, Government Take ranges from 38-52%, among the least favourable in the world. The most favourable Government Takes for this PSA result from government participation of 20% in reasonably profitable projects. For these cases Government Take ranges from 50-52%. The least favorable Government Take, ranging from 38-39%, results when the government declines to exercise its option to directly participate in the project.

 

These economic results are consistent across a wide range of project economic factors such as development capital costs, operating costs, gas prices, gas production rates or gas quantity discovered (reserve size). The relative insensitivity to these typical project economic factors is due to the absence of certain terms found in industry standard PSAs such as Cost Oil, Cost Recovery Ceiling, Windfall Profits and other such terms.

 

In practical terms, the determinant for government revenue and Government Take is the overall viability of the project. If there is a profitable project the government will receive 6% royalties on all gas produced in addition to the mandated profit share ranging from 38-52% (depending on the duration of production, e.g., 25 yrs.).

 

In that sense the interests of the government and the contractor are aligned; what is good for the contractor is good for the government. However, the range of Government Take remains among the lowest in the world and is inconsistent with PSA best practices and industry norms.

 

 

Tagged . Bookmark the permalink.

Comments are closed.