Options for Guyana’s crude oil disposition

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Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.

Crude oil to be produced from an Exploitation Area shall be taken and disposed of in accordance with the rules set out in the agreed lifting procedures. Arguably, this is the best and the hardest option. It presupposes that the joint operating agreement of the parties can find common ground on the applicable lifting rules and procedures for crude oil and are able to commit to those rules and procedures at the time of entering into the operating agreement, without provision for further negotiation and revision of those arrangements.

This is the best option in the sense that it eliminates the need for intense argument and potential misalignment between the investing parties when negotiating a lifting agreement as late as six months before first oil.

It may be the obvious choice if the contract area is close to an existing trunk pipeline and/or terminal and it is reasonable to assume that lifting will take place on the terms of that pipeline’s or terminal’s standard procedures. Alternatively, if the joint venture concerns an investment in a ‘brownfield’ hydrocarbon reservoir, for which the offtake and transportation facilities and arrangements are already established, it may only be necessary for lifting procedures to indicate any amendments to those existing arrangements necessary to enable the incremental hydrocarbon volumes to be accepted by those existing offtake and transportation facilities.

Also, the investing parties may reach a common view that they will each lift by the same mechanism, be it pipeline or marine tanker, in circumstances where they will bear similar risks and costs; this may enable them to agree upon terms for the lifting procedures simply because they can arrive at a common view as to how best to address those risks and costs.

It is the hardest option because the joint venture parties are unlikely to view transportation and marketing risks in the same way, particularly if they are taking their view at the outset of the joint venture, expecting transportation and marketing options to change significantly before any discovery reaches production. In any event, the lifting procedures should address as a minimum the matters set out in the agreement from the delivery point to the rights of the parties to sell an entitlement.

Unlike the other alternatives for the options in the right and obligation to take in kind, this consideration does not address the status of the host government or Government Oil & Gas Company as a Crude Oil lifter, which will either need to comply with the rules and procedures under the lifting procedures or for which alternative arrangements will need to be agreed. Given that many Host Government Agreements allow for the Government Oil & Gas Company lifting its profit hydrocarbons to share transportation and marketing arrangements with the joint venture, it may be premature to negotiate a fully termed lifting agreement as part of the operating agreement, only to find it needs substantial renegotiation when the Government Oil & Gas Company wishes to become a party to it.

Moreover, if crude oil is to be produced from an Exploitation Area, the investing parties shall in good faith, and not fewer than six (6) months before the anticipated first delivery of crude oil, as promptly notified by the operator, negotiate and conclude the terms of a lifting agreement to cover the offtake of crude oil produced under the contract. The lifting procedure shall be based on a Lifting Agreement and shall contain all such terms as may be negotiated and agreed by the investing parties, consistent with the Development Plan and subject to the terms of the contract. The Government Oil & Gas Company may if necessary and practicable, also be a party to the lifting agreement; if the Government Oil & Gas

Company is a party to the lifting agreement, then the parties shall endeavour to obtain its agreement to the principles outlined in the agreed disposition of the crude oil. If a lifting agreement has not been entered into by the date of first delivery of crude oil, the parties shall nonetheless be obligated to take and separately dispose of such crude oil as provided in the conditions for the right and obligation to take in kind and in addition shall be bound by the terms set forth in the Lifting Agreement until a lifting agreement is signed by the investing parties (Fowler 2018).

This option contemplates the parties entering into a period of negotiation to agree to a lifting agreement prior to the first delivery of crude oil. This option respects the fact that the parties may not wish, or may not be able, to finalise lifting arrangements until shortly before first oil. The Lifting Agreement provides the starting point for the negotiations and the terms on which the parties will lift crude oil if the lifting agreement has not been agreed in time for the first production.

This provision itself will change the dynamic of the negotiations for the lifting agreement; joint venture parties having access to transportation and markets and comfortable with the terms of the Lifting Agreement which will apply in default of agreement will be able to set the pace of negotiations, knowing that other reluctant parties will not be able to hold up the first production in order to obtain modifications to the model which they seek.

This ‘last-minute’ approach brings with its certain project risks; it assumes that the parties have committed to invest in the development of the relevant reservoir well before the lifting agreement was finalised. This option may play into the hands of joint venture parties with established access to transportation and marketing capacity who can afford to take the relevant capital investment risk before obtaining certainty on the terms of the lifting agreement.

If a party is less certain of its access to transportation and markets, and consequently the terms on which it will lift hydrocarbons, it may be better advised to negotiate a modification to this option, requiring the parties to negotiate and agree with binding lifting principles, if not a full lifting agreement, as a condition of their support for the joint venture’s decision to proceed with development. This can be equivalent to the options for the disposition of natural gas, a consideration for Guyana.

Further, this option also addresses the potential need for the prospective Government Oil & Gas Company to be a party to the lifting agreement. This presupposes that the Government Oil & Gas Company will lift royalty crude oil or the Government’s share of profit oil; if it participated in its own right in the joint venture, it would be a party to the operating agreement and automatically bound by the agreed provisions of the agreed terms of the disposition of crude oil. The purpose of the language should be to ensure that the parties are aligned in persuading the Government Oil & Gas Company to follow the provisions of the agreement, and not to use the negotiation with the Government Oil & Gas Company to try to secure different terms for themselves.

This preference recognizes, however, that the investing parties may not succeed in persuading the Government Oil & Gas Company to apply the given condition unamended with the result that either the parties will have to modify the lifting agreement to secure its consent, or enter into their own lifting agreement in accordance with agreed terms, and enter into a separate arrangement between themselves and the Government Oil & Gas Company. This condition does not consider the need for the parties to coordinate their liftings with liftings by the Government Oil & Gas Company.

However, if it is truly necessary for the Government Oil & Gas Company to be a party to the lifting agreement but no agreement is reached by the date set for first oil, there will be deadlock instead of first oil. When lifting the Government’s royalty oil or profit hydrocarbons, the Government Oil & Gas Company is not an operating party and is not bound to lift its hydrocarbons using the Lifting Agreement, pending finalization of a lifting agreement.

Such an alternative would be unsatisfactory unless the investing parties are prepared to review the Lifting Agreement before applying it and resolve between themselves many of the options and alternatives within the framework of the arrangement. Ironically, the parties may find this as difficult as negotiating a stand-alone lifting agreement. Unless they do so, applying the Lifting Agreement unamended and unadjusted will inevitably lead to disputes. The inevitability of such disputes may force the parties to resolve their differences before first oil.

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