Principles for natural gas agreement with the Government of Guyana

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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.

The Guyanese government under the contract is likely to have its own share of profit hydrocarbons to lift, including natural gas. A state-owned oil and gas company (‘the government oil & gas company’) will be appointed to lift such share, which will be taken in the common stream with the parties’ natural gas lifted as cost hydrocarbons and profit hydrocarbons.

To govern such common stream, either there must be some form of balancing agreement between the government oil & gas company and the parties, or the government oil & gas company should be a party to the natural gas balancing agreement. Likewise, the government oil & gas company may wish, and it may be in the parties’ interests for it, to participate in joint gas sales, in which case it will need to be a party to the agreement governing multi-party gas sales.

Parallel provisions should appear in crude oil principles where the parties recognize that if natural gas is discovered it may be necessary for the parties to enter into special arrangements for the disposal of the natural gas, which special arrangements are consistent with the development plan and subject to the terms of the contract, and where natural gas to be produced from an exploitation area shall be taken and disposed of under a gas balancing agreement.

The situation is not to be confused with the scenario where the government oil & gas company obtains a participating interest under the Joint Operating Agreement (JOA) and is bound by conditions of the disposition of production, as a participant in the joint venture.

In many jurisdictions, the state entitlement to profit hydrocarbons is considered to be a tax payable by the joint venture parties, and any failure to lift the state share by the state or its appointed lifter may be unfairly treated as a failure to pay tax by the joint venture parties under the contract. If the state is a party to a natural gas balancing agreement, it would be easier for the joint venture parties to convince the relevant tax authorities that any undertaking by the state of its ‘tax in kind’ will be remedied by an overtaking at a later date – albeit in a later tax period.

These conditions may be somewhat surprising because it constitutes an ‘aide memoire’ for provisions to be inserted in other agreements particularly the Contract which may or may not have been agreed by the time the JOA is executed.

That said, the proposed articles will sensibly seek to address the potential conflicts of interests that arise between the joint venture parties and the state in relation to the marketing and pricing of natural gas. As noted, the commerciality of any natural gas reservoir is in part driven by the ability of the parties to obtain acceptable prices, in a market which is necessarily regional and constrained by the extent of the local gas distribution network.

In emerging economies such as Guyana, that network is likely to be state-owned and state-controlled; furthermore, domestic prices are likely to be subsidized and regulated by the state. As a result, the state may have an interest in obtaining the joint venture’s natural gas at the lowest possible price consistent with forcing the joint venture to agree to develop the reservoir in the first place. In such circumstances, the joint venture has a very legitimate concern to ensure that their entitlement to natural gas has at least equal access to gas transportation capacity, the regional gas markets and ultimately to the same gas price as the state’ s natural gas entitlement.

The agreement must address a related point – in emerging economies, the joint venture parties may wish to stall or slow down any development of a natural gas reservoir until the point where the regional gas market is sufficiently evolved to be able to take the joint venture’s supply of natural gas reliably and to pay a price which will support the commerciality of the development.

The Lifting Agreement

It is essential that the JOA negotiators are completely familiar with the lifting agreement before using conditions of the disposition of crude oil. The lifting agreement is only suitable for a particular set of relatively familiar and uncontroversial circumstances where it can be foreseen that crude oil will be shipped from an offshore or onshore location to a marine terminal from which the parties’ respective cargoes will be lifted by tanker. The lifting agreement would not be suitably unamended, for example, if:

  • the regional tanker market was not a ‘level playing field’ (which might be the case if the government oil and gas company has preferential access and/or cabotage rules apply),
  • the commercial arrangements applying to the marine terminal require the joint venture parties to take title to their entitlements of crude oil before the crude oil is shipped at the marine terminal (an issue mentioned but not addressed in the lifting agreement); or
  • the joint venture parties expect to deliver hydrocarbons into a pipeline or rail network, requiring the lifting agreement to synchronize the timing of nominations and scheduling with the scheduling requirements of the pipeline or rail network operator which are often on non-negotiable, monopolistic terms.

In any event, the proposed lifting agreement itself must provide for several alternatives and optional provisions for the Parties to select. If the parties make no effort to review the model lifting agreement and fail to agree which alternatives and options shall apply, then in some cases the model lifting agreement may be unworkable and legally unenforceable.

In other cases, the failure to select an alternative option may not be fatal to the operability of the model lifting agreement but may cause disputes in specific circumstances. The options in the lifting agreement which the parties ‘must’ address if they are to rely on certain conditions for the disposition of crude oil, and identifies those options and alternatives which the parties are recommended to address if the risk of the significant dispute is to be avoided; must be set-out and agreed to by all parties.

It must not be intended to be a definitive guide to the decisions and choices the negotiators must take in relation to the lifting agreement before using these alternative conditions but illustrates the extreme difficulty in applying the principles of the lifting agreement as such a lifting arrangement in practice unless it is at least partially negotiated.

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