 the oil contract debate the oil contract debate the oil contract debate webmaster wed 3282018 1126 by dr leyland m lucas in the late 1990s guyana signed an oil and gas exploration agreement with exxon s subsidiary eepgl that agreement not only permitted significant activity by exxon but also provided guyana with a small subsumed royalty of no more than 1 the agreement was also in clear contravention of guyana s laws which stipulated the number of blocks that could be offered to a single entity though there were clear violations in law guyana has chosen to honour that obligation rather than raise it in other forums or attempt to invalidate it as a nation our word has been our bond fast forward to our current situation where we find much being discussed regarding the current contract and whether or not the nation s best interests have been considered in fact in the past few months we have been privy to an ongoing debate around the contracts signed by the government of guyana and exxon this debate has gotten so intense that some have even questioned the integrity and negotiating ability of governments in other developing countries where the exploration of oil and gas is ongoing yes in the case of guyana there is a great deal of evidence to suggest that better could have been done but who are we to question the outcome when we were absent from the process as my grandmother would often say when a family member chose to criticize others make sure that your house is clean before telling someone else that theirs is dirty in an earlier article on local content i made the point that oil is no longer a critical commodity there is an abundance of oil in the global market prices are highly volatile and the world has begun a gradual process of shifting from fossil fuels to renewable sources of energy these are realities that cannot be ignored for example within our hemisphere we see significant declines in oil and gas production yet very little evidence of a major impact in the global marketplace likewise the kingdom of saudi arabia a major oil producer with onefifths of the world s reserves has also begun the process of delinking its economy from oildependency and looking for newer ways to stimulate growth and development the kingdom of saudi arabia has determined that given the volatile prices oil revenue can no longer be the foundation of economic development instead the kingdom has shifted towards renewable energy sources and undertaken significant activities towards transforming the foundation upon which the future economy will stand guyana as a country has also committed itself to a policy of sustainable development and in so doing must balance issues of production and protection afterall we exist in a very fragile ecosystem having made these observations i d like to proceed with a small contribution to this debate as one of my former bosses mr clarence ellis would say no matter what the situation if you are seen to be truthful reliable and honest in your dealings people will work with you therefore my contribution to this debate for the most part will center on the words reputation and position these words should be at the heart of any conversation about contracts and the subject of renegotiation i hope that the importance of these words will be reflected and help to either advance or bring some closure to the debate the oil contract to some extent what we are dealing with here is a prisoner s dilemma in a simple titfortat version players attempt to match better one another s moves with the hope that the victor will emerge with the lion s share however research has shown that such strategies seldom succeed eventually parties come to recognize that continuous moves and countermoves are less productive and that mutual cooperation works best in essence let s find a middle ground rather than try to be the ultimate winner this is an important point in the ongoing debate around the exxon contract because continuous negotiations and renegotiations will yield no fruitful results hence the situation becomes one of finding an acceptable position of compromise from which both parties can gain some benefit and continue to operate with mutual respect as we focus on the current contract one cannot ignore the fact that a contract previously existed how do we renegotiate this contract within a prisoner s dilemma framework moves and countermoves will only make sense if one party has something that is vital to the other and can force the latter to respond to the actions of the former in this case we have a product that the world wants but does not need any moves by our negotiators could be easily ignored consequently it makes no sense to engage in efforts to renegotiate a contract from a position of weakness moves and countermoves also influence one s position subsequent moves by a party only makes sense if this is being done from a position of relative strength hence i pose the question what is our strength the simple answer to this question is nothing we do not own the wells we do not have the skills necessary to exploit them and we do not have the technology to provide the valueadded products in fact truth be told at this stage we are struggling to meet local content requirements one cannot renegotiate a contract from a position of future possibilities but must do so within the current context so any conversations of renegotiation will take place from a position of weakness rather than one of strength this brings us to the issue of reputation what does it say about a country that signs an agreement and then seeks to change it over time governments and countries develop reputations as either reliable or unreliable bargaining partners each reputation comes with costs and benefits if guyana develops a reputation for being an unreliable partner then all options for future development are lost as a nation and as a government we must realize that our word is our bond if we cannot be relied upon to honour our obligations then there is no place in the world of nations for us recently some have suggested to me that we can do this on our own as i listened to these suggestions i sensed subtle tones of nationalism and nationalization while such suggestions are laudable one must admit that boat has sailed guyana and the rest of the developing world are full of examples of the consequences of nationalization in the absence of an appropriate skill set while it served its political purpose the benefits of so doing left much to be desired oil like sugar and bauxite are primary products with volatile prices and much of the valueadded downstream product quality one of the issues that has been raised in this oil contract debate surrounds the product quality yes there is a great deal of literature that suggests the crude is of an exceptionally high quality like an exceptionally welltailored suit superior quality commands a high price provided that a market exists hence one must ask the question can quality command a high price in a saturated market the simple answer to this question is no as we know primary product prices fluctuate quite significantly so a high price today might hit rock bottom tomorrow for those of us old enough to recall guyana sold its sugar at a high price on the world market in the 1970s rather than honour its obligations to existing contracts not too long after the bottom fell out of the world market as a nation we were profitable in the shortterm but suffered in the longterm particularly with respect to our reputation moreover the wells are not owned by the government of guyana they are owned by exxon and its partners how do we exact additional tribute from these companies simply because we have a product of exceptional quality when the owner opts to not sell it guyana cannot force exxon and its partners to pay a higher premium when they can choose to not pump oil and gas from the wells not doing so provides the government and people of guyana with zero revenue hence the need to be cautious in one s approach to renegotiating of contracts placing this issue of quality into the prisoner s dilemma framework how do two players arrive at a mutually beneficial position when one player ceases to participate more specifically how does one arrive at mutually beneficial positions when the dominant player withdraws the fact is under these circumstances the game ends and there are no winners it s like that childhood experience where the owner of the ball runs home with it because he is unhappy with some decision what we have left is a group of disgruntled children who grumble and look for something else to do unfortunately guyana has very few options and even fewer resources that can be summoned into action frontloading an interesting argument has recently been raised that guyana would be better off receiving a sizeable upfront bonus rather than waiting for later disbursements through royalties while those numbers vary from the wellreasoned to the pieinthesky estimates one needs to look at the domestic reality we are a nation with various needs from education to infrastructure to address those needs we will require a significant influx of financial resources however if that influx is not regulated it will cause significant inflationary pressures such pressures will further damage the economy and leads to a significant decline in living standards with a massive influx of cash one does not speedily correct the errors of the previous decades engineers scientists agricultural experts and doctors are not created overnight it takes years of training to acquire these skills if the nation is to acquire these skills then it must be done over time let s not forget that we are dealing with a product whose price is highly volatile where will the resources come from when an engineer needs specialized training in 5 years but the bottom has fallen out of the oil sector yes this may happen anyway but at least we would not recreate the conditions for another massive brain drain as was experienced in the 1980s when resources for scholarship recipients were scarce let me use a simple example to further elaborate on this point think of someone in the desert with no food or water for an extended period of time he she is rescued and immediately placed in front of a large quantity of food and drink if that person consumes everything without control then he she dies however if he she consumes in moderation until the body is once more accustomed to consuming solids etc then there is a greater likelihood of survival the point i am making here is that a massive unregulated inflow of cash through a significant bonus may entice policymakers to undertake massive investment projects which the economy cannot embrace with its limited skills inventory instead a gradual inflow and expenditure might prove more beneficial to the nation in the longrun so while frontloading of contracts and securing large bonuses might be politically popular it may prove to be economically disastrous book value in some circles it has been suggested that guyana deserves a larger bonus because of its contribution to exxon s bottom line at least one commentator has made the point that since the discovery of oil and gas deposits off the shores of guyana exxon s book value has increased significantly in my humble opinion to use book value as a basis for renegotiating a contract is not a sound position book values change on a daily basis in fact exxon s stock price like so many others in the market has been on a rollercoaster ride one year ago its common stock price was 8283 today it is 7627 last month the stock price reached a high of 8907 which stock price should we use as the basis for asserting book value and renegotiating this contract should both parties make offers and counteroffers following a pattern within a prisoner s dilemma game such uncertainty cannot be tolerated instead of embracing such uncertainty both players will be forced to arrive at a mutually beneficial point moreover how reliable a negotiating partner is a government when its position appears to change with every market fluctuation clearly other nations and firms will not take us seriously since stability is essential to the capitalist system of trade and exchange geopolitics over the past decade commentators have noted a change in global relations that change has seen a decline in nation states and the rise of the corporate state that corporate state takes the form of transnational corporations which have been able to influence global politics through their actions for instance in the us we see massive amounts of money being poured into political campaigns by individuals and companies such as the koch brothers george soros and the professionals on k street why is this important within the guyana context the emergence of corporate states is important because they have the ability to alter things within a nation and change the balance of power as stated by former british prime minister lord palmerston and later expressed by henry kissinger friends and enemies are not permanent but interests are in this case the interests are oil and gas understanding the permanence of interests is important within the context we are examining although there may seem to be a disagreement between venezuela and the us any perceived reluctance on our part to abide by negotiated agreements could significantly alter the regional balance if exxon or any other transnational deems it favourable to reengage with the venezuelan government then they will do so a reliable bargaining partner is always better than an unreliable one who then will take up the mantle on our behalf if venezuela flexes its military might against us are we to expect support from the us administration when we have acted against the interests of an american corporate giant i think that an examination of history would reveal that the answers to these questions are not favorable conclusions oil and gas have been found and they have the potential to offer a great deal of wealth to our beloved guyana if appropriately managed this is already reflected in the international monetary fund imf reports suggesting a change in our economic classification although we may argue about the royalty and signing bonus it is merely an exercise in futility we are in a prisoner s dilemma having originally negotiated a very bad deal as a bargaining partner one does not change the rules of the game unless one comes from a position of strength unfortunately such strength does not exist in our case we have a product that the world wants but does not need we lack the skills base and infrastructure to pursue this venture on our own there is a global shift away from oil and gas towards renewable and sustainable sources of energy as such we are approaching all such negotiations from a position of relative weakness rather than strength as a nation there is an expectation that we will honor our word our word is our bond and as such we must strive to establish and maintain a good reputation even within a prisoner s dilemma framework some reliability is expected if a move is made that player is expected to honour the consequences of that move rather than default when countries default on their obligations their ability to reengage with other parties is seriously hampered particularly as a small and young country we must strive to uphold a positive reputation irrespective of the consequences good reputations are hard to come by can be easily lost and extremely difficult to regain let us focus on playing the hand we have been dealt rather than continually questioning its validity maybe for future generations there is a lesson to be drawn from this experience a nation should always focus on establishing high educational standards and building its skills base lest it be found wanting article adapted from  https wwwstabroeknewscom 2018 business 323 theoilcontractdebate  dr leyland m lucas sebi oil oil gas 