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Jagdeo refuses to reveal Exxon’s ‘huge’ return on investment
Vice President, Dr. Bharat Jagdeo
Kaieteur News – Vice President Bharrat Jagdeo revealed last week that US oil giant ExxonMobil had received “huge” returns on its investment in the Stabroek Block, but declined to reveal the rate of return the company was charging Guyana.
An investor’s return is the percentage of net gains or losses on an investment over a period of time. This is a key area where oil companies could abuse it to make more profit by charging the state unfair fees.
Jagdeo clarified last week that the company did not use the loan to finance the Stabroek block development; therefore, no interest costs were added to the bank’s costs.
The Vice President made it clear that the company is using the revenue generated from the block and financing the development project through equity. According to him, the company is earning Its return on equity is “huge”.
He explained: “If you provide financing, and nobody else does, you’re a free investor, and if you have costs then you recover them. So you get a return whether it’s in the form of a loan or equity. So in this case, Exxon has made it clear that there are no interest costs. They’re funding the operations with equity and their own retained earnings. There are no interest costs, so don’t you think they’re getting a return on equity? They’re getting a huge return on equity, and that’s exactly what’s happening here. They chose not to go the interest route, but they’re getting a return on equity.”
Since there is no interest cost, Kaieteur News asked the oil and gas industry’s top decision maker on Thursday what the company’s return on equity was.
To this end, Jagdeo explained that interest rates change over time, adding that after the investment is repaid, the company will receive greater returns in the future.
Under the terms of the 2016 Production Sharing Agreement (PSA), ExxonMobil can deduct up to 75% of the monthly revenue generated by the Stabroek Block for cost recovery (recouping its investment). The remaining 25% is shared with Guyana as profit.
As such, Jagdeo said: “If you look at it in the long term, it will grow substantially, so it will change over time. Like right now, if you look at it, it may be relatively low… let’s take the example of $30 billion in equity, but they only get 10.5% of the total oil sales. The total value of oil per year, when you compare it, based on equity investment, may look relatively modest over this period of time, but when we start clearing the cost bank, it will grow substantially.”
The vice president was careful not to reveal the specific rate of return on the company’s investment, but noted that the returns would increase over time.
“Their return on equity will increase significantly over time, so they will get a good return on equity, a huge return on equity,” Jagdeo said, adding that Guyana’s revenue will also increase significantly after ExxonMobil pays off its debt.
At the same time, he noted, “There is no doubt that they are making a lot of money, they are going to get a good return, and a lot of that return is related to the financial provisions under the 2016 Public Service Agreement (PSA), which we have now adjusted under the new PSA, so I think that speaks for itself.”
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