Financial Analyst: Lack of ring-fencing a positive trade-off

Financial Analyst Joel Bhagwandin has contended that the lack of ring-fencing is serving Guyana positively, as it is a key driver behind the country’s ramped-up oil production.
Several commentators have argued that, to ensure maximum profits from Guyana’s numerous oil fields within the Stabroek Block, the implementation of the ring-fencing mechanism is important to ensure profits from one oil field are not utilised for the development of another without compensation.
In an interview with Ignite Insights this week, Bhagwandin explained that the increasing cost of developing oil fields has caused oil companies to look internally to raise capital to finance their projects.
“With all the events that took place in the world; the covid pandemic, regime change, change in policies, in the United States etc., the cost of financing is today more expensive; that coupled with climate change policies globally, (have) negatively impacting the cost of financing for the oil and gas sector,” he said.
Alternatively, if the cost of raising capital on the market is more expensive, the cheapest source of raising finance is from companies’ internal sources, the analyst opined.
Bhagwandin explained, therefore, that because of the lack of ring-fencing, Guyana has been able to ramp up oil production at an unprecedented rate, since the oil company has been able to use the available profits to develop the additional fields.
“Because of the lack of ring fencing, that is now working to our advantage; because of that the policy makers as shrewd as they are…they have flipped that into a positive to ensure that although we have the lack of ring fencing it is really not shortchanging the country, or a forgone revenue it is really a tradeoff to take the excess money to quickly ramp up our own production, to reinvest the profits in our own market to develop the resource and in the outer years, we will get that in the outer years.”
Given the pace and level of oil production, the timeline of the exploration licences, and the project economics of the various oil fields, Bhagwandin sees the lack of ring-fencing as a positive trade-off, where Guyana will get back its profits by 2035 and thereafter.
Industry experts have urged, however, that in oil companies using Guyana’s profits to fund oil field development—and the fact that a 75 per cent expense charge is recovered off the top by oil companies before profit sharing—Guyana ought to be compensated for its profits financing the development of the additional oil fields.