Dear Editor,
Reference is made to a letter in the Stabroek News edition of February 18, 2023, with the caption, “the Exxon HQ budget is an added burden on the backs of Guyanese”, by opposition Member of Parliament (MP), Ganesh Mahipaul. The opposition MP contended that the cost for the facility which is an estimated US$160 million is outrageous to be “footed by the Guyanese taxpayer”, blatant abuse of power, and a disregard for the Guyanese people’s struggles etc.
In order to determine whether indeed the estimated cost is exorbitant, it would be prudent to ascertain the cost per square footagebased on the size of the facility and compare same to other similar commercial construction projects and /or related facilities being undertaken currently.
In this regard, the table attached shows two publicly known construction projects, namely, the Pegasus Suites and the Vreed-En-Hoop Shorebase project. Based on the publicly known particulars of these three projects, the Pegasus Suites cost per square-footage is the highest at US$435 per sq. ft representing more than 2 times the cost for the Exxon-facility; while the Vreed-En-Hoop Shorebase which is a combination of a commercial and industrial development is lower at US$344 per sq. ft representing 1.7 times the cost of the Exxon-facility.
It is critical to understand the various sources of government [http://funding.To](http://funding.To “smartCard-inline”) this end, there isrevenue generated from taxes to the national treasury and there is also non-tax revenue. Often times, contentious financial issues in the oil and gas industry are equated to taxpayers funding.Case in point, the argument put forward by the opposition M.P that the cost of the facility will be a burden on taxpayers–ismatter-of-factly a false perception. Simply put, Guyanese taxpayers invested zero dollar into the oil and gas exploration and development activities in Guyana. The initial invested capital into the oil and gas sector was sourced from the oil companies in the form of equity financing from the companies’ shareholders and debt financing from the international capital market. The invested capital is being recovered from the sale of crude and not from the Guyanese taxpayers. Hence, the cost of the command center which is a capitalized expenditure is cost recoverable from the sale of the crude oil and not the Guyanese taxpayers.
With respect to the question on whether the need for the facility is justified–the answer is yes. Currently, there are only two Floating Production Storage and Offloading (FPSOs) vessels operating offshore, producing about 350k barrels of crude oil per day. According to Exxon’s country manager, the offshore operations are supported by rented office space that accommodates about 250 employees. The new state-of-the-art and expanded facility is designed to cater for about 500+ employees when production is ramped to north of 1.2 million barrels per day by 2025 and beyond. At the current production rate and an average price of US$60 per barrel, the annual revenue turnover of the sector is an estimated US$7.56 billion, which, when ramped up to 1.2 million barrels per day–will reach US$26 billion, representing more than 3 times the size of the current annual revenue turnover. The cost of the facility represents 0.6% of the annual turnover at US$60 per barrel when production rate is scaled to 1.2 million barrels per day.
Moreover, the opposition M.P failed to consider that naturally as Guyana seeks to scale up oil production to above 1 million barrels per day, then unavoidably there will be the need to invest in adequate onshore facilities to support the offshore operations. This is a normal and basic concept in the growth and expansion of any type of business, not just the oil and gas business. Let’s take a supermarket business for example, if the entity only has one location and is limited to a 2000 sq.ft building inclusive of warehouse space, then obviously the only way this enterprise can grow two-fold, three-fold and even ten-fold, the supermarket owner (s) would have to invest in new locations, larger facilities and infrastructure to support any such growth plans.
The opposition M.P failed to consider the development impact and the multiplier effect therefrom that this investment will bring about. Towards this end, Exxon’s country manager reported that the staff complement will more than double from 250 to over 500 employees. Let’s assume that 200 additional employees will be Guyanese, this will translate to direct employment opportunities for Guyanese workers. These employees will also pay their income taxes (PAYE). EEPGL’s 2020 financial statements showed that administrative expenses stood at G$20.8 billion. So, it would be reasonable to estimate that 1/3 of the administrative expenses accounts for employment cost, just for the sake of this argument, and let’s say that the effective tax rate is 28%, then the PAYE would be anywhere around $2 billion annually for the current staff complement. Consequently, as the company seeks to double its staff complement, PAYE alone can increase from $2 billion annually to $4 billion annually. Then there is the multiplier effect, directly and indirectly, as a result of these activities, increased spending in the economy, feeding into aggregate demand across all sectors for goods and services, which will also contribute to other forms of taxes to the national treasury such as VAT.
Finally, in view of the foregoing discussion and analysis, the cost of Exxon’s new operating / command center is below the estimated cost per square-footage when compared to two other commercial and industrial construction projects. Therefore, it cannot be meritoriously described as exorbitant and an abuse of power on the part of the government.
Respectfully,
Joel Bhagwandin, Financial Analyst
