Monday, March 25, 2013

Young Man's View: Selling Off Bahamian Oil

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ADMITTEDLY, the discovery of oil in the Bahamas can have gargantuan returns, fostering self-sufficiency and increasing prosperity among Bahamians, if the massive amounts earned is properly managed and used for the national good. That said, if the government’s decision to allow Bahamas Petroleum Company (BPC) to drill multiple exploratory wells leads to the discovery of large quantities of black gold, will the benefits be felt by a broad swath of Bahamians or will the Bahamas be another Nigeria – a corrupt, rich nation with a relatively poor population.
 
Since the announcement by Minister for Environment Kenred Dorsett that BPC had been granted five licenses, which granted them permission to commence drilling exploratory wells, talks of oil and the associated financial windfalls have dominated discussions on the airwaves, in the barbershops and at almost any outing where there has been a gathering of Bahamians – even in church.
 
At present, BPC has convinced the government to agree on the sweetest, dumbest deal that any government could purport to be negotiating on behalf of the citizenry. I feel intellectually insulted, particularly since the royalty rates proffered – according to the proposed production license — are the lowest in the world (with the exception of Ireland). The licensing agreement between BPC and the government states that the oil royalties would be disbursed on a sliding scale, i.e. if 75,000 barrels of oil are produced daily, the royalty rate would be 12.5 per cent; if it’s in excess of 75,000 and up to 150,000, it would be 15 per cent; 150,000 to 200,000 daily barrels would yield a royalty rate of 17.5 per cent; 250,000 to 350,000 would result in a 20 per cent rate and any daily production in excess of 350,000 barrels would incur a royalty rate of 25 per cent. Hmmmm, how insulting! Clearly, the government cannot be acting in the best interest of the Bahamian people when they are giving our patrimony away for 12.5 to 25 per cent. Time and time again, I always feel like our government’s so-called negotiating teams should try to negotiate taking a candy from a child before entering a room full of professional sharks (negotiators) on the opposing side.
 
More than the 12.5 to 25 per cent slap in the face, BPC has been given five licenses to drill in an area spanning nearly four million acres at $0.92 cents per acre per annum. Well kiss my leg! If I’m going by the government’s logic, why don’t I also just give them my house and go live in the doghouse!
We should settle for no less than 50-70 per cent of any profits earned from oil exploration, much like the Norwegians and Sudanese already do.
 
Whilst I have no problem with oil drilling in the Bahamas – considering the resultant economic boost— the discussion surrounding our initial foray into the oil industry has heightened the stench of corruption and dysfunction that could engulf such an industry if it is grossly mismanaged and shrouded in dodgy practices. In Nigeria, corporate fat cats and greedy politicians have seen an astronomical inflation of their private bank accounts due to crookedness and an air of impunity.
 
According to the online encyclopedia Wikipedia, royalties (sometimes, running royalties, or private sector taxes) are usage-based payments made by one party (the licensee) to another (the “censor”) for the right to ongoing use of an asset...Royalties are typically agreed upon as a percentage of gross or net reserves derived from the use of an asset or a fixed piece per unit sold of an item of such...A royalty interest is the right to collect a stream of future royalty payments, often used in the oil and music industries to describe a percentage ownership of future production or revenues from a given leasehold...So, why are we selling ourselves so cheap?
 
And, if the government has granted BPC licences to drill exploratory wells, why has that been done without the proper regulatory regime in place?
 
Why is a seemingly penny stock company coming to the Bahamas and adamantly expressing an interest in drilling for oil? Why is BPC not registered in the Bahamas?
 
Since BPC is registered in the Isle of Man – “a secretive, nearly tax-free offshore financial centre” –are they subject to the information exchanges that is seen on the major Stock Exchanges?
 
Now that BPC has been given oil exploration licenses, it appears that the oil company is attempting to sell certain exploratory rights to a “strategic partner”, which makes it probable that the company doesn’t have the necessary funding (reportedly $125 million) and could likely be pursuing a corporate entity that would pay them to use their licenses to drill or fund their drilling exercises. If they are seeking funding, it means that – as it stands—another company (with the money) would “front” the capital and take a percentage of the remaining 87.5 per cent that BPC retains, per their agreement with the government.
 
I’ve heard the recent proclamation by the Prime Minister that he owns no shares in any companies in the Bahamas, but does he or any Member of his caucus own shares in companies domiciled in other jurisdictions? If so, who are the members that have such interests and in what companies?
 
Who are the shareholders in BPC? Who are the directors? Is BPC another Bluewater?
 
Why was BPC given exploratory licences as opposed to inviting other, more established companies to bid? Research shows that Chinese companies are paying between $500 million and $1 billion for the right to drill in the borders of certain countries (just the drilling rights). Why was the government in such a rush that they couldn’t wait to see the outcome of the drilling being done in Cuba? If oil is discovered in Cuba, we would undoubtedly have a bidding war for the right to drill in the Bahamas. Thus far, Cuba has had companies from four different countries – Spain, Malaysia, Venezuela and, most recently, Russia – each taking turns drilling for oil in Cuban waters whilst we – in the Bahamas – box ourselves in!
 
Why BPC? What is their claim to fame? Why not engage major oil companies such as Royal Dutch Shell (with a market capitalisation of 140, 900,000,000 billion British pounds), Chevron, Exxon-Mobil, Agip or Total? What is the extent of BPC’s experience in the oil industry?
 
What about signature bonuses – has the government been paid any fees upfront for BPC to have the right to drill? If BPC is willing to spend an aggregate total of $175 million (according to them $50 million has already been spent) on oil drilling, I’m inclined to believe that they have concrete knowledge of a vast oil depository under the seabed.
 
We should not allow the wealth generated from any future discovery of oil to be concentrated in the hands of kleptomaniac lobby groups, wannabe aristocrats and elitists and/or siphoned into personal bank accounts and on self-aggrandising initiatives!
 
Oh, before I forget.....was any of BPC’s $50 million spent on electioneering during the last political cycle?
 
As Bahamians, we must demand suitable regulatory standards and transparency in every aspect of this potentially promising, new economic sector; demand that the oil wealth trickles down to the masses; demand the institution of laws that require BPC (and any other company) to report all payments as well as publicise all contracts/licenses; establish a special financial unit to oversee this industry; and demand that our government invests in oil spill equipment and implements laws to protect our pristine environment.\
 
The fact that we are reliant on tourism and that the Bahamas has one of the largest fish nurseries in the world should be at the fore of the government’s contemplation as they grant these licenses. No drilling should occur until the proper legislative framework is in place. As it stands, the government can hardly address the oil sheen on the water at Clifton Pier, which is due to spillage from BEC’s main plant!
Lastly, over the past few days, there has been much talk about a sovereign wealth fund. There is merit in establishing such a fund, particularly as countries such as Norway ($715.9 billion), Australia ($300 million), Trinidad and Tobago ($2.9 billion), United Arab Emirates (more than a trillion), China (more than a trillion) and Singapore (nearly $500 billion) have all established such funds (sometimes more than one).
 
A sovereign wealth fund (stocks, bonds, cash, property, etcetera) can be used for various investments, as well as for needed developmental projects. Frankly, quite similar to the Central Bank’s reserves, if we become an oil producing country such a fund should be capitalised in US currency and either be managed as a separate entity or by the Central Bank as a separate portfolio.
 
Around the globe, sovereign wealth funds (SWF) have been established to offset the volatility of oil prices and take into account the finiteness of mineral resources such as oil. A local SWF can create savings/pension funds for future generations of Bahamians as is done in Norway and/or stabilize our economy if and when there is a depreciation in government revenue or the mineral supply is exhausted. At present, the government of the Philippines is mulling over whether or not they should launch such a fund.
 
• Next week, I shall revisit this topic from another angle and also address one or two other issues of the day.
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