Tuesday, May 24, 2011

“The Bahamas, a giant oil province in the making”

Report reveals potential oil revenue for Bahamas

NG Business Reporter

What financial benefit should Bahamians expect to reap if the sands beneath us hold the immense oil treasures some are projecting?

Under the current leasing arrangements, royalties of up to 25 percent of well-head revenue could translate into hundreds of billions over time. But as far as the government’s take goes, the terms of those licenses are quite favorable — for the licensees.

The projection for a small government take relative to other oil-producing countries is playing into the Bahamas Petroleum Company’s (BPC) efforts to attract investors to its Bahamian petroleum exploration project, and was featured in its April 2011 investor presentation, “The Bahamas, a giant oil province in the making”.

“Attractive fiscal terms: Low royalty; no corporation tax,” was the way it read in BPC’s investor presentation. One graph compared how licensee revenues in The Bahamas might stack up against revenue from a royalty-paying federal lease in the United States’ territorial waters in the Gulf of Mexico, based on $90 per barrel oil and 2007 variables. About 33 percent of revenues were allocated to costs in both territories, but with royalties calculated at peak production levels, the Bahamas government would take 25 percent in royalties compared to about 27 percent for the US fields. The US government cut of the lucrative revenue stream does not stop with royalties, however.

US Gulf of Mexico revenue to the licensee was reduced another 25 percent approximately in taxes. In the case of The Bahamas, that would go to the licensee’s net revenue, according to a chart presented. That chart was also a part of BPC’s competent person’s report prepared by the firm Moyes & Co. in 2008 and available on BPC’s website at http://www.bpcplc.com/our-assets/competent-persons-report.

Of the 16 countries used for another chart in BPC’s investor report, the “government take” for The Bahamas was clearly the lowest, and inversely the “free cash flow” projected for licensees in The Bahamas clearly the highest. That chart was based on $100 per barrel Brent oil pricing and more current data than the Moyes data. Oil producers like Canada, Iraq, Nigeria, Libya and closer to home the US and Guyana are included in that study.

While very encouraging to the prospective investor, it may highlight some of the challenges ahead for a country with no oil and a limited mineral resource production history. This nation’s experience with salt and aragonite production may prove poor preparation if the drilling BPC hopes will happen next year proves that world-class oil production potential here.

And the potential is massive.

John Bostwick II, attorney and author of “Bahamas 20/20 Vision” told Guardian Business on Friday that based on public statements made, BPC could be looking at $2.4 trillion worth of oil — his calculations based on $97.50 per barrel prices. He says the size of the potential oil traps may be missed by many.

“I don’t know if people really are focusing on what they are saying,” Bostwick said. “Supergiant traps, not giant — supergiant.”

Supergiant oil traps have 5 billion or more barrels of ultimately recoverable oil.

In its recent investor report, BPC’s leads and prospects showed about 9 billion barrels as the ‘most likely’ yield level from structures in the southern fold belt covered by four of its licenses. If the traps there had a 100 percent structural fill, a less likely scenario, they could hold 24.3 billion barrels. At $100 per barrel for oil, that’s $2.4 trillion across the life of those fields. If predictions by many economists for a continued increase in oil prices prove true, that total value escalates. And that value is only for the areas BPC has done some survey and other research work on — it has additional exploration license applications in the pipeline.

According to the Petroleum Act, a licensee would pay a royalty “at a rate of not less than twelve and one-half per centum of the selling value at the well-head of the petroleum won and saved from the licensed or leased area.”

Information available on BPC’s website details the rates further. The royalty rates are 12.5 percent for oil production up to 75,000 barrels of oil per day (bopd); 15 percent for 75,000 to 150,000; 17.5 percent for 150,000 to 250,000; 20 percent for 250,000 to 350,000; and 25 percent for any amount in excess of 350,000 bopd. Gas production is set at a 12.5 percent rate, and land is rented for $0.92 an acre per annum, though rentals are deductible from royalty payments.

Just for illustration, if 500 million barrels of oil are produced in a year under those license terms, with oil at $100, it would generate about $11.4 billion in annual royalties for government. That assumes production is averaged out across a 365-day year. That’s a lot of roads — or schools, universities, hospitals, court rooms, police equipment, training programs, etc. For comparison, the entire gross domestic product (GDP) of The Bahamas in 2007 was 7.2 billion, according to World Bank data.

But is it enough? Based on BPC’s investor presentation, it’s may be a good deal for their investors.

The issue is likely to grow in prominence for Bahamians as more research is done, and particularly if drilling results change the narrative from a story about possibilities to a story about how The Bahamas became an oil giant.

Despite the billions a government stands to make, when the cost-benefit analysis is done, the potential benefits at least seem less strong than they could be. At least not when compared to what many other nations are able to secure for their petroleum assets.