The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Petroleum Company’s (BPC) royalty rates are “30 per cent higher” than those paid by Gulf of Mexico oil drillers, its chief executive disclosing that these terms were also “more onerous” than what is specified in the existing Petroleum Act.

Breaking his silence following last week’s political controversy, Simon Potter told Tribune Business that any debate over whether the Government should seek to re-negotiate its commercial terms with BPC was “premature”, given that the oil exploration firm had yet “to find a single barrel of oil” in Bahamian waters.

Justifying the existing agreement with the Government, Mr Potter emphasised that BPC and its $50 million investment to-date had assumed all the risk, with its oil exploration activities not costing the Government one cent.

And, pointing out that the Government would earn any royalties from oil discoveries from “day one”, the BPC chief executive said there had been no exploratory well drilling in Bahamian waters for 25 years.

This, Mr Potter said, meant comparisons between the Bahamas’ royalties regime and that in Trinidad & Tobago, where oil and gas exploration activities had been going on for 100 years, were inappropriate because it was like “comparing apples to oranges”.

Earl Deveaux, the former minister of the environment, had last week suggested that the Government seek to re-negotiate its commercial terms with BPC prior to any exploratory oil well drilling, arguing that it would now have greater leverage to do so.

However, Mr Potter, pointing out that the Bahamas did not yet have a functioning oil and gas exploration industry, said: “Look, we haven’t drilled a well yet, nor found a single barrel of oil. To be talking about terms and benefits is nice; it’s what we’re here for, but it’s premature.”

The BPC chief executive said the key question, as yet unanswered, was whether commercial quantities of extractable oil lay beneath Bahamian waters.

Implying that all discussion of potential earnings, and how these should be split, were moot until this was answered, Mr Potter told Tribune Business: “Let’s find out if there’s something there to get excited about.

“We’re excited, our investors are excited, but let’s see what’s there.” He declined, though, to comment on whether BPC would be prepared to alter its deal terms if proven commercial quantities of oil were found.

BPC’s existing commercial terms with the Government involve a ‘sliding scale’ of royalty fees, with the rates tied to production (the daily volume of oil, measured in per barrel terms) that is extracted from Bahamian waters.

The royalty rates range from a low of 12.5 per cent for 75,000 barrels per day to a peak of 25 per cent for 350,000 barrels per day or more, with a production licence granted for 30 years.

And BPC has also previously pointed out, using a market price of $80 per barrel of oil, that once production costs - equal to $40 or 50 per cent of this sum - were taken out, the remaining $40 would be split 50/50 between the company and the Government.

Despite the continual suggestions, from some quarters, that BPC obtained ‘to sweet a deal’ from the Government, Mr Potter said the incentives specified in the existing Petroleum Act had not been attractive enough to entice other oil explorers to the Bahamas until his company came along.

“Is it good, is it bad? It hasn’t been enough,” Mr Potter told Tribune Business. “No one has done meaningful work here for 25 years.

“Whether the royalty rates are enough, it hasn’t been good enough to promote the kind of activity seen from BPC and its shareholders.

“A great test to me of the investment environment is how much activity is being undertaken in that industry or sector,” he added.

“For the last 25 years, it’s not been enough to offset the risk/reward matrix to get companies to invest in the oil and gas industry of the Bahamas.”

Emphasising that BPC’s royalty rate structure was “30 per cent ahead of the Gulf of Mexico,” Mr Potter added: “The licences we were granted were consistent with the [Petroleum] Act and regulations.

“Our licences have more onerous conditions than in the Act, and are consistent with the licences granted to other companies who have not done anything, and have not spent the kind of dollars we have in the Bahamas. They came, saw and left.

“It’s intriguing that these licence terms have been enduring. The Act has been in existence since the 1970s, and our licence is in compliance with the Act, and licence terms are for more onerous than those defined in the Act.”

Emphasising that the Government was taking no financial risk or incurring any costs in relation to oil exploration activities in this nation, Mr Potter said revenues would start “accruing” to it from the day oil was discovered.

“The good thing for the Government is it comes off the top (revenues) and they get income from day one. It’s good from everyone’s point of view,” Mr Potter told Tribune Business. “Where does the risk lie? It lies with the oil company.”

BPC, he added, would have to finance, drill and construct its wells and facilities, and meet government-specified targets for doing so - all of which impacted potential shareholder returns.

Any oil-related revenues, Mr Potter added, could be used to diversify the Bahamian economy away from tourism and financial services; reduce its dependence on the US; create long-term jobs and spin-off opportunities; and generate educational opportunities.

As for comparing the Bahamas’ oil industry royalties to Trinidad, Mr Potter argued: “They’ve had oil production in Trinidad since the early 20th century. They’re one of the largest exporters of gas in the world, so that whole risk profile is completely different in Trinidad.

“The sector was last here in the Bahamas 25 years ago, so the whole risk - commercially and technically - is very different from that which pertains in Trinidad. Any comparison is not apples and oranges.”

Mr Potter said comments attributed to him at a London energy conference, where he described BPC’s commercial terms as ‘second to none’, had been taken out of context.

In the middle of selling BPC, and its activities, to existing and potential investors, Mr Potter implied that he had been lauding the virtues of the Bahamas’ investment regime - not suggesting that the company had been able to ‘put one over’ on the Government.

Pointing out that investors could easily switch capital to other oil exploration “hot zones”, the BPC chief said the Bahamas’ political stability between administrations plus the “integrity” of its legal and fiscal regimes, gave it a competitive advantage from a fiscal perspective.

And Mr Potter said his reference to the Privy Council, in response to an audience question, was not a threat to the Government if it decided to try and renegotiate the deal’s commercial parameters, but a move to provide reassurance on the Bahamian legal system’s ability to provide redress.