When countries have oil and gas resources, they typically sign Production Sharing Agreements (“PSA”) with foreign oil companies (in this article called “FOC”) for exploration and development of those resources. There are certain basic characteristics in PSAs, that ensure that the country with the oil and gas resource and the FOC mutually benefit from the relationship. The PSA that our Government signed with GPG on 31st March 2008 departed significantly from these basic characteristics, so that it was heavily one-sided in favour of GPG.
The FOC is usually a financially sound company with vast experience in commercial petroleum exploration and development. ExxonMobil, BP, Shell, Sinopec, Total SA, Phillips and Lukoil are among the top FOCs in the world. GPG is a locally formed company, set up on 11th December 2003, for the sole purpose of entering into the oil and gas agreements with our Government. Therefore, at the time of signing the PSA with our government, GPG had absolutely no experience, expertise or history in the petroleum industry.
It also turned out that GPG lacked the financial means to undertake exploration and development. It did not come up with the upfront payments it was required to make under the agreements with Government. The first US$2.5m, it borrowed from an individual, Lev Model. The second sum of US$10m to be paid within one (1) month of signing the PSA, it did not pay. Instead, our Government decided to accept a “comfort letter”. This US$10m was supposed to represent GPG’s minimum exploration expenses. The failure of GPG to come up with this sum was early proof that it lacked the means to carry out its obligations under the PSA. Yet, Bowen and Mitchell recklessly persisted. Was there something in this deal for them and the NNP?
The Government of Grenada is the ONLY country to have signed a PSA with GPG since its formation in 2003. Why Government chose to sign a PSA with GPG instead of seeking a relationship with one of the more experienced, financially sound, reputable FOC remains a mystery. The mystery is compounded by the fact that the PSA was signed against the advice of our legal experts.
Under usual PSA terms, the country remains the owner of all the resources and the FOC is entitled to a share of the production. The FOC is also entitled to recover its operating costs. Sometimes PSAs give governments an option to bear some of the operating costs. It is not usually compulsory for governments to do so. It is their choice as owner of the resource.