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August 01, 2006



Whilst it appears as though the Government of the Bahamas has decided to approve the LNG facility I wanted to weigh in with my two cents. I don’t wish to debate whether or not the same is safe but rather since such a decision has been made I want to ensure that we as a people receive our fair share.

One of the positive side effects may be that we are moving toward a real diversification of the Bahamian economy. To achieve this however the Government must be prepared to play hard ball and negotiate from a position of strength and not as it appears that we have done in the past, that being from a position of weakness where we have given away all manner of inducements because we are just so happy that a particular project is going to grace our country.

What appears to be the normal process when negotiating a Heads of Agreement is rather than extract a fitting price for the right to conduct business within our shores we put forward a figure that we think will not offend and then complain afterwards when it’s evident that the profits generated by the venture are exponentially higher than the yearly fees so much so that as a result we are made to look ludicrous. On closer examination and without the benefit of the empirical data it appears as though the golden egg about to be laid by LNG will be for all intents and purposes expatriated.

To avoid a repeat in this respect the financial benefits for the economy must be one that is reasonable and effectively displaces the risks that we assume. Specifically it is not enough to require a yearly rent but rather we must receive a percentage of the gross revenue as determined by an independent accounting firm.

Whilst we do not posses the natural resource, we are providing a base for the creation of that resource and therefore our negotiations must be analogous to those countries that posses fuel oils but lack the financial base to engage in self exploitation and therefore must allow multinational corporations to come in and harvest their supplies.
The business section of the Tribune on Friday quoted the Minister of State for Finance Hon. James Smith as stating ‘the potential ‘windfall’ from approving the AES liquefied natural gas (LNG) project and privatizing the Bahamas Telecommunications Company (BTC) could pretty much eliminate the projected $125 million GFS fiscal deficit if both events happened this year.’ He continued ‘That hypothetically if both projects were accomplished and the proceeds applied to the fiscal deficit other things being equal and the best case scenario achieved with no unplanned spending demands incurred they could cancel out the 2006-2007 deficit projected at about 1.9% of gross domestic product.’

Now this article is in an unassuming way provides extremely important information and I highly recommend it you. I say that because it makes two critical points which baffle and annoy me. The first is that it appears that with these negotiations it’s going to be business as usual on the part of the government and secondly and more importantly it presupposes on the part of AES that we in the Bahamas are a bunch of jack asses who would agree to just about anything and amount to nothing more than jungle bunnies.

In taking Minister James Smith’s statement I guess the latter point from above is true. The problem that I have with the statement by Minister Smith is that if it denotes the mind set of the government then we have lost the fight even before the battle begins.
I would expect any statements emanating from the Minister to be brimming with confidence heralding the dawn of a new day for the country. I never want to hear Minister Smith speak in terms that if all goes well we can erase the fiscal deficit but rather I want to hear that projected revenues from the LNG project will erase the fiscal deficit and actually help create a budget surplus, as well as allow us to reduce our national debt.
Now why is this possible? Taken from the words of AES’s own representative Aaron Samson the project manager for the Ocean Express plant he notes that government was guaranteed a $20 million revenue base. He further stated ‘that had the plant been operating in 2005 the government would have earned an extra $40 - $50 million in unbudgeted revenue that could have been used to stabilize other areas of the economy.’
This is because the LNG supplied by the plant is linked to the Henry Hub index meaning that once the price rises above $4.50 per unit base the sharing component included in the draft Heads of Agreement which has yet to be signed (thankfully) stipulates that 2.5% over and above the $4.50 base accrues to the government.
Ladies and gentlemen of the Bahamas if the government signs on to this at such a pathetic rate then we are indeed jack asses and deserve what ever morass in which we become embedded. Its simple mathematics and extrapolating the numbers using the lower end of the figures presented by Mr. Samson AES would have made an additional $1.6BILLION in PROFIT. Accordingly based on the statements credited to Mr. Samson, as a Bahamian I am to be happy that my country would have been able to apply a band-aid to a gaping wound thus steaming a miniscule flow of blood for a year.
Any Heads of Agreement better secure at least 20% of this index linked revenue which in and of itself is insufficient and in all honesty should be 40%. This latter figure would have still allowed AES to clear a little less than $1Billion in additional revenue but more importantly would have sent $640million to the public treasury.
I implore the Prime Minister to seek and extract all that he could. It is evident that AES desperately wants to be here after all how else can you explain a company with 30000 employees, whose revenue for fiscal year 2005 was a little over $11Billion which represented a 16.9% growth over the previous year, waiting patiently for four years whilst this government arrived at its decision which is five years after the Ingraham Administration gave its approval in principle.

The reasonable conclusion is that despite the lengthy delays the cost of doing business in the Bahamas is so much lower than elsewhere that it is well worth the wait. One can postulate as to why its cheaper in the Bahamas and some of the reasons surely must be that as we don’t fully understand the situation we are probably not going to require the level of security and oversight that Florida would. Another would of course be that they expect to sucker us for a measly 2.5%.

Well to hell with them if that’s how they feel and I honestly and sincerely hope that the government adopts a similar approach. This project represents a once in a lifetime opportunity for this country and when one is making a deal with the devil he only gets one shot so we have to make it count. With the price of crude oil today continuing to escalate there is little if any reason to believe that the unit price on LNG won’t continue to soar as well.

In looking at the typical way in which these contracts are negotiated I have noted that there are many methods but a few that seem to be utilized more often than not. In a paper entitled ‘Production sharing agreements: oil privatization by another name?’ by Greg Muttitt presented to the General Union of Oil Employees’ conference on privatization in Basrah, Iraq, 26 May 2005 he noted

‘One variant on the technical service contract is the buyback agreement, which has been used on some fields in Iran. In this system, a foreign company provides capital to invest in a project, but is paid a fixed rate of return, agreed in the contracts thus preventing excessive profits. Companies have a right to buy the oil or gas.

In the concession model, sometimes known as the tax and royalty system, the government grants a foreign company or more often, a consortium of foreign companies a license to extract oil, which becomes the company’s property to sell, transport or refine once extracted. The company pays the government taxes and royalties for the oil.
An extreme version of this system existed in Iraq until nationalization took place in 1961 and 1972. A relic of the colonial era, it gave companies ownership and control over all of the oil in the entire country, for a period of 75 years, and give the government minimal influence over development decisions, regulation or tax.

The favored system of the oil corporations is the production sharing agreement (PSA). This is a more complex system. In theory, the state has ultimate control over the oil, while a foreign company or consortium of companies extracts it under contract. In practice, however, the actions of the state are severely constrained by stipulations in the contract.
In a PSA, the foreign company provides the capital investment, first in exploration, then drilling and the construction of infrastructure. The first proportion of oil extracted is then allocated to the company, which uses oil sales to recoup its costs and capital investment – the oil used for this purpose is termed ‘cost oil’. There is usually a limit on what proportion of oil production in any year can count as cost oil (commonly 40-60%). Once costs have been recovered, the remaining ‘profit oil’ is divided between state and company in agreed proportions. The company is taxed on its profit oil. There may also be a royalty payable on all oil produced.
Sometimes the state also participates as a commercial partner in the contract, operating in joint venture with foreign oil companies as part of the consortium – in this case, the state provides its percentage share of capital investment, and directly receives the same percentage share of cost oil and profit oil. The foreign company’s share of the profit oil is then subdivided according to the production sharing terms.

Many of these systems are extremely complex, and often ‘the devil is in the detail’: it is more the precise terms of any legal agreement or contract that determine the balance of control and revenues between the state and foreign companies, rather than which type of model is employed.

Even mainstream commentators admit that the difference between PSAs and concessions is more about giving the appearance of state control, than about any practical implications. Daniel Johnston, a recognized industry expert on PSAs, comments.’

Now I want the Bahamas to of course be safe for my children and grand children and would expect that the most stringent security measures would be put in place.

I also want a Bahamas that is capable of sustaining itself and supplying the needs of the people.

That does not mean that I dont appreciate the concerns of the environmentalists I do therefore the strict controls but I honestly feel that the opportunity to diversify the economy is one that cant be passed up.

I will speak more of the security aspects in my column in the Nassau Guardian on Monday



In the beginning I was willing to look at the LNG question in terms of the disastrous effects that it could have on the natural environment as well as the increased risks to our country due to the terrorist threat that it posed.

I’m still somewhat skeptical of the ability of this or any government to hold the line and insist that the AES Corporation deploy the latest technology and security measures to ensure that this facility is not only state of the art but has a secured perimeter that satisfies even Sam Duncombe and ReEarth.

I have become a major proponent of the LNG facility being put here because of the enormous effect that this can have on the Bahamian economy and by extension the quality of life for Bahamians.

In life you are lucky to be presented with a golden opportunity that can with one stroke of the pen change life as you know it. The government’s approval of LNG presents us with such an opportunity. As a service based economy overly dependent on tourism we will for the first time in our history be able to change the equation.

I realize that these words must make some think that I have gone stark raven mad but I can assure you that nothing can be further from the truth. Before I proceed let me make it clear that I am using as a basis for this argument the Draft Heads of Agreement that is presently before the government as presented by AES Corporation. Of course I have also stated that we would be the monumental jack asses they assume us to be if we approve this agreement as is.
In my piece that appeared on July 31st I stated ‘Taken from the words of AES’s own representative Aaron Samson the project manager for the Ocean Express plant he notes that government was guaranteed a $20 million revenue base. He further stated ‘that had the plant been operating in 2005 the government would have earned an extra $40 - $50 million in unbudgeted revenue that could have been used to stabilize other areas of the economy.’
This is because the LNG supplied by the plant is linked to the Henry Hub index meaning that once the price rises above $4.50 per unit base the sharing component included in the draft Heads of Agreement which has yet to be signed (thankfully) stipulates that 2.5% over and above the $4.50 base accrues to the government.’
Now what seems apparently clear to me is that at the time the draft Heads Of Agreement was presented to the government the AES Corporation themselves did not accurately predict future oil prices. I can’t say exactly when this would have been presented to Cabinet but the logical assumption would be that it was either contemporaneous with the granting of approval in principle by the Ingraham Administration or soon after the Christie Administration took over. The spot prices for LNG would have ranged anywhere from just under $2 to $3 in the latter part of 2001 and most of 2002.

In my opinion AES would have suggested a Henry Hub Index Linked price of $4.50 as being the basis where additional revenue would be realized by the government as AES themselves didn’t envision as I noted above the steep and rapid escalation in the base unit price. In ‘The Price of Wind’ an article by Charles W. Kleekamp which appeared in Cape Cod Today on March 14th 2005 he noted ‘The price of natural gas has tripled from $2 a unit a million BTUs to over $6. And that is the fuel of choice for all the new power plants in New England. Soon we will need to build additional unloading facilities to import more liquefied natural gas (LNG) from the same friendly folks. The age of cheap oil and gas is over.’ When published Mr. Kleekamp would have been speaking about the previous four years, the Natural Gas Weekly Update stated on Thursday, August 17 2006 ‘Since Wednesday, August 9, natural gas spot prices decreased at most market locations in the Lower 48 States. On Wednesday, August 16, prices at the Henry Hub averaged $7.02 per MMBtu, decreasing 57 cents per MMBtu, or about 7.5 percent, since the previous Wednesday.’
I have yet to explain the basis of my bold assertion but it was important that I first set up the price structure of LNG. According to statistics furnished by the Bahamas Government the grand total of all revenue which is comprised of Tax revenue, Non-Tax revenue and Capital revenue was $964,985,970.00(actual) in 98/99; $1,035,507,580.00(actual) in 99/00; $1,031,750,622.00(provisional) in 00/01; $1,082,501,407.00(provisional) in 01/02; $1,137,047,873.00(provisional) in 02/03; $1,260,578,896(provisional) in 03/04; and $1,379,121,033.00(provisional) in 04/05.
What these figures show is that the country generates less than $1.5Billion per annum and based on our current expenditure we will continue to run a budget deficit for the near future.
Now I also showed that based on the statements of Mr. Samson of AES and using the Draft Heads of Agreement although the Government would have realized an additional $40 million in unbudgeted revenue when the figures are extrapolated AES would have realized an additional $1.6Billion in revenue.
Accordingly we can change the way of life in this country through the simple process of negotiation. Of this $1.6Billion we have to get a larger share and I have put forward that 40% would be an optimal figure. Even if as a country we realized only 25% that would mean $400million in un-budgeted revenue.
Our failure as a country to approve this plant has meant that we have lost a great opportunity. As the Heads of Agreement is not yet in place I’m sure that AES will insist that the Henry Hub linked price now exceed $4.50. What ever price is finally agreed and whatever the percentage of the shared revenue we receive is what we can use to determine if this government possesses ability and foresight to determine the interests of the nation.
I accept that the $4.50price may no longer be feasible based on the additional costs in constructing the facility. What I can’t agree with though is the Henry Hub now being linked to the current prices quoted. What seems reasonable as a linked price of somewhere around $5.25.
The type of money that can be generated for the benefit of the Bahamas is at present unimaginable. This money can be used to immediately upgrade our physical infrastructure; payoff national debt; improve education; provide real opportunities for small businessmen and countless other uses.
To Prime Minister Christie I say lets get a deal done and soon and one which you can use to ensure your legacy in the annals of Bahamian History.

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