The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Petroleum Company (BPC) yesterday said its original agreement with the Government effectively gave this nation a 50/50 profit split if it discovered commercial quantities of oil, adding that its investors were putting “hundreds of millions of dollars” at risk.

Simon Potter indicated to Tribune Business that the financial deal, which would see BPC pay a sliding-scale of royalties between 12.5-25 per cent, depending on how much oil was recovered daily, was weighted in the Government’s favour given that the corporate world viewed royalties-based contracts as “regressive”.

While not commenting directly on demands from Bahamas Christian Council (BCC) leaders that this nation should receive 50 per cent of the profits from any oil discovery, Mr Potter said the current financial terms effectively provided for this.

“Once the company has paid to finance the development, then what is left is the free cash flow,” he told Tribune Business. “Fifty per cent of that goes to the Government, 50 per cent goes to the company.”

In previous presentations to numerous Bahamian society groups, including the BCC itself and its members, BPC has shown, using an $80 per barrel oil price as an example, that 50 per cent of that revenue – some $40 – would go to cover costs.

That would leave $40, or 50 per cent, left, which would be split 50/50 between the Government and BPC.

Referring to the royalty-based nature of BPC’s contract, Mr Potter added: “Royalties are what companies traditionally view as quite regressive, in the sense they are paid from day one on the first source, and do not recognise profitability or the fact it’s taken you several years to get here where your funds are placed at considerable risk.”

While royalties were seen as “a levy off the top”, meaning they were based on revenues, the BPC chief said the company was not complaining. “That’s not to colour it as bad,” he said of the company’s financial arrangements with the Government.

“It is what it is, and from our perspective we view a deal as a deal. We signed up to do some work within an established fiscal framework. The shareholders of BPC are prepared to put hundreds of millions of dollars at risk here, and the reward has to be commensurate with that level of financial risk. There’s not been a single well drilled in Bahamian waters for 25 years.”

Reverend Patrick Paul, head of the BCC’s economic committee, on Tuesday blasted BPC’s financial agreement with the Bahamas as “categorically unjust, injurious and unfair to the democracy of our nation”.

He alleged that 50 per cent of the profits from oil exploration be placed into a national Bahamian sovereign trust/wealth fund, separate from the Government’s Consolidated Fund, under the oversight of the Central Bank of the Bahamas.

While the BCC and National Citizen’s Committee were talking about such a fund paying an annual $100,000 dividend to every Bahamian family, the discussion seems a tad premature as it has yet to be confirmed whether commercial quantities of oil exist in the Bahamas.

Mr Potter declined to comment at all on the BCC and Committee comments, but it is understood BPC feels the same way, believing they are talking – at the moment – about how to divide zero. And 50 per cent of zero is the same as 25 per cent.

Earlier this week, though, Mr Potter said BPC had “become more confident” in recent months over its chances of discovering commercial quantities of oil in Bahamian waters.

Acknowledging that there was “no guarantees in life”, Mr Potter told Tribune Business that BPC believes its prospects of striking commercial quantities of oil in Bahamian waters was high - at least when compared to industry averages.

The 2011 Competent Persons Report, produced independently of BPC, placed the prospects of success in the Bahamas at about 20 per cent.

“People will look at one-fifth and say that is not very good, but for somewhere that hasn’t got commercial hydrocarbons [before], that’s pretty darn good,” Mr Potter told Tribune Business.

This newspaper understands that the oil industry normally puts its chances of discovering commercially viable quantities in areas where there is no history at between 5-10 per cent, so the Bahamas’ success prospects appear to be double the norm.

Referring to BPC’s prospects of success as “technical risks” (not environmental risks), Mr Potter added: “Have we become more confident about the outstanding technical risk? Yes, I’d say we’ve become more confident.

“From the 3D, you don’t spend $35 million and not expect to get something from it. The risks have come down from our perspective. From our assessment of the technical risks, we’re very confident of the technical work we’ve done, and have only improved on the initial work done on the 3D.”