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ExxonMobil loses key case in Guyana oil controversy over insurance

May 22, 2023
Tom Sanzillo

Key Findings

A recent decision in Guyana rejected ExxonMobil’s attempt to dilute its commitment to bear all costs for any future oil spills at its offshore operations.

The agreements between Guyana, ExxonMobil, and its partners work in favor of ExxonMobil: Although it is liable for costs related to damage from drilling, costs of insurance can be passed to Guyanese taxpayers.

The Guyana lawsuits highlight the Guyanese government’s aggressive corner-cutting to provide incentives to ExxonMobil: The judge called the government’s behavior derelict, pliant and submissive.

Without a parent company guarantee, Guyana risks economic decimation if left to pick up the bill for an oil spill from Esso’s operations.

A recent decision in Guyana rejected ExxonMobil’s and the government of Guyana’s attempt to dilute the company’s written commitment to guarantee that it is obligated to bear all costs to clean up any future oil spill at its offshore operations. The decision lays bare the risks of the Liza 1 project to ExxonMobil’s investors, the people and businesses of Guyana, and the stability of the Caribbean regional economy.

The operator of the offshore project, Esso Exploration and Production Guyana Limited (EEPGL), and its partners CNOOC and Hess, have an agreement with the Guyanese government that allows Esso to drill and pump oil and gas at Guyanese offshore sites. The environmental permit for the Liza 1 project requires the consortium to provide insurance for all costs for clean-up, remediation and damage from an oil spill, plus an unlimited guarantee from ExxonMobil, the parent company of Esso, for everything not covered by the insurance.

In the case Collins, Whyte v. Environmental Protection Agency and EEPGL, Judge Sandil Kissoon ruled the consortium is not meeting the permit’s requirements. In effect, ExxonMobil is drilling in violation of its permit, and Guyana environmental regulators are not enforcing the insurance terms. The judge strongly criticized the ExxonMobil-led consortium and the government of Guyana.

If an oil spill or other catastrophic event occurred without a full and unlimited guarantee by the parent company—in this case, ExxonMobil—the court found that “the State is liable for all that occurs.”

No doubt, the court recalled the $70 billion in damages caused by BP’s catastrophic 2010 Deepwater Horizon spill in the Gulf of Mexico. But the issue is critically important in the Caribbean, as well. Islands located within the path of a potential oil spill from the Guyana project produce more than $140 billion of economic activity annually, largely based on the maritime and tourism sectors.

ExxonMobil has asked for a stay of the proceedings while it appeals the decision. The plaintiffs, however, said any delay in meeting the insurance requirement would allow the consortium to continue operating without the required insurance. “Every day in which Esso operates without the financial assurance is a day in which Guyana could be liable for billions of dollars,”  they argued.

IEEFA has reviewed the agreements between Guyana and ExxonMobil and its partners. Our work finds the agreement provides a profit take that tilts in favor of ExxonMobil and its partners. Although ExxonMobil is liable for any costs related to damage from the drilling, the costs of insurance can be passed along to the Guyanese taxpayer.

It also is unclear why ExxonMobil, the world’s leading private oil company with a market capitalization of $429 billion, would have hesitated to provide full insurance against any potential catastrophe. The permit is in the name of its subsidiary. And it remains unclear why the Guyanese government is not enforcing the environmental permit to obtain the guarantee, especially given that it is signed by the consortium’s president in return for permission to operate. It is part of the terms of the permit, an acknowledged cost of doing business and cannot be viewed as a new, unforeseen cost to ExxonMobil.

Published reports suggest that the liability issue is well known and well understood by all the parties. According to an unpublished 2021 IHSMarkit audit, none of the parties to the agreement with Guyana—Exxon, Hess or CNOOC—had provided evidence of coverage. The breach of the permit was raised in the audit at least two years ago.

The company’s recent defense is that it already has several layers of insurance that more than cover any credible costs. According to published reports, the coverage amounts to more than $20 billion. Exxon claims local affiliates have $19 billion in assets, and additional insurance provides another $600 million and an additional $2 billion parent guarantee.

The judge in the suit, however, described Esso as an “assetless” subsidiary.

It appears that Esso expects its partners to provide an unlimited guarantee, backed by a pledge of their assets. The lack of transparency and the failure to complete and release the IHSMarkit audit in a timely and responsible manner may have contributed to an overly optimistic picture of the business risks facing the consortium and its partners.  

One of the more significant problems that the lawsuit unearthed is the record of poor transparency that has plagued the project from its inception. The judge’s order calls out Esso and the EPA for their seeming unwillingness to fully and completely disclose the details of the insurance arrangement:

“The Agency sought refuge in silence, avoidance, concealment and secrecy notwithstanding the grave potential danger and consequences to the State and citizens if an event occurred at the Liza Phase 1 Petroleum Production facilities in the Stabroek Offshore Guyana in absence of such financial assurances mandated by the Environmental Permit …”

According to press accounts, ExxonMobil’s stock took a $10 hit, falling almost 12 percent, in the two weeks after the announcement of the court’s decision. The consortium’s president said if the company cannot comply with the judge’s order, it could lose as much as $350 million per month.

In ExxonMobil’s recent response to two shareholder resolutions asking for better reporting on environmental litigation and oil spill plans, the company called the Guyana lawsuits meritless. This statement was written after the company had lost an earlier lawsuit in Guyana and as the recently decided insurance case was pending.

These are hardly meritless claims. They highlight the Guyanese government’s aggressive corner-cutting to provide incentives to ExxonMobil. The Guyanese enforcement of the matter has been lax.

The judge called the government’s behavior derelict, pliant and submissive.

ExxonMobil has been informing its investors that Guyana and the Permian are rapidly growing assets. Given consortium’s concerns about potential monthly losses if the company cannot comply with the insurance requirement, the ruling makes one wonder if its business model is actually profitable in Guyana if the terms of the permit are enforced, despite the many advantageous terms of the contract.

In the wake of the judge’s decision, eyes are now focused on the Guyanese government’s enforcement actions. The government faces an institutional conflict between the revenue it receives from oil extraction and the health and safety of its people. In this instance, the government has no choice. A court order has to be obeyed. But it is disturbing that the country’s officials are taking Esso’s side against the judiciary and the people of Guyana. A government that is prepared to bend the rules in favor of one company is a weak and unstable government.

The economic risks to Guyana are clear. ExxonMobil has the resources to clean up a spill. Guyana does not. Without a parent company guarantee, Guyana risks economic decimation if left to pick up the bill for an oil spill from Esso’s operations. Trying to dismiss this as “environmental” litigation will no longer work.

This is about the economy and the money—not the environment.

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

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