According to Pedro Haas, Director of Advisory Services at Hartree Partners who was tasked with carrying out a feasibility study for an oil refinery in Guyana, the cost to construct such a facility would be some US$5 billion, and would see at least half the invested amount lost upon commissioning.
Presenting the findings of the study last evening at the Marian Academy auditorium to a few hundred attendees, Haas explained that building an oil refinery would be a very risky investment which would require a vast amount of capital. The refinery question has arisen in light of ExxonMobil’s plans to begin pumping oil from its Liza well around 2020.
Haas explained that when calculating the cost to build refineries, the industry’s jargon represents it as a cash amount per barrel of oil. “For many years, refinery cost to build was about US$10,000 to a barrel and then it changed and rose to about US$20,000 and about today it could be up to US$25,000”, he observed.
As such, he pointed out that when calculating the cost for the refinery here, the latter figure was used. Initially the company started out their calculations based on a 250,000 barrel per day refinery, but had to scale it down to a 100,000 barrel per day refinery. Additionally, because the company was only exposed to data from 2013, it had to factor in an inflation adjustment for the present, along with adjustments for the location since there would be a need for new infrastructural facilities and other ancillary facilities to support and run alongside a refinery.
“You can make various assumptions but we’ve made a range of assumptions and finally that gives you the cost of a grass-roots, 100,000 barrel per day, cracking refinery and we ended up with a total grass-roots cost in the neighbourhood of US$5 billion. It’s a large amount of money,” Haas told the gathering last evening.
According to the analysis, the base case for the 100,000 barrel-per-day new refinery would result in a negative rate of return to the tune of US$3 billion. “Now that is a very significant number because if you remember the total investment is US$5 billion. That means you are destroying over half the value of your investment the day you commission your refinery. It’s a very significant value destruction impact and of course, the maximum debt leverage is very, very small,” he pointed out.
When asked whether the project was a viable option, Haas said, “You saw the numbers, they are pretty definitive… the numbers are so negative it becomes very, very difficult.”
Normally, a project of this sort would, in a profitable environment, be able to leverage somewhere between 60%-70% of investment. However, Haas pointed out the government would only be able to finance 15%. “…So it is mostly equity capital that has to finance this,” Haas added.
Explaining that the model that was used to calculate the figures is flexible and could be adjusted, Haas pointed out that the Group made a change on the optimistic and pessimistic side of the spectrum but were still being presented with a large figure of negative return.
Preparing for questions on how other refineries are making money while a new oil refinery in Guyana would immediately lose more than half of its investment, Haas explained that the fact that there is no supplementary infrastructure to support an oil refinery is a major contributing factor to the investment not working out.
“Building and operating refineries is a risk proposition. It’s a very capital expensive proposition and we think we’ve tried to assess what a reasonable ballpark figure for capital cost, operating cost, refining margin is and to give the Ministry and yourselves a sense of what the broad parameters are,” Haas highlighted.
However, Haas pointed out that the oil refinery was not the only option that Guyana could use to take full advantage of its pending oil wealth. One of the options that Haas explored and reasoned with the gathering last night was the possibility of “becoming very skilled at international trade of crude products.” He said that the country could explore the possibility of selling and buying crude at an appropriate economic price and ensuring that the market price for both sales and purchases are maintained.
There is also the possibility of swapping the crude oil for oil products at a predefined exchange rate or entering into a tolling agreement or processing deal. “You can reach an agreement with a refinery and you agree to pay a certain fee per barrel and you have a certain slate of products you are going to obtain as a result of that process. It is something that is done every day in the oil market,” he explained.
Another option that Haas explained was that of using the proposed Sovereign Wealth Fund to invest in oil companies’ stocks. “Essentially you would be protected. Let’s say the price of crude went down and the products went up, you could compensate that by having stock in a company and receiving dividends,” Haas highlighted.
After the presentation, Haas fielded questions from the floor where various persons queried the viability of scaling down the refinery in size, which Haas said would not be a viable option.
“If you scale it down… If you have a very high infrastructural cost, the fact that you scaled down hurts the project instead of helping it. Because you are going to have to build docks, you are going to have to build tanks. You are going to have to build water treatment. You are going to have to build an energy facility to supply power. You are going to need steam. You are going to need all sort of ancillary facilities around the refinery to make the refinery viable. The problem you have with these massive investments is that the cost of building a refinery and the cost of building the infrastructure is not necessarily proportional. The bigger you build it the lower the unit cost,” Haas further explained.
After the presentation, Minister of Natural Resources Raphael Trotman said that the government would have to do further deliberations on the findings in order to determine the way forward. “Government asked a question and we’ve got an answer but now we have to superimpose on that some political and other considerations. There are refineries in other parts of the world which may not be turning an economic profit but are providing other benefits,” Trotman said, while explaining that the findings will be taken and discussed at the cabinet subcommittee and they will also discuss it with the operators and have it opened to scrutiny by other experts.
