ExxonMobil will take the first three liftings of crude oil from the country’s huge offshore deposits and Guyana will receive its share in its ground-breaking petroleum endeavour beginning around March next year.
While payment for its first portion from the Stabroek Block is therefore some months away, Guyana will immediately begin receiving the 2% royalty from the inaugural lifting.
Projecting oil lifting volumes offshore at 1 M barrels intervals, Director of the Department of Energy (DoE) Dr Mark Bynoe yesterday assured that this country will have measures in place such as offshore third-party verification of quantities. It will also retain a marketing firm to sell its oil by the time of the first lift. The government and the DoE have been flayed for the sloth in putting arrangements in place for first oil considering the major offshore find in May of 2015. Key legislation such as that for the proposed Petroleum Commission and Local Content Policy are still to be passed amid a political and legislative impasse.
While the inaugural lift is expected one month after first oil potentially in December, this country will wait until the fourth lift, projected in February or March next year, for its share. And following terms of the agreement pertaining to cost oil recovery and contained in a crude lifting agreement, Guyana will sell its share through an international marketing firm directly from the vessel using a Free on Board (FOB) arrangement.
“Should first oil be realized in 2019, the first lift is not expected (until) about one month after, all other things being equal, Guyana’s crude is expected to be sold FOB…government, through a marketing agent is projected to sell its share of exported crude on a fee per barrel basis,” Bynoe yesterday told a press conference he hosted at the National Communications Network studio, Georgetown.
A crude oil lifting agreement should be finalized sometime this week and according to Bynoe will specify the mechanism for allocating the schedule of cargo liftings, based upon entitlements and calculated taking into account the cost recovery rules of the petroleum agreement. “It lays out the strict procedures for the efficient crude lifting”, he said.
“When we speak about a lift all we are speaking about is the taking of oil from the FPSO (Floating Production, Storage and Offloading platform) and transferring to the transporting vessel. Guyana’s share is not expected until late February or maybe March. The reason for that is that the first lift is going to take about a month for the FPSO to be filled. When you reach peak (production) you would have more rapid lifts,” he explained.
Guyana’s much-criticised 2016 Production Sharing Agreement with ExxonMobil subsidiary, EEPGL allows up to 75% of oil to be assigned to cost recovery with the remaining 25% as profit oil to be divided equally between Georgetown and EEPGL. Before the deduction of cost oil, Guyana is to receive a 2% royalty on the oil extracted.
ExxonMobil – which is partnering with Hess and CNOOC Nexen in the Stabroek Block – last week said that if first oil is next month, then it projects peak production to be around March where some 120,000 barrels of oil per day will be pumped from the Liza 1 wells to the FPSO.
Bynoe said that a decision was taken to allow ExxonMobil to receive the first lift of crude and he explained why the decision was taken.
Impurities
“ExxonMobil is not only a lifter, they are not only the operator, but they also have refineries. My understanding is the first lift often comes with a fair amount of impurities. Impurities in your crude can affect the price that you get for that crude, which would not only impact that batch but it could impact subsequent batches,” he posited.
“So it would make sense for Exxon to take that first lift, which it will then process within its refineries, so that the quality of the crude or the integrity of the crude can be preserved going forward,” he added.
Oversight of the process is catered for as Bynoe noted that it was government’s desire for transparency.
“It is the government’s desire to be pursuing a third-party verifier on the FPSO. So even outside of what is stated within the Crude Lifting Agreement, to be able to preserve the integrity of the system and also to reduce potential value leakage is for us to have someone who could verify so in the event there is any issue when the fuel is shipped, whether quality or quantity-wise, we will be able to have our own evidence to push back against that,” he said.
Hedging
And when the time comes to sell its share of oil, Bynoe said that it will be done through advice from the marketing firm it hires but government will not be hedging sales. “Guyana did have some experiences with hedging in the gold sector which didn’t work out so well for us so we would be cautious about going into hedging at this stage,” he said.
A consultant that will be responsible for the procuring of a marketing firm has already been hired and Bynoe said that since he could not remember her name at the time, he will make it public soon.
Back in May of this year, government had advertised for consulting services to provide guidance on selling Guyana’s share of crude oil.
The DoE had said that the objective of the assignment is for the consultant to provide advisory services and technical support towards the establishment of a crude oil marketing function which would cover “all aspects of crude marketing and logistics of crude oil produced in Guyana, together with preparation of competitive tenders for such marketing.”
According to the terms of reference, the consultant’s duties would include the provision of views on world crude markets (volumes forecast and price estimates by regions) and, more specifically, the US Gulf Coast and Asian markets.
It also includes advising on the best crude marketing strategy for government’s share of lifted crude oil resulting from its production sharing contract(s), based upon the criterion on maximizing government revenues, highlighting the pros and cons of: single seller or agent versus multiple sellers; single market or a variety of markets; a fee per barrel of oil marketing arrangement based on spot sales versus longer term sales to a specific buyer; FOB crude oil sales versus CIF sales or a mixed FOB/CIF sales portfolio including shipping; as well as long-term versus medium-term versus short-term sales or a mix thereof.
Further, the consultant has to provide advice on the possible pricing formulas potentially achievable for each category of possible sales (destination, duration); spot references for European sales; Latin America, Africa and Asia sales; and long term price formulas.
Optimal marketing
Additionally, the consultant will have to provide advice on the optimal marketing strategy to create a benchmark crude premium for Guyana’s crude and develop a risk management strategy to include pricing objectives; approved contractual and financial instruments; risk exposure limits; counterparty credit limits; and hedging policy.
The consultant’s duties will also include providing advice on comparative economics of domestic use of crude oil compared to international markets and how to maximize government revenue from crude oil sales. He or she would also have to define the organisational requirements for Guyana’s crude oil marketing function including business processes; staffing and skills requirements; internal procedures and approval processes; budget resources; data requirements; monitoring and reporting requirements and provide a pragmatic timeline to achieve an operational crude oil marketing function.
The consultant’s work will be carried out over 90 days per year (in the first year) of which at least 60 days will be spent in Guyana. The consultant will make an inception visit of at least three weeks to formulate work programmes, perform initial training, and support urgent commercial decisions facing the DoE. Subsequent visits will be for at least two weeks in duration.
Bynoe said that even as Guyana awaits sales revenue from its share of oil, it will be collecting on the 2% royalty according to the terms of the Production Sharing Agreement with ExxonMobil and partners.
“It means for the average man that it is not different from any other investment. It will take time for us to see all benefits we all dream of. Yes you hear Guyana can become a Qatar [but] Qatar did not get it where it is overnight. It took years for them to get there,” he said.
