Dear Editor,
The oil business is a risky one. It is always subject to asset maturity and also geopolitics. The proven, probable and possible reserves are always subject to revision; normally downwards. Even during the development phase, financials are normally reassessed. Tullow Oil’s CEO has quit after the company cut its production outlook and suspended the dividend. The change of perception about the commercial viability of their discoveries in Guyana has a lot to do with this outcome.
Regarding Exxon’s assets, the Guyanese government will not see profits from the offshore development in the short term because of the unfavourable way the business plan and the financial architecture was agreed. Realistically speaking, assuming a barrel at $50, a 2 per cent royalty, and including the gas profits into the financials at $2.8 per MMBTU, with an initial CAPEX of $4.5 billon exposed during the first five years for the first two phases, and up until the 220,000 B/D plateau is reached, the whole plan makes monetisation of Guyana’s proven oil and gas reserves most likely beyond the seven to nine-year window for Guyana to start receiving benefits.
Uncertainty analysis signals a likely scenario of unsustainable growth beyond the 9th year, due to a high possibility of increasing gas production and decreasing oil rate, which could have a detrimental impact on the total cash flow. The offshore Stabroek project has several intangibles which could easily harm the Net Present Value (NPV) profile. The economics have a number of yet “unrisked” assumptions with no firm technical basis to support it, such as the production plateau reach time and extent, the implication of accelerated production on formation damage and productivity decay, the environmental balancing costs, and the optimum exploitation plan not yet firmed up. Because of the lack of available local oil and gas expertise, the Field Development Plan and the Business plan haven’t been screened, reviewed, and really independently weighted by the Guyanese institutions. That’s why so many unexplained inconsistencies still prevail, such as the huge well costs difference between Liza Phase I and Liza Phase II. This is a clear inconsistency as the learning curve should ensure otherwise; costs reduction instead of cost increasing.
As per initial findings and even before the first drop of oil and bubble of gas have yet been produced, the government seems to be already committed to pay, somewhere between $850 to $950 million to Exxon in pre-contract costs. For the small Guyanese economy whose 2018 GDP was just a little over $3,000 million, it means a sizable 31+ per cent load exposure.
Considering the investment plan with over $4 to $6 billion in CAPEX, and the financial expectations of agreed 2 per cent royalty over the whole extracted volume of crude oil, plus a 50 per cent of the 25 per cent cut remaining after a gigantic 75 per cent Exxon take supposedly assigned to cost recovery, the NPV won’t be positive for the Guyana people in the near term but beyond the midterm, and only under the assumption of 100 per cent success rate, and full sustainable production growth, which sadly is seldom the case for most if not all green (immature) projects.
But in the very likely event that the assets require larger than expected CAPEX and larger than expected OPEX, the return for Guyana will potentially be delayed much further, bringing to the table the urgent need for a detailed review of the agreed field development and business plan, as well as the financial terms.
Yours faithfully,
Millan Arcia Einstein
