Even as the company plugs most of its US$3 billion capital and exploratory expenditures into its Guyana operations, Stabroek Block partner Hess, yesterday brushed off concerns about a possible renegotiation of the Production Sharing Agreement (PSA) that it has, along with ExxonMobil and CNOOC, with Guyana saying both government and opposition have signalled they will not renegotiate.
“Most of the news that you hear is not from reliable sources, neither the current government nor opposition government. I think they both have been pretty clear that they’re going to honour the PSC [PSA]. So I think that’s the real takeaway you should have,” Hess CEO and Director John Hess said yesterday.
He was at the time responding to a question from Barclays Bank PLC, Research Division-Research Analyst, Jeanine Wai, during the company’s Q4 2019 Earnings Conference Call, on recent headlines here about the potential for a contract renegotiation.
The PSA between Guyana and ExxonMobil’s affiliate, Esso Exploration and Production Guyana Limited (EEPGL), and partners CNOOC, NEXEN Petroleum Guyana Limited, and Hess Guyana, states that up to 75% of the revenue earned from production could be used for expenses and to recover the companies’ investment. This was estimated at US$5 billion by the year 2020, when production was estimated to begin at the Liza-1 well. The remaining 25% – profit oil – is to be split evenly between Guyana and ExxonMobil.
EEPGL holds 45% interest in the Stabroek Block while Hess Guyana Exploration Ltd has 30% and CNOOC Petroleum Guyana Limited holds the remaining 25%.
On Sunday last, the Stabroek News reported that former Petroleum Adviser to the President, Dr Jan Mangal, said that ExxonMobil’s Payara oil well development should not be approved until it yields big changes to the much-criticised 2016 deal including a higher royalty rate than the current 2%.
Mangal believes that while ExxonMobil has been adamant that changes cannot be made to the PSA, the fact that the Environmental Protection Agency (EPA) has been able to secure unlimited liability insurance coverage for accidents and spills and ensure it has unfettered access to offshore operations, is demonstrative that the company will give in to what it wants.
“We are seeing EPA announce small wins because those are easy. Exxon hasn’t given up much, and that is, Exxon gave what it wanted. These small wins, these are easy things for Exxon. We know that we are making progress when we can get the big wins; the increased royalty, a new contract that doesn’t have a stability clause… a generally fairer contract overall,” Mangal had told the Sunday Stabroek.
“To get those big wins, we need to get Exxon and partners to the renegotiation table and we have to play hardball. We should not have approved Liza-2 and we should not now approve Payara. We are giving in to Exxon too easily. If we wait, say even in another five years’ time, it will be very difficult, far more difficult to renegotiate,” he added.
But like ExxonMobil, Hess yesterday said that it is not worried about a push for renegotiation as both government and the opposition have signalled their intentions to keep the PSA as is.
‘Cash engines’
At yesterday’s Earnings Call, Hess was represented by Chief Executive Officer, John Hess; Chief Operating Officer, Greg Hill; and Chief Financial Officer, John Rielly.
As he played up Guyana, the CEO boasted that the company had an outstanding year in terms of operational performance and continued execution of its long-term strategy, achieving a number of important milestones in delivering higher production and lower capital exploratory expenditures than its original guidance.
“With Guyana and the Bakken as our growth engines and Malaysia and the deep-water Gulf of Mexico as our cash engines, our portfolio is on track to deliver increasing and strong financial returns, visible and low-risk production growth and industry-leading cash flow growth. It is important to note that both Guyana and the Bakken will become significant cash generators over the next several years. As we have stated in our investor presentations, where we provide a financial outlook through 2025, our portfolio is positioned to generate approximately 20% compound annual cash flow growth and more than 10% compound annual production growth, and our portfolio breakeven is projected to decrease to below $40 per barrel Brent by 2025. As our free cash flow grows, we will prioritise return of capital to shareholders, both in terms of dividends and opportunistic share repurchases. Another key element of our strategy is maintaining a strong balance sheet and liquidity position and managing risk,” he said.
He further added, “Turning to Guyana, where Hess has a 30% interest in the Stabroek Block and ExxonMobil is the operator, 2019 was an outstanding year in terms of both exploration and developments. On December 20, the Liza Phase 1 development achieved first production and is expected to reach its full capacity of 120,000 gross barrels of oil per day in the coming months. We recognise this pivotal moment in Guyana’s history and are committed to working collaboratively with the government, our partners and the people of Guyana to build a safe and sustainable industry that fulfills the promise of shared prosperity.”
Hess informed that the second Floating Production, Storage and Offloading Vessel or FPSO, is under construction for the second phase of Liza development. It is expected to start production in Guyana by mid-2022 with a production capacity of 220,000 gross barrels of oil per day.
Front-end engineering design for a third FPSO, the Prosperity, is underway to develop the Payara field, pending government approvals and project sanctioning.
‘Banner year’
And pending approvals from government here, Hess said that production from Payara could start as early as 2023, reaching an estimated 220,000 gross barrels of oil per day.
“From an exploration perspective, 2019 was a banner year with 5 new discoveries at Tilapia, Yellowtail, Triple Tail and Mako. On Monday, we announced an increase in the estimate of gross discovered recoverable resources for the Stabroek block to more than 8 billion barrels of oil equivalent. We continue to see multibillion barrels of exploration potential remaining. We also announced a significant oil discovery at Uaru, marking the 16th discovery on the Stabroek block. The Uaru discovery will be incremental to the new resources estimate,” the CEO explained.
The company’s Chief Operations Officer, Gregory P Hill echoed most of what Hess said as he called the continuing growth of the resource base on the block, “truly remarkable.”
He announced that after the Noble Tom Madden completes the evaluation of the Uaru discovery, the drillship will move to development drilling for Liza Phase 2. The Stena Carron, he said, is currently engaged in a well test at the Yellowtail discovery, after which it will drill and test the Yellowtail-2 appraisal well. After completing the evaluation programme for Mako-1, the Noble Don Taylor will next drill and test the Longtail-2 appraisal well.
The Noble Bob Douglas will continue drilling development wells.
He said that ExxonMobil plans to bring in a fifth drillship later this year and the company expects the first half of 2020 to be dominated by appraisal activities, primarily in the greater Turbot area.
In the second half of the year, they plan to drill several new exploration wells, including some that will test the emerging deeper plays on the Stabroek Block.
And while the company had said that its estimate had been under-budgeted from the US$4.4 billion to US$3.7 billion that sum also went down by a further US$200 million, pegging it now at US$3.5 billion.
“Turning now to our Guyana developments. On December 20, production commenced from the Liza Phase 1 development, less than five years after the discovery of hydrocarbons and well ahead of the industry average for deep-water developments. The project also came in under budget. At sanction, Liza Phase 1 was budgeted at (US)$4.4 billion gross, including the purchase of the FPSO. We now expect the gross cost for the development to be approximately (US)$3.5 billion or 21% below the sanctioned estimate. Liza Phase 1 production continues to ramp up. Current gross production is approximately 75,000 barrels of oil per day from 3 of the 5 producers available at start-up,” Hill said.
“Production is expected to reach the FPSO’s capacity of 120,000 barrels of oil per day in the coming months. For the full year 2020, we forecast our net production to average approximately 25,000 barrels of oil per day. The Liza Phase 2 development is progressing to plan. On January 13, the hull for the Liza Unity FPSO, which will have a capacity of 22200 and 20,000 barrels of oil per day arrived at the Keppel Yard in Singapore. Construction of all 13 deck modules is currently underway. Meanwhile, in Guyana, installation of subsea flow lines and equipment is underway and development drilling is expected to begin next month. We continue to forecast first oil by mid-2022. Pending government approvals and project sanctioning, a third development at Payara is planned to utilise an FPSO with a gross production capacity of 220,000 barrels of oil per day with first oil as early as 2023,” he added.
