Dear Editor,
The Sunday Stabroek of April 26 published a column titled; “Guyana’s infant Oil & Gas Sector, the 2020 General Crisis and the just-ended one-month oil price war”. In this article, the April 12 OPEC agreement is addressed as the “savior” for the so called general (oil market) crisis, when on the contrary, the overall entropy in the oil sector is far from over. The general crisis hasn’t ended yet, and on the contrary, it threatens to be more pronounced, deeper, and last much longer.
Facts suggest that the crisis is just beginning. New variables have shown face recently, like negative West Texas Intermediate (WTI) prices, and a number of assets being closed; particularly offshore assets, as for the case of the 62 offshore platforms been shut down in Brazil [https://seekingalpha.com/news/3561297-petrobras-to-shut-down-62-brazil-offshore-oil-platforms]. In the US, since early March over 300 rigs dedicated to oil development have been demobilized, bringing the total number of active oil rigs back to 2016 levels, when oil production was only 8,500,000 BPD. At this pace US production could soon fall below 10,000,000 BPD, and lose over 250,000 jobs. This latest is, under our perspective, the ultimate purpose of the “general crisis”; to turn the US into a net consumer. To turn marginal and uneconomic most if not all of the offshore and unconventional oil developments.
Since the very beginning this entire crisis is not accidental, and not fortuitous. The main motivation has been driven by market share; particularly Asian market share. A market share which has been taken progressively by the US on behalf of sanctions, to some OPEC producers like Venezuela, Libya, and Iran. Coupling to this general crisis, the pandemic arrived to intensify the effects of the pre-existing global glut by differentially decelerating major economies.
As of now, the whole effect of this deceleration hasn’t yet fully reflected its effects on the most economies; hence on most markets. Most Central banks have been acting very mildly bailing out a number of corporations, most of them linked to mass transportation. But at the same time, most major economies in their desperation to revive their economies are falling into the error of downplaying the danger, and extent of the pandemic, and the very likely scenario of a resurgence in even larger proportions. When the sum of all of these elements bloom and hit the ground, the shockwave will be actually felt in its whole intensity, and particularly in the energy sector and the OECD countries.
Specifically for the case of Guyana as officially informed by Exxon, production costs for Liza were estimated initially at $35 per barrel for phase I, but only under the assumption of a 120,000 BPD output which has not been yet the case. Since first oil showed face in December 19, 2019, achievable outflow from this asset has not been able to even closely reach the original production target. Liza wells are literally underperforming.
In a previous article via Kaieteur News online we described the [https://www.kaieteurnewsonline.com/2020/02/03/guyanas-offshore-facts-risks-and-challenges/] technical facts, risks, and challenges facing the Liza project. This complex asset required from inception the implementation of assisted production as it is volumetric, meaning no natural pressure support other than fluid and rock expansion exists. This has not yet been done, therefore pressure can actually decline rapidly and wells lose productivity as it has been actually happening. On top of this, naturally occurring formation damage is now beginning to play an important role during production as also described in our previous paper.
All of these elements point into the direction of larger costs, larger CAPEX and larger OPEX. In our view, the oil price in the best case scenario will remain around the mid $20’s towards the end of Q3 2020, looking to stabilize far into 2021 in the low to mid $30’s. The survival of Guyana infant oil industry will therefore depend on the relaxation of the fiscal regime offered to Exxon, and on the actual efficiency reached during field operations. But unfortunately for Guyana operations are underperforming, and Exxon has already really squeezed the terms, inclining the contract to their favour, so there is not a whole lot to be done in terms of contract terms to favour the margins without hurting the country.
In the meantime, Exxon so far is having hard times in most of its assets globally, shutting down operation in Africa, reducing activity in the Permian, and so far, changing project phasing for Guyana.
Yours faithfully,
Millan Arcia Einstein
