Introduction
Today’s column continues my extended assessment of the cost of delay encountered at the Payara project, as modelled and reported on by Rystad Energy back in July this year. It will focus briefly on three main topics: 1) offering a few closing observations on the topic of externalities, which was discussed last week; 2) completing my reporting on the Salama, M et al study that undertook an investigation into causes of project delays in the oil and gas sector of UAE; and 3) indicating the positive investment signals in this period. The last topic shows the reverse of the possible negative domino effect referenced by Rystad Energy in its reporting of the modelling results! Further, for the record, it should be noted that, as of October 1, the project delay is no longer official.
Externalities and development
Briefly, dynamic externalities play quite central roles in all major economic growth and development theories. Areas that particularly favour dynamic externalities in growth and development models include but are not limited to: technology, innovation, skills enhancement and training, market growth, product development, pollution and environmental harm. Oil projects open up prospects for all of the above to occur. The areas of dynamic economies cited here both promote and impede sustainable economic growth and development. The last item (pollution and environmental harm) is perhaps the greatest impediment and, sadly, it is perhaps most frequently encountered in the crude oil and gas sector.
Growth and development theories focus on dynamic externalities that drive market and non-market economic processes such as cluster formation, localization, urbanization, industrial and commercial agglomeration, and inter-sectoral linkages. These market and non-market processes typically combine to generate productivity effects, which in turn can be exponentially enhanced by supportive policies like public education, health, social services and more broadly human capital creation aimed at broad based skills enhancement and embedded technical knowledge. Clearly much of this depends on how the national regime of local content requirements, LCRs, is administered.
More on causes of delay
As revealed last week in my listing of the ten most important causes of project delays reported in the Salama, M et al study of the UAE, these are headed by delays in procurement, item delivery, and selection of contractors. Authorities’ approval to proceed is listed tenth. It is, however, the only reason listed for Rystad Energy’s study of Guyana. Several other observations are noteworthy for readers. First, the UAE study indicated a strong correlation (0.7) between delays in the front-end engineering and design phase (FEED) of projects and their overall delay duration. Second, oil and gas projects are multi-disciplinary, complex, of longer term duration, as well as highly capital and R&D-intensive. These features place them at the cutting edge of management practices, technology and science.
Third, taken together, the above circumstances make the goal of meeting the time constraint a fundamental imperative driving all oil and gas projects and therefore requiring cost of delay modelling to become routine. Indeed the study further suggests that between 5% and 20% of oil and gas project duration is attributed to delays. For a 20-year project, this ranges from one to four years! Fourth, 89% of all respondents in the study indicated that the engineering, procurement and construction (EPC) phase of oil and gas projects is the most significant for the success of these projects.
Survey studies like Salama et al on the UAE will, hopefully, be replicated for Guyana. I hope UG students hear me. Such work would inform citizens and raise their informed, rather than misinformed sloganeering, so widely disseminated in our print and social media. The informed critique always advances understanding and removes the pollution of noise and nonsense from the public square.
In the next section, I address the risks of a domino effect on investments in the oil and gas sector as indicated by the Rystad Energy’s cost of Payara–Pacora delay.
Domino effect!
I seek to demonstrate in this section that, instead of a negative domino effect on investments in Guyana’s oil and gas sector the indications are the reverse, a strong positive surge in investors’ confidence in Guyana’s offshore sector. The rate of new finds and discoveries has remained very strong for Guyana and exceptional when evaluated at the global level. In this year, the Operator, ExxonMobil, and partners have already announced a 16th discovery Q1, 2020, Uaru; 17th Yellowtail 2, Q3, 2020; and 18th Red tail, Q3, 2020 They are currently drilling at Tanager, which at 8 thousand meters is a new frontier depth for the ExxonMobil grouping.
Further, the ExxonMobil grouping had indicated it expects to have five drill ships in operation by 2020. It plans to be surveying, exploring, and eventually operating on the Canje and Kaieteur blocks starting in Q1, 2021. As one of the Operator’s partners, Hess Corporation, has declared, the group expects to have as many as seven floating production storage and operating platforms, FPSOs, offshore Guyana; the third largest number worldwide. Output is expected to reach 750,000 barrels per day oil equivalent (boe) by 2026. The announced reserves the ExxonMobil grouping had declared is 8 plus billion boe at end of 2019; that is, for the first 15 discoveries. The 2020 discoveries are not yet added to the grand total.
Readers might perhaps wonder why, given the onset of the 2020 global general crisis as I have detailed it in this series, positive developments like these continue to favour Guyana. I believe the reason for this lies in the intrinsic cost competiveness of producing Guyana’s crude oil as well as the medium sweet properties it enjoys. The latter makes it a highly preferred crude because its low sulfur content of 0.5 meets the International Maritime Organization’s recent 2020 regulation designed to reduce sulfur emissions from fuel used in maritime vessels that pollute the environment.
Conclusion
Remaining space in this column does not allow me sufficient opportunity to properly address the first and most important part of my reasoning that the intrinsic competitiveness of Guyana’s crude oil lies behind its unprecedented commercial success. Next week’s column will therefore continue addressing this topic.
