Introduction
As indicated last week, today’s column will continue my summing up of a few remaining concerns, which I have identified and have been evaluating in recent columns. To recall, these concerns are considered crucial because they pertain to fundamental concerns such as: the cost of production; the cost-price relation; sector competitiveness; commercial and fiscal breakeven prices for gas and oil; and the projected share/ratio of Government Take in Guyana’s rapidly evolving infant hydrocarbons sector.
Of specific note, a miscellany of similarly weighted concerns still remains to be examined. And, a few of these will be briefly addressed in today’s column.
I begin however, by raising a basic consideration: why, given the crushing global demand pressures placed on oil as a source of energy use throughout this year’s global general crisis, has Guyana’s crude oil continued to exhibit such robust investment inflows overall? This is responded to in the next section.
Why the deepwater success?
As matters stand, in spite of significant setbacks linked to gas flaring, startup compression equipment failures, regulatory hold ups (Payara) and so on, at this juncture and going forward to 2021 and beyond, all leading energy intelligence analytics accept the ExxonMobil target set for Guyana to be producing around 750 thousand barrels oil equivalent (boe) per day by 2025/2026, as eminently attainable. While a wide range of factors explain this likelihood, I would like here to specifically highlight one of these. That is, the capability of the lead Contractor in Guyana’s Production Sharing Agreement (PSA) for the Stabroek Block.
At the recently concluded Caribbean Virtual Oil and Gas Summit (CARIVS) 2020, Alistair Routledge, ExxonMobil President, observed that the company is convinced that its sustained investment in proprietary technological breakthroughs and world-class cutting-edge research skills made all the difference in its achievement of a 90% discovery success rate in the Stabroek Block. In his presentation, Routledge referenced two specific technologies; namely, 1) full wavefield inversion imaging, and 2) algorithms to determine through use of super-computers the best opportunities for finding oil and gas.
The following quote sums up the central acknowledgement Routledge made in his Conference presentation: “The foundation for these discoveries is upfront investment in proprietary seismic data and proprietary technology that ExxonMobil developed.” Additionally, I remind readers that earlier this year Rystad Energy had awarded ExxonMobil the 2019 Explorer Award. Further, worldwide, the company had discovered in that year 12.2 billion boe; and in Guyana alone 1.8 billion boe. ExxonMobil had also received the 2018 Explorer of the Year Award.
It goes without saying that such considerations should obviously play a major role in guiding Guyana’s petroleum strategy going forward; and not least in securing the core incentivization provided by the fiscal regime in its PSA. This is reinforced by the information presented in the next section.
The trail of failure
The second concern I’ll address today, is the need to remind readers of the long trail of failures that have inhabited the global oil and gas sector, over recent decades. In a recent announcement the Westwood Global Energy Group has reported that between 2008 and 2016, 11 billion boe of crude oil and 36 billion boe of gas discoveries, with each discovery larger than 100 million boe in size, had stalled without progressing to commercial production. This represents about 40 percent of total discoveries between 2008 and 2016. Alarming as this is, some analysts believe it could get worse.
Thus, a wide swathe of bodies and organizations, independent, private and social, are actively urging that, with the recent USA electoral shift to the Democratic Party and its climate action agenda along with, the pandemic and other 2020 pressures on oil prices going forward to 2021 and perhaps beyond, the risks of stranded petroleum assets will increase exponentially. The Carbon Tracker Institute projects that by 2030, 30% of intended fossil fuel investment will not be followed through. Rystad Energy has claimed that 10 percent of today’s global recoverable oil and gas resources will be stranded because of the COVID-19 pandemic. To take one more example, the Financial Times has estimated that if the United Nations climate change targets are to be met as much as 80% of recoverable hydrocarbons would become useless.
Political economy
A third concern is the challenging political economy framework within which Guyana’s infant oil and gas sector is constrained to develop. I have stressed repeatedly in this series of columns that this framework is distinguished by many challenges, including 1) weak capital-raising capacity 2) low technical and technological capability 3) limited managerial and entrepreneurial competences 4) an overall distressingly inadequate institutional and governance regime; as well as sharp political divisions. This listing excludes social and cultural challenges.
The above leads to two binding constraints. First, Guyana is in no position to finance, to provide the skills or to acquire the technology and capital needed to explore its hydrocarbon resources, let alone develop and successfully commercialize these. Second, as a consequence the government will find itself always striving under any contract with international oil companies (IOCs) to balance the requirement of optimizing national benefits while also optimizing its incentives to private investors to assure investment flows that it cannot otherwise provide.
Because of this tension, I have concluded that all of Guyana’s PSAs reflect a shifting balance of power between the Government of Guyana (GoG) and the IOCs. As such, there will be inexorable pressures as we go forward to re-assess and, if necessary, to re-negotiate these, independent of public complaints.
Given this construct the search for a perfect contract is an essentialist folly. The extant Guyana PSAs can and will be re-visited. Opportunities for IOCs to gold plate costs and practice tax avoidance are intrinsic to every PSA. However, tax evasion is illegal and legal contracts cannot over-ride this reality. However tax avoidance is not illegal anywhere.
Conclusion
Next week’s column will wrap-up discussion of this topic.