Dear Editor,
A few friends who read my article “Looking Out of Guyana’s Fossil Window” in John Mair’s third edition of “Oil Dorado?” have asked me to explain why I wrote that I expect Guyana to receive around one hundred and fifty billion US dollars over the next thirty years in Oil and Gas revenues. My calculations are pre-mised on the following:
1: The price of oil will average US$68 per barrel. Currently, it is over US$100 per barrel but it will fluctuate. 2: The Expected Ultimate Recovery of Oil will be 10 billion barrels over the life of the field. Currently, Recoverable Reserves are estimated at 11 billion barrels of oil equivalent. I expect that it will be higher by the time the exploration phase is completed. 3: Capital expenses incurred to tap the field will average US$10 per barrel. Liza One was US$7 per barrel, Liza Two was lower and Payara is expected to be a little higher but I believe ten dollars per barrel is a reasonable estimate for this exercise. 4: Operating expenses expected to average US$30 per barrel to get the oil from under the seabed to the floating platform, ready for sale. 5: Guyana will receive 2% royalty on oil sold by ExxonMobil and its Stabroek block partners, referred to hereafter as EEPGL. Note: I assume that Guyana will not receive a royalty on its profit share of oil. 6: Until EEPGL recovers its upfront capital expenses, system-wide within the Stabroek block, 75% of the sales revenue will be allocated to expenses, first to operating expenses and the rest to recovery of capital expenses. The other 25% will be considered “profit” whether or not there is an actual profit, and Guyana will receive a half of that as its share, beginning as it did, from the first calendar quarter of production. 7: If and when EEPGL recovers its capital expenses, then a split of the actual profit, half for Guyana and half for EEPGL kicks in, with Guyana receiving its share in oil (and gas if gas is sold). 8: Depending on the price of oil, once EEPGL has recovered its capital expenses, the percentage of the sales revenue that Guyana receives can be any percentage from 12.5% to much higher.
Let’s use premises 1 to 5 above to calculate Guyana’s total revenue over the estimated 30-year life of the Stabroek field: Oil available for sale: 10 billion barrels. Sales price: $68 per barrel. Revenue = $680 billion. Capital expenses at $10 per barrel = $100 billion. Operating expenses at $30 per barrel = $300 billion. Total expenses, both operating and capital recovery = $400 billion. Profit = $680 billion-$400 billion = $280 billion. Sharing half and half: Guyana’s share =$140 billion. Notice that $140 billion of total of $680 billion = 20.6%. Then there is the royalty due to Guyana. Since Guyana would have received 20.6% of production, its royalty is based on the portion sold by the others, or 79.4%. So Guyana’s royalty = 2% of 79.4% of $680 billion = $10.8 billion. Therefore, Guyana’s total revenue = $140 + $10.8 = US$150.8 billion. Yes, that comes up to 22.18% of the total sales of the Stabroek block. Not bad, considering that the US government gets around 15% to 18% in deep water Gulf of Mexico oil fields. Please keep in mind that Guyana’s revenue stream is back loaded, for two main reasons: 1: It will take several years to fully ramp up production to peak levels, 2: Like all investors I know, EEPGL wants to recover as much of their capital costs as soon as possible, before sharing the profits.
Actually, Guyana getting at least 12.5% of sales right from the start is a good deal, and makes up partially for some of the more egregious lopsidedness and loopholes in the
agreement. But I believe it is time for Guyana to move on, learn from the mistakes, correct them in future deals and focus on how to maximize this huge income stream for the betterment of all Guyanese living in Guyana. I was curious to find out what the average price of oil needs to be for EEPGL to fully recover their capital investment, using the above scenario. The answer that I came up with is US$46.65 per barrel. And how much can Guyana get if the price averages around the current price of US$100 per barrel? My answer is US$314 billion! Or 31.4% of sales! I wouldn’t bet on this scenario though because I have seen times when the price of oil made everyone involved look like a genius and as many times when it made many look like grime. And if the average price was US$44 per barrel, EEPGL would have lost money on this deal and Guyana would have received US$62.7 billion over 30 years if EEPGL stuck with it! Buckle up, Guyana.
Sincerely,
Tulsi Dyal Singh, MD
