Guyana’s low cost oil resource continues to be key for Stabroek Block partner Hess, which on Wednesday said it foresees global commodity demand for decades to come, even as the company vowed to continue accelerated development as requested by the current government.
With the Liza Destiny Floating Production Storage and Offloading (FPSO) vessel already producing 10,000 barrels more than its announced maximum of 120,000 barrels of oil per day (bpd), plans are in train to ramp that amount up to 140,000 bpd by the end of this year, which will add to the 220,000 bpd expected from the second FPSO – Liza Unity. The Liza Unity is currently producing at 121,000bpd.
Altogether, Hess said that it anticipates twenty five (25) lifts this year at one (1) million barrels per lift, which would offset any capital increase and still leave significant cash flow.
Guyana has not yet disclosed how many lifts it anticipates for 2022.
“Key to our strategy is Guyana, the industry’s largest oil province discovered in the last decade. According to a study by Wood Mackenzie, Guyana is one of the highest-margin, lowest carbon intensity oil developments globally. As discussed earlier, the world will need these low-cost oil resources for decades to come to meet future energy demand,” Hess Chief Executive Officer, John Hess, said at the company’s first quarter earnings call.
“I just have to remind everybody going back like to the Guyana lifts, with two lifts in the first quarter, seven in the second, eight in both the third and fourth, that we’re… even with any increase in our capital budget, we’re going to have significant cash flow growth and significant free cash flow growth throughout this year,” Hess Chief Financial Officer John Reilly would add during the question and answer segment of the conference call as he discussed the financials.
Exxon starting production at the Liza Unity on February 22 and the 60-day permitted start-up period allowed for flaring without a fine, ended on Friday, April 22. Government has said that vessel is now only on pilot flare.
However the Destiny FPSO, which has been producing oil since December 2019, has been plagued by technical problems with its flash gas compressor system, leading to millions of cubic feet of climate-endangering gas being pumped into the atmosphere on a daily basis. These problems have not yet been resolved.
The company has promised to have a new flash gas compressor installed on the FPSO by the end of June this year. In the meantime, it will have to continue paying the US$45 per tonne of carbon dioxide equivalent.
It is unclear what the current daily flaring levels are for that FPSO as government officials are yet to answer that question. What is also unclear is why the company is allowed to ramp up production when it has not yet resolved the flaring problem.
Several calls to the EPA head Kemraj Parsram have gone unanswered.
‘Investment rather than discourage’
Meanwhile, Hess noted that with Russia’s invasion of Ukraine, the spotlight has been put on energy security and the critical importance of oil & gas to the global economy.
“Energy security is essential for an orderly energy transition. Oil markets were tight even before the Russia-Ukraine conflict. We have now had seven consecutive quarters of global oil inventory draws, and at the end of March, global oil inventories were estimated to be more than 400 million barrels less than pre-COVID levels. The world is facing a structural oil supply deficit, and the only way to address it is through more industry investment and that will take time to have an impact.”
He explained that according to the International Energy Agency, a reasonable estimate for global oil and gas investment is at least US$450 billion each year over the next 10 years to meet demand.
“So to ensure an affordable, just and secure energy transition, we need to invest significantly more in oil and gas. And we also must have government policies that encourage investment rather than discourage it. In a world that will need reliable low-cost oil and gas resources now and for decades to come, Hess is in a very strong position, offering a differentiated value proposition. Our strategy is to deliver high-return resource growth, deliver a low cost of supply and deliver industry-leading cash flow growth, while at the same time, maintain our industry leadership in environmental, social and governance performance and disclosure,” Hess posited.
“Our successful execution of this strategy has uniquely positioned our company to deliver long-term value to our shareholders by both growing intrinsic value and growing cash returns. In terms of resource growth, we have built a balanced portfolio focused on the Bakken, deepwater Gulf of Mexico, Southeast Asia and Guyana. With multiple phases of low-cost oil developments coming online in Guyana and our robust inventory of high-return drilling locations in the Bakken, we can deliver highly profitable production growth of more than 10% annually over the next 5 years,” he added.
And as he explained how Guyana fits into the matrix of the company steadily moving down the cost curve, he said that the investment here ensures that the company holds a solid balance sheet. That is because the first four sanctioned oil developments in Guyana have a breakeven Brent oil price of between $25 and $35 per barrel. And by 2026, the company’s portfolio breakeven is forecast to decrease to a Brent oil price of approximately $45 per barrel.
“Our balance sheet will also continue to strengthen in the coming years with debt-to-EBITDAX [Earnings before Interest, Taxes, Depreciation (or Depletion), Amortization, and Exploration Expense] expected to decline from less than 2x in 2022 to under 1x in 2024. Our financial priorities are: first, to have a disciplined capital allocation process so that we invest only in high-return, low-cost opportunities; second, to maintain our investment-grade credit rating and have a strong cash position and balance sheet to ensure that we can fund our world-class investment opportunities in Guyana; and third, to return up to 75% of our annual free cash flow to shareholders,” Hess said.
Further, he added, “With the successful start-up in February of the Liza Phase 2 oil development offshore Guyana, which at capacity will add $1 billion of net operating cash flow annually at a $65 Brent oil price. In late February, we repaid the remaining $500 million of our $1 billion term loan scheduled to mature in March 2023. And on March 1, we increased our regular quarterly dividend by 50%. In April, Hess received total net proceeds of $346 million from the secondary offering of Hess-owned Class ‘A’ shares of Hess Midstream and the sale of Hess-owned Class ‘B’ units to Hess Midstream. Post these transactions, Hess owns approximately 41% of Hess Midstream.”
‘Excellent working relationship’
The PPP/C government came in for high praise from Hess, when the company was asked to give a perspective on the relationship it has with government, from a regulatory and a fiscal viewpoint and it used the early approval of Yellowtail as testament.
“John, any perspective on the relationship you have from a regulatory and a fiscal perspective in Guyana? It seems like that has been stable, but given it represents a disproportionate amount of the asset value, we always want to stay on top of any inflections that might be happening there,” Neil Mehta of Goldman Sachs, posed to the Hess President.
He replied, “In terms of the Guyana government, our company and our joint venture have an excellent working relationship, a very constructive one with the government. Testament is the early April approval of Yellowtail.”
“The government has been very clear with us that they would like us as a joint venture to accelerate the development of their oil resources to basically improve the prosperity and have shared prosperity for all Guyanese citizens. So it’s a very constructive working relationship. It continues,” he added.
Hess said that the company also wants to help to help the government in social responsibility as well, “trying to make a better future for all Guyanese”.
“So it’s an excellent relationship and we continue to work with them. And as I said before, ExxonMobil has done an outstanding job on project management and execution, bringing a lot of value forward for our joint venture, for the people of Guyana and for our shareholders in the excellent achievements they’ve had in terms of being really ahead of schedule now on Liza Phase 1, ahead of schedule on Liza Phase 2, ahead of schedule on Payara. And that track record is to the benefit of the Guyanese people as well as our shareholders,” he said.
Into the short term future, Hess says that it continues to see the potential for at least six FPSOs, on the block in 2027, with a production capacity of more than 1 million gross barrels of oil per day and up to 10 FPSOs to develop the discovered resources on the block.
But when asked about the company’s “line-of-sight …through 2027” which differs from ExxonMobil’s, Hess said that its partner and Block Operator is expected to provide clarity on any changes at its [ExxonMobil’s] earnings call.
“You still talk about six FPSOs, six development phases, but your production guidance or outlook is still a little bit different from what the operator ExxonMobil is saying. So I’m curious if you can just help us close the gap. Is it plateau rates? Is it more conservative assumptions? What’s the difference? Because clearly, it seems to us that your guidance is more realistic than what the operator is saying at this point,” Hess was asked by Bank of America representative Doug Leggate.
“Yes, Doug, great question. I think ExxonMobil will be addressing that on their call, I understand, but we’re sticking to the guidance that we gave, which by 2026 will be… ‘27 will be over 1 million barrels a day of capacity. And I’d say that’s a conservative number,” Hess replied.
