Dear Editor,
Reference is made to Professor Andre Brandli’s letter to the Editor of Stabroek News dated October 11, 2022, with the caption “Mr. Bhagwandin is operating completely in the dark with his calculations.” Professor Brandli argued that “in essence, Mr. Bhagwandin is trying to mislead the readership of Stabroek News by presenting fictitious scenario of the development of Guyana’s future oil revenues using assumptions”. Brandli went on to state that there is no reliable data in the public domain on the capital expenditures (CAPEX) and operating expenditures (OPEX) for each of the two floating, production and storage & offloading vessels (FPSOs).
First, all publicly registered companies in Guyana are required to file their audited financial statements with the Deeds Registrar. While these may not be published anywhere on the internet, in the case of the oil companies, they too are required to file their financial statements. Anyone can literally go to the Deeds Registrar and request a copy. Christopher Ram would have done so and published in one of his columns on the 2021 Consolidated Financials for EEPGL, CNOOC and HESS. I would have also done so. So the 2020 and 2021 financials for EEPGL, CNOOC and HESS are publicly available and accessible. Secondly, all of the project economics information for each development, including the estimated capital expenditure for each development are available at thise link: https://corporate.exxonmobil.com/locations/guyana/guyana-project-overview#LizaPhase1ProjectDescription,https://corporate.exxonmobil.com/news/
Liza 1, the CAPEX is US$4.4 billion; Liza 2, CAPEX is US$6 billion; Payara the CAPEX is US$9 billion and Yellowtail, the CAPEX is US$10 billion, bringing the total CAPEX for the four approved projects so far to US$29.4 billion. This data is cited from the above link. With this data, a modelled forecast can be constructed for different scenarios for the four approved developments to reasonably ascertain what would be the government’s take. Thirdly, looking at the Consolidated Financials for 2021, the OPEX represents 42% of total revenue, therefore, the remaining 33% would have been allocated towards the recovery of the CAPEX. It is reasonable to assume, for the purpose of any forecast analysis, that the 75% cost recovery cap comprised of OPEX representing 40% of the total cost and recovery of CAPEX representing 35% of total cost, capped at 75%.
Fourthly, ExxonMobil (Guyana)/ EEPGL, on a regular basis facilitates various stakeholder engagements with the private sector especially, through the business support organizations such as the Guyana Oil and Gas Energy Chamber (GOGEC), the Georgetown Chamber of Commerce (GCCI) and the Private Sector Commission (PSC). Through these engagements, EEPGL shares information, such as updates on project development, local content spends etc., and also avail themselves to answering questions from the private sector.
Professor Brandli went on to argue that in the absence of ring fencing, no one can reliably predict when Guyana’s share of revenue will go beyond the 2% royalty and 50% profit. Editor, again for Professor Brandli’s edification, to date 33 wells have been drilled in the Stabroek block of which 3 are dry wells and the remaining 30 are commercially viable wells, accounting for the estimated 11 billion barrels of proven reserves to date. The exploration cost per well ranges between US$60 million – US$100 million. Applying the higher end cost, these three dry wells would amount to US$300 million. Juxtapose this with the gross revenue that the 30 commercially viable wells will generate over their productive life, the cost of the dry wells will be less than 1% of total revenue. In fact, using the four approved developments so far, the gross revenue at an average price of US$60 per barrel would amount to US$177 billion.
The cost of the three dry wells represents 0.17% of total revenue, therefore, having minimal or almost zero impact on the bottom line. For greater clarity, the four developments alone account for just under 3 billion barrels of crude oil out of 11 billion barrels of proven reserves in total representing just 27% of the total proven reserves in the Stabroek block or less than 1/3 of the total proven reserves. Professor Brandli’s final argument in his letter weighed in on the sanctity of contract as a misconception by the Vice President and argued that the financial risks for the consortium ended in 2019 with the onset of oil production. Editor, it is a misconception to believe that the financial risks ended for the consortium in 2019, when the reality is such that oil is a volatile commodity. Oil prices are impacted not only by global demand and supply but also geopolitical tensions. To this end, the world witnessed the playout of these dynamics when oil price literally crashed below US$10 during the pandemic period and then skyrocketed above US$100 on account of the compound effects of the Russian / Ukraine war. Consequently, financial risks are always a concern in the oil and gas industry, globally.
Sincerely,
Joel Bhagwandin