Dear Editor,
Joel Bhagwandin (JB) concluded the Liza 1, Liza 2, Payara and Yellowtail projects will produce respectively 438 million barrels in 10 years, 600 million barrels in 8 years, 600 million barrels in 8 years and one billion barrels in 11 years. The computed average daily production rate based on JB’s information is exactly equal to the nameplate daily production capacity. This means the projects will start up at or around nameplate production capacity and basically produce oil at nameplate capacity for 10, 8 and 11 years, until all the oil is recovered. No oil reservoir produces oil this way. Oil reservoirs start up at or around nameplate capacity and with time the production rate will constantly drop until it becomes uneconomical to recover oil.
JB’s 10 years, 8years and 11 years significantly underestimated the time to recover the targeted oil. Liza1 first environmental permit was for 20 years before being changed by the courts, an indication of the expected timeline for the Liza1 operations. A decline curve analysis is required to predict the oil depletion rate and ultimately the expected reservoir production time. JB recovered all the oil in 10, 8 and 11 years, computing massive revenues which will never be realized as the recovery times will be much longer. In the analysis that JB is attempting, one may compute OPEX with some reasonable accuracy by using the Break Even Point (BEP) of the project. BEP by definition is the oil price necessary for the project’s discounted net present value to be exactly zero. The BEPs for Liza 1, Liza2, Payara and Yellowtail have been reported in the press. Cash available to pay down the project investment capital to zero is the oil production multiplied by BEP minus OPEX. The cash is then discounted prior to writing down the project investment capital to zero.
With the BEP, project investment capital cost and a decline curve analysis, OPEX can be determined quite easily. JB is all over the map, computing OPEX. In his original letter, 75% cost oil has 30% dedicated to OPEX and 45% to CAPEX, such perfect numbers. How he arrived at these numbers is a mystery. In his latest iteration, JB concluded Liza 1 OPEX is 42% of 2021 revenues i.e. G$230, 534 million. The two largest contributors to the G$ 230,540 million were G$78,565 depreciation, depletion amortization and G$34,471 million exploration expenses. It would be interesting to see the process for paying depreciation, depletion and amortization expenses from the OPEX budget, who gets the money? These are typical line item charges in the Profit and Loss Account to decrease tax burden and has nothing to do with OPEX spending. Exploration expenses referred above were the expensing of the Koebi dry hole. G$230,540 million is a gross overstatement of Liza 1 OPEX spending. JB added up the reported project cost for Liza1, Liza2, Payara and Yellowtail and concluded US $29. 3 billion is the recoverable CAPEX by 2025.
Somehow, he leaves out US $460+ million pre discovery cost inserted in the 2016 PSA and exploration cost not associated with the four projects. JB ignored Uaru CAPEX spending which has to commence in 2024 if the project is to come on line in 2026/2027. A sixth project likely will have CAPEX spending beginning in 2025. JB underestimated the total CAPEX spend by 2025. Finally in his analysis, JB paid back US $29.3 billion CAPEX spending with US $29.3 billion. Stabroek block partners will never accept US $29.3 billion for US 29.3 billion CAPEX recovery. Let’s consider pre discovery cost which has a 2016 value of US $460+ million. Cash to pay the pre discovery cost was available in 2020, US $460+ million has less value in 2020 than 2016. It will require more than US $460+ million in 2020 to repay US $460+ million spent in 2016. This feature is reoccurring where CAPEX spending is occurring years before revenue will be able to pay CAPEX spent.
The Stabroek block partners will never accept US 29.3 billion to pay down US $29.3 billion in CAPEX spend. JB model seriously overestimated revenues, underestimated CAPEX spend to 2025 and does not discount the cash available to pay off CAPEX recovery.
Sincerely,
Deryck Daly
