Introduction
In today’s column I wrap-up my revisit of previous calls to build an oil refinery; whether 1] state-owned and or operated 2] as a Joint Venture, JV, or 3] privately owned and operated. In the previous presentation I had proposed two Decision Rules for guidance. In today’s wrap-up I begin by referencing the Government of Guyana’s recent announcement, in late H1 2022, of its intention to invite tenders for building a local oil refinery.
I shall address the Authorities’ proposal in the next section, and afterwards proceed to review a few analytical concerns some readers have raised with me as I wrap-up.
The proposed refinery
In August last year [2022] Oil Now under the caption, Long term viability critical to any decision on oil refinery for Guyana, had reported ”The Guyana government had no plans to build a refinery for its oil as late as last year”; hinting very clearly that Government’s decision to do so was made quite recent. Reports of private industry showing strong interest in a refinery grew as the geo-political risks to the global oil market multiplied in large measure due to the Russia-Ukraine war, the worsening of China/United States economic and political relations and a marked uptick of OPEC+ assertiveness in the global crude market. Crude oil prices as the associated risks grew exponentially.
Reports at the time also revealed that the Ministry of Natural Resources and the National Procurement and Tender Administration Board, NPTAB, had invited bids to design, finance, and construct Guyana’s first oil refinery.
Pertinent details
Pertinent details are as follows: 1] the refinery is a small modular one circa 30 thousand barrels per day [30,000b/d] 2] construction is expected to start this year and be completed within 2 years 3] no GoG participation is intended for investment funding or operational control. The fiscal package includes 4] 10-year tax holiday including income, imports, sales, property, trade, consumption or other imposts not specified. 5] provision of land to site the refinery in Berbice near Crab Island. Market support comes via 6] crude oil supplies afforded to the refinery out of Guyana’s share of profit oil at market prices 7] domestic market protection is offered including for any refined products sales
In addition, the Authorities specify standard due diligence requirements such as audited financials, bonds, fees and related mandatory disclosures in support of the bidders’ capabilities NPTAB reports seven bidders to date.
Analytical observations
For the wrap-up I offer brief comments on three considerations. These are firstly, has the economic case for an oil refinery materially changed since my intervention on the Pedro Haas consultancy; secondly, how significant is the geo-political invocation of national security to an oil refinery decision; thirdly, is the Petrotrin experience in Trinidad and Tobago salient. I address these for the remainder of this column in the order indicated
1-Material change
Upfront I assert that the case for an oil refinery in Guyana has not significantly improved, both domestically and internationally, since I first addressed this topic back in 2017. While modular refinery technology has yielded productivity gains in capability and complexity and incomes and demand for refined products have grown in Guyana, the scale of proposed operation at 30,000 is less than one-third of that in the Haas study-100,000 bbl/d
Internationally many prevailing economic trends work against the construction of new oil refineries at this time. Perhaps the most pressing secular and structural trend is the global climate transition underway from carbon emitting fuels. Recall the vast majority of nations, indeed the United Nations itself, is spearheading the switch to renewables. A small emerging oil producer cannot resist these pressures. Even a powerful USA is being pressured to shut down refining capacity in 2022 even as a shortage of such capacity is evident.
Global macro-economic trends reinforce the secular economic trend indicated above. Covid-19 and post pandemic effects on supply chains, government spending, price, and interest rates policy responses, have been complicated by geo-political tensions, the war in Ukraine along with Big power trade, technology and investment stresses. All these work against capital intensive investment in a carbon-emitting extractive sector
2- National security
It should be noted that the Authorities have at the highest levels expressed the view that national security concerns are playing a key role in their approach to a local oil refinery. This has been sparked by skyrocketing crude prices amid explosive geopolitical turmoil and the Russia/ Ukraine war. Vice President Jagdeo is cited in the media on the national security considerations as claiming it is “to ensure Guyana does not run out of fuel
These are important but far too expensive as an insurance against this risk. With a likelihood of producing 1.5-1.7 billion barrels of oil per day by the 2030s Guyana should aim to leverage its crude output for bilateral sidebar bilateral mechanisms offering refined products for what is globally a tiny market demand.
3- Petrotrin
As noted earlier, the fortunes of crude oil refinery construction in the Caribbean region whether for exportation as a deep-water port or for domestic import substitution, make for disappointing reading. Refineries have closed as loss-making promising to re-open at dates long passed. For Guyanese the geographic proximity of Trinidad and Tobago, reinforced by travel, migration, trade and cultural links make for shared experiences. Emerging oil and gas in Guyana must seek to learn from its neighbour’s mistakes. While we celebrated development in the opening of Petrotrin, we must also learn the lesson of its losses, bankruptcy and closure in 2018.
Conclusion
Next week I introduce a new topic.