Introduction
Today’s column shifts the focus from taking stock of the prevailing PSA resource price on offer for the rights to extract crude oil towards estimating Guyana’s estimated recoverable oil resources. As noted in last week’s column, the resource price is alternatively represented as Government Take, or the Average Effective Tax Rate AETR, which is the price investors pay to produce crude for sale under the ruling PSA. The purpose is to afford comparisons, when the resource price is changed consequent to the public auction of future oil blocks
Taking stock
While my efforts to gauge Guyana’s holdings of crude oil resources for this series, has been shaped by many considerations, two primary drivers inform it. Firstly, a strong bullish outlook on Guyana’s hydrocarbons potential. And second, as noted last week, the incentivizing/disincentivizing investor “resource price” set by the ruling PSA. The first driver complements my long declared bullish outlook. And, the second, invokes the public auctions PSA template to be implemented.
In recent writings I have indicated my longstanding monitoring of energy analysts and intelligence firms and arrived at the conviction that, my first public outlook on Guyana’s hydrocarbons potential back in 2016 is understated at 12 to 15 billion barrels of oil equivalent, boe. Indeed I have read analysts who privately advise clients of amounts roughly double this size. Thus, the world’s largest digital media energy platform circulates the description, `Guyana, one of the world’s hottest oil drilling zones’ [Source, Energy World, Economic Times, November 4 2022.] That prediction is by 2035, Guyana will be producing 1,7 million bbls/d, becoming the fourth largest offshore oil producer.
Since 2016 I have repeatedly drawn readers’ attention to the “Nobel Prize winning economic theory of incomplete contracts”. This theory assures the constant need to revise/re-negotiate Guyana’s ruling PSA. As we shall observe, the announced template for the auction of 14 blocks reveals significant adjustments to, size and location of exploration zones; signature bonus; royalty rate; cost recovery terms; profit split ratio; and, the introduction of ring fencing and corporation taxes.
Updated prediction
From my reading it appears that, Guyana’s shared geological structures with West Africa support the bold thesis of the petroleum system of the Guianas Basin being a mirror-image – labeled the “Atlantic Mirror” theory – of the petroleum system present in West Africa, where several elephantine petroleum accumulations have been discovered in recent years, including, the Jubilee discovery offshore Ghana.
I further confess the theory is responsible for shaping my strongly bullish outlook on Guyana’s potential recoverable hydrocarbons. However, the results of two United States Geological Service, USGS, surveys, 2000 and 2012. formed the basis for my initial prediction of Guyana’s hydrocarbon resources.
Updated prediction
Representing the USGS results on a continuum, I opined that the reported 95 percent confidence value data reflect what I interpret as a cautious or conservative interpretation of the geological data. And, by parity of reasoning, the 5 percent value represents a more expansive or generous valuation. The middle position on this continuum is represented by the 50 percent value and the mean likelihood, as defined in the USGS Report. Taking the above into consideration I chose the mean likelihood from both surveys and then rounded up to the nearest whole number to arrive at 13-15 billion boe.
More heroically, I further assumed this circumstance supported the thesis of asymmetric risk. That is, the decision agents in the sector [both resource Owner and lead Contractor for operations] vested in the likelihood [thesis] that the reward outcome [resource finds] will be greater or lesser than is the norm depending on the placement on confidence interval. Risk is not assumed to be distributed “as likely or not”, equally along the continuum. The upside risk is therefore, more appealing to both Owner and Contractor.
The USGS reports that their results are based on a probabilistic method where 1] estimated reserves are fully risked 2] estimates are confined to conventional resources 3] on the probability distribution curve Fractiles [F95, F50, F5 and the mean] reveal the estimated amounts to that value and their chances for the minimum attained. Thus, for example F95 reveals the “at least” amount that is expected with a 95 percent choice of finding.
Extrapolating from the laundry list of considerations cited here; namely
1] the reasoning indicated in the above paragraphs
2] the lack of a cohesive and coordinated global climate agenda from COP27
3] a strongly exploration incentivizing global oil market price for crude oil [in the neighborhood of US$ 100 per barrel]
4] Guyana’s continuing explosive success rate for petroleum exploration from First Find in 2015 to date
5] its steeply rising creaming curve over the same period
6] the reported yet-to-explore zones;
and 7] indicated Guyana offshore and onshore explorations to come;
there is a clear need for me at this juncture to hazard a revised or indeed updated best guess or guesstimate of Guyana expected crude oil reserves.
For this I have embraced greater risk dynamics and therefore move from the search for a mid-point on the continuum, to one closer to the 5 percent confidence value and consequently riskier. My best guess at this point of time is a 10 percent Fractile, yielding about 28-30 boe.
Conclusion
Before addressing the targeted template of Guyana’s public auctions for its oil blocks, I shall as a third taking stock item address the unfolding worldwide response to the global climate transition and the policy option of net zero carbon emissions. This broadly defines the horizon of Guyana’s best oil opportunity.
