Introduction
Over several immediately preceding columns I have undertaken a basic stock taking of Guyana’s petroleum sector in three of its dimensions. First, published estimates of its Government Take ratio [that is, share of oil companies net revenue flows] or in fiscal terms the Average Effective Tax Rate, AETR, levied on oil investors. Second, similar estimates of recoverable petroleum resources; and third, similar estimations of what I term as the “shelf life” of prevailing carbon emitting crude oil global trading. Consequent to this the declared upfront purpose behind this undertaking is to evaluate the consequential unfolding situation after the Government’s planned public auctions take effect.
The column’s title goes to the heart of the matter through invoking several basic queries. Thus, for example, what are the intended benefits from the proposed public auctions? Further, based on its several aims what weight is given by the Authorities to raising the AETR in the public auctions? What is the price elasticity of demand for exploration blocks in Guyana?
Going forward I shall address the topic from four broad perspectives; namely 1] decision making and seeming delays in the holding of public oil block auctions 2] official details on the proposed template for the public auctions 3] a look at what research reveals about the productivity of public oil blocks auctions; and 4] a brief review of the prospective Guyana effects of its public oil blocks auctions.
Planning the auctions
Since the discovery of crude oil [ May 2015] and its later production and export [December 2019] the ruling Stabroek Block Production Sharing Agreement, PSA, between the Government of Guyana, GoG, and ExxonMobil and Partners has been subjected to severe criticisms and insightful critiques from the outset. My own contributions have focused on matters like the absence of ring fencing, bilateral negotiations for oil blocks and the sequencing of revenue flows over oil well lives.
Consequent to such analyses the Authorities have responded. And, one such response is accommodation to calls for public oil blocks auctions.
Indeed, the Department of Public Information reported as follows on December 9 2022:
“His Excellency Dr Mohamed Irfaan Ali officially launched the first auction for the development of 14 oil blocks, as part of efforts to develop Guyana’s oil and gas resources. President Ali said the competitive bidding round is expected to close by April 14, 2023, and new contracts will be awarded by the end of May 2023. This of course would follow negotiations and evaluation of the bids that we received during this bidding round”
It was further reported that the oil blocks on auction are for both shallow and deep-water areas. And the process will ensure that Guyana gets the ‘best possible outcomes’ based on lessons learnt.
Delays
Currently it is being reported by Reuters that, Guyana’s proposed oil blocks auctions are being closely followed worldwide. This is attributable to reputational pluses of the sector including its crude oil specification as sweet light crude. The announced three-month delay and pushing back of submissions of bids to mid-July is noted and has been attributed officially to 1] “strong industry feedback, and 2] the need for modernizing the country’s oil and gas regulatory framework”. The latter is expected to guide development of the blocks. Reuters has attributed this information to the Ministry of Natural Resources.
Based on the Presidential announcement cited in the previous section Guyana had hoped originally to receive bids through mid-April and award contracts under new financial terms by the end of next month for up to three deep-water and 11 shallow-water blocks. The government in March began public consultations for a new production sharing agreement (PSA) model. As it claims the new terms are designed to increase significantly the government’s take from its booming oil output, now controlled by a consortium led by ExxonMobil.
The authorities have further stated they have received strong interest from international and national oil companies.
The proposed bidding round will be Guyana’s first competitive auction following the present allocation of blocks through direct negotiations. Vice-President Jagdeo has also indicated another auction could follow next year.
Of significant note, Guyana has recently concluded agreements with two oil and gas exploration firms; namely, PGS Exploration UK Ltd and CGG Data Services to reprocess seismic data relevant to the blocks on offer, which will be available for companies participating in the round.
Crude oil quality
For readers who have not followed this column regularly Guyana’s crude oil has been measured to have both a high API gravity (> 30) and a low sulphur content (< 0.5%). Classed as sweet light crude, this means that 1] Guyana’s crude should flow easily from the reservoir rock to the producing well, and 2] the low sulphur should mean that the crude should be less corrosive on producing wells. This combination lowers the cost of refining it.
Of course, although API gravity and sulphur content are the key determinants of crude oil quality and as a result is favoured in the market with a better selling price compared to heavier more sour crudes, crude oil prices are often determined by more than these factors. We know from this series how much other factors [distance from markets, geopolitics, supply] versus the demand by refineries for crude blends and therefore broader market forces determine prices.
Conclusion
Next week I turn to the second area of focus in my treatment of this topic I first introduce the key fiscal metrics of Guyana’s ruling PSA. The information is captured in a simple schedule for readers’ convenience. Following that I do the same for the draft model PSA and indicate the differences Because of constraints I will not aspire to capture a summary of the two drafts.
