Introduction
As indicated last week, today’s column will begin addressing 1] current estimation of Guyana’s recoverable crude oil resources 2] the fiscal metrics in the model PSA prepared for the impending public auctions of crude oil blocks; and, 3] policies linked to, or contingent upon, the public auctions of crude oil blocks.
Going forward, I shall pursue these topics in the order indicated above.
Resource estimates
I draw readers’ attention to the three publicly available estimates of Guyana’s recoverable crude oil resources
The XOM Website provides an estimate of 11.3+ bln barrels of oil equivalent, boe
The Authorities in their advertisements of the public auctions provided their first independent estimate [as distinct from reporting estimates], which I have come across. That estimate is 25 billion boe.
Regular readers of these columns are aware that, the “Atlantic Mirror” theory together with two United States Geological Service, USGS, surveys, 2000 and 2012, form the basis for my admittedly highly bullish outlook on Guyana’s potential hydrocarbon resources. Representing the USGS results on a continuum, I have opined that the reported 95 percent confidence value data reflect what I interpret as a conservative interpretation of the geological data. And, by parity of reasoning, the 5 percent value represents a more expansive 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 this 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 as my initial estimate.
However, with subsequent finds, I now assume that this supports the thesis of asymmetric risk. That is, the decision agents in the sector [both resource Owner and lead Contractor for operations] are 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.
Indeed, the USGS has reported 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 a laundry list of considerations, which I won’t repeat here 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.
The fiscal metrics in the public auctions
In this Section I introduce the key fiscal metrics contained in the Authorities template for the public auctions soon to be on offer.
As reported last year the GoG through the Ministry of Natural Resources announced that 14 oil blocks had been identified and will be auctioned for the nation’s first-ever competitive offshore oil and gas licensing round. The ministry also announced enhanced fiscal terms to guide all future oil and gas investments reaching the production stage. The Ministry indicated the changes followed on 1] reviews of global best practices and 2] advice of industry experts. And these incentives are designed to incentivize “oil companies with the necessary finance and expertise to expedite the prospecting and development of oil discoveries within the shortest possible timeframe,”
Further, “this is in keeping with the government’s vision to increase the extraction of petroleum resources to satisfy global demands, while at the same time utilizing earnings to strengthen Guyana’s non-oil sectors for a robust and stable economy. The government remains steadfast in realizing the One Guyana vision where all Guyanese will benefit from our extractive resources.”
Proposed template
The announced template for the auction of oil blocks next year shows significant upward-biased adjustments in revenue terms to:
1] the size and location of exploration zones; 14 new blocks are on offer, 11 in shallow water and three in deep water. These blocks vary in size from 1000 to 3000 square kilometers; while clustering around 2000, While there is no limit to the number of fields Investors can bid for, only three will be awarded to any one Investor.
2] signature bonus; adjusted to US$10 million for shallow water blocks and US$20 million for offshore deep-water blocks
3] royalty rate; raised to 10 percent
4] cost recovery terms; limit now capped at 65 percent, with
5] profit split ratio of 50/50 retained
6] the introduction of ring-fencing provisions; and
7] corporation taxes; now set at 10 percent.
In addition, the new PSA template situates itself in a universe where discoveries are proven before the auction so frontier zone risks are somewhat reduced, thereby making the timing of the auctions propitious. Emphases are also placed on the work programmes, financial offers, and local content proposals of bidders.
Although no auction has taken place as yet, by simple inspection one notes that, overall, the fiscal metrics in the new PSA template trend upward; displaying an intended increase in the AETR or price required by the Authorities to 27.5 percent plus company tax of 10 percent
Conclusion
Next week I proceed as indicated in the Introduction above.
