Asked in Washington last week how disappointed he was that only six companies had made bids in Guyana’s offshore block auction, President Ali predictably bristled and quickly came up with an excuse:
“We went out to auction at a time when major economies in the world are basically saying to oil producers ‘we’re not going to finance you’ so you’re going to a market where raising of capital is an issue.”
A few days later, asked the same question, VP Jagdeo replied: “You have to understand that you are competing with other countries that have great prospects and they want the investment in their countries too. They are prepared to have those investments go to them by lowering the government’s take.”
Neither reason stands up to scrutiny. When it comes to the President’s reply, a Wood Mackenzie report stated that the global oil and gas exploration sector had its “strongest year” in 2022 in more than a decade. Yes, there was in recent years a strong narrative by Western governments to discourage oil exploration as part of addressing climate change. That was up until the Russian/Ukraine war and the spectre that the West was suddenly vulnerable to energy shortages even as it placed sanctions on Russian oil. Overnight, governments went from talking about energy transition to urging energy security – something President Ali has touted Guyana could play a role in. Secondly, as part of the current American policy of friend shoring – encouraging its companies to invest in allied countries – and with Guyana being in a safe neighbourhood close to the Atlantic seaboard – it is a great surprise that not one American company (other than the already present Exxon and Hess) made a bid.
Also of interest is that no national oil company from so called close development partners Brazil or India showed interest despite all the chatter, photo ops and jet planes back and forth.
As for VP Jagdeo’s claim that Guyana was out-competed by other countries, it is hard to see where he is talking about. In the end it comes down to geology. Where’s the oil? What type is it? and how easy is it to extract? Great fiscal terms are not an incentive when the chances of finding oil are slim. 40% of something will always be better than 60% of nothing. Perhaps he was referring to offshore Namibia but even there it is early days and the geology is still to be clarified.
It is of course not surprising that both President Ali and Mr Jagdeo found external reasons for the lack of interest rather than acknowledging that this could be of the latter’s making.
So what might be some of the real reasons?
This auction has been long in the works and that delay alone would not have been an encouraging sign to any company wanting to commit billions here.
In May 2020, then Director of the Department of Energy, Dr. Mark Bynoe had said the government was going ahead with seismic surveys of the potential blocks. There was some old 2D seismic related to Block C but he memorably explained why this was important “In terms of going to a potential licensing round, to use Guyanese parlance, ‘you do not want to be buying a puss in bag.’ This would have included both the nearshore and the deepwater blocks.
Even though tenders had gone out and potential companies evaluated, all of this was scrapped by Mr Jagdeo: “The price of oil is high, and I think it’s the right time if we go to auction, so we’re moving toward using the current data set, not generating future data sets.”
There would have been ample time to have undertaken these seismics, because it still took him three years to complete the auction. When he first made an announcement there was no mention of a new PSA nor for new legislation and he said that the auction would be done “by the latest” Q3 2022. Also, he said acreage the government had received back from companies that failed to find reserves or did not continue their exploration programmes would be included in the auction. It was not.
But the lack of seismic is probably the primary factor in why there was not more interest. His claim in April of a “minimum of five different investors in the basin” now seems like all talk and no hat after an auction in which oil companies were being asked to bid and pay a signing fee of up to $20M on blocks whose geology was largely unknown. In other words they were being asked to bid on “a puss in bag”. That might have been a gamble too far even for an industry known for risk taking. The majors who did make bids are already in the Suriname and/or Guyana basins so would probably have their own insights from their current explorations to make a better informed decision. Also some of this might have been defensive to avoid unitisation issues with competing companies across blocks, and as such that might mean less urgency to explore.
Some other companies have questioned the high signing bonuses for the nearshore that are seen as potentially holding gas but with all the complications and expenses involved in developing that commodity. Also the aggressive relinquishment clause was also discussed as potentially meaning unrealistic work programmes.
Then there are some other factors: capacity constraints and regulatory issues. Any new company coming in here is going to be faced with almost no available infrastructure – dedicated ports or laydown yards – since these are already monopolised by existing operators. There is also a shortage of skilled workers and suitable companies with whom to partner as required by local content legislation. Another factor is that the cost of doing business here and accommodating overseas workers is very high and getting higher. As for political risk, there is currently no serious likelihood of a change in government before 2025 and therefore a change in policy or regulations. But the absence of an apolitical Petroleum Commission that makes and enforces technically based decisions largely uninfluenced by the politicians might be a concern to any investor. This is despite the pledge by Mr Jagdeo in August 2020 that “Over the next six to eight months we will move to the establishment of a petroleum commission.”
Over three years later it appears there is still no hurry and we can see by the administration’s enfeebling of the Environmental Protection Agency what it thinks of strong independent institutions. In matters such as local content there remains too much ministerial discretion. In any country it is that locus of discretion that always attracts corruption. Meanwhile the audit fiasco uncovered by this newspaper is just an example of how amateurish our regulation of the sector remains, even as it makes up 90% of the country’s exports.
This failed auction round is a lost opportunity for Guyana, and if one believes those who say fossil fuels are on their way out, it might be one lost forever along with potentially billions in revenues. Mr Jagdeo and his President would do well to take some time for introspection and listen more to experts on this and many other issues related to the proper regulation of the oil sector.
