Introduction
Today’s column concludes the discussion on the fourth and final modeled driver and its metrics, which I believe undergirds any serious appraisal of the viability or affordability of a Guyana Universal Basic Income, UBI, mechanism, the Buxton Proposal. That driver is the estimated components that make up the IDB’s 2020 modeled cost of production for Guyana’s crude oil.
Last week’s column addressed some of the characteristics, features and assumptions, used in the modeling exercise. In the next section I add a bit more as it speaks to the model features and timelines made available by the Lead Contractor ExxonMobil and its partners.
Further Model Assumptions
First, the model was constructed on the basis of the then ruling Production Sharing Agreement (PSA) with Exxon Mobil and its partners.
Second it accepted Exxon Mobil’s project profile as a given. This was very bullish for Guyana, viewing it as a leading player in the Americas
Third, the project profile laid down by Exxon Mobil was fully accepted. That is, starting with Liza 1, the planned development of the five other projects was extrapolated to the economic parameters given by Exxon Mobil. This projected the commissioning of five projects to reach a targeted production level of 750,000 barrels of oil equivalent per day at a timeline (boe/day) by 2025.
The model does not include gas, based on the focus to concentrate on crude recovery in current fields and new projects, along with and the potential for the development of gas-to-shore facilities and associated industries.
To date, the Stabroek field is estimated to hold more than 8 billion barrels of oil equivalent after 16 discoveries. The model assumes that each project will have a production life of 20 years with a two-year decommissioning period. The Liza Phase 2 (proj 2) commenced production in 2022 at a capacity of 220,000 boe/day using the Liza Unity floating production storage and offloading (FPSO) facility; Payara (proj 3) also at a capacity of 220,000 boe/day began operations in 2023, using the Liza Prosperity FPSO.
Modeled cost ratios
Schedule 2 below has abstracted some useful economic data derived from the IDB’s modeling of the five projects: Liza 1, Liza 2, Payara, and the not-yet- named Projects 4 and 5. The Schedule shows data on 1) the cash flow for the five projects, before the closure or de-commissioning fund 2) net oil revenues flowing from the five projects and 3) their overall, as well as individual items per barrel cost of production. The two additional projects, proj 4 and 5, should share similar production profiles to Liza Phase 1 at 120,000 boe/day. The projects are assumed to have an immediate ramp rate to full production capacity which plateaus in the first year, then falls at an average decay rate of 0.62% p.a for projects 1,4, and 5; and 1.71% for projects 2 and 3. The planned production sequencing of crude production of approximately 750,000 boe/day in 2025, will make Guyana the fifth largest oil-producing country in Latin America and the Caribbean.
The data reveal that, the item operational expenses, opex, constitutes the largest single item responsible for the cost of producing a barrel of crude oil on the Stabroek block, with Exxon Mobil the lead contractor. Opex refers to Exxon Mobil’s day-to-day operational expenses like wages and salaries, rent, utilities, legal and accounting, general and administration, overheads, R&D, and so on. These expenses keep the company operating and account for US$7.4 per barrel of crude oil produced. This represents 40.4 percent of the estimated US$18.3 required to produce one barrel of crude oil in the model.
Capex or capital expenditures at US$4.7 per barrel is the second largest item, accounting for 25.7 percent of the per barrel cost. While opex focuses on the ongoing short-term expenses of the contractor, capex focuses on longer term significant expenditures designed to improve future Exxon Mobil performance beyond the current fiscal year. Typically, such long- term expenses include property, plant, equipment, and other fixed assets. The emphasis is on longevity; that is designed for use beyond the current fiscal year. Together, the model reveals that opex and capex combined account for about two-thirds of the cost of producing a barrel of crude oil.
To have nearly one-sixth of the cost for producing a barrel of crude oil devoted to a de-commissioning fund belies the noise and nonsense narrative in print and social media concerning Guyana’s uncatered for abandonment of its oil and gas structures when the reservoirs are depleted. Similarly, the narrative of the endless burden of gargantuan exploration debt comes up against the reality that, exploration debt is projected to account for only 70 cents or 3.8 percent of the per barrel cost of producing a barrel of crude oil on the Stabroek block
Concluding observations
Based on its main findings the IDB has observed that, independent of the quality of the current PSA: it is self-evident, improved governance of the nascent hydrocarbons sector (institutional organization and regulatory oversight) is a high priority for lifting Guyana’s ability to contain value leakages along with improving its share of value capture. This is indeed a recurring theme undergirding my columns from their inception.
While my main concern about the IDB report for this series of columns has been its modeling of government revenues I repeat my earlier strong recommendation for readers to do their reading of this document. Indeed, its last two sections, 5&6, make recommendations on 1) value capture and why institutions matter and 2) governance and institutional arrangements. The latter briefly draws lessons from other countries experiences; namely Norway, Brazil, Colombia and Mexico.
