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A Stena Forth Class 3 drillship arrives in Guyana. (Photo: Government of Guyana)
Wednesday, December 2, 2020
Perspectives

Guyana Oil: Challenges, Cautious Optimism


Political situation stabilized, new government appears business-friendly.

BY ENERGY ADVISOR
Inter-American Dialogue

Estimated resources at Guyana’s offshore Stabroek block are now nine billion barrels of oil equivalent (boe), up from more than eight billion boe forecast earlier this year, Hess Corp., one of the companies developing the block, said last month. What is the current state of oil production in Guyana, nearly a year after it began? How have low oil prices and increased uncertainty this year affected the South American nation’s prospects for oil development? Is the government of President Irfaan Ali, who took office in August, implementing the right policies to both attract investment and effectively manage oil revenue?

Jennapher Lunde Seefeldt, assistant professor at Augustana University: Guyana’s current production is less than what was expected, due to Covid-19 and an oil price bust.

Additionally, ExxonMobil’s expenditures were reduced, and the Stabroek block’s production faced technical problems. Nevertheless, the company refocused its efforts in Guyana and began drilling in an adjacent block. Ali’s inauguration helped stabilize the political situation. Ali’s early moves as president should be attractive to investors. In November, Ali reflected on his first 100 days in office, remarking on the utilization of the emergency budget to launch critical infrastructure developments.

This will facilitate and support the growth of local content investment with contracted majors. While Ali said he will not pursue changes to the original Stabroek contract, he is expected to take a firmer stance on future contracts. As more oil is found, Guyana’s position to negotiate increases. Lastly, Ali initiated the creation of a Petroleum Commission, which is meant to limit political influence in managing the industry—something investors will surely appreciate. But as a frontier, Guyana’s regulatory framework remains limited. This slows processes down and costs the government billions in lost revenue. Ali hopes to avoid further losses by strengthening the state’s administrative and regulatory capacities.

While new or altered regulations might detract investment, establishing a framework offers stability and signals the rules of the game. Several indices consider Guyana as mediocre for investment openness. Ali’s plans and actions should reduce some investor uncertainty. These promises and already-initiated plans offer Guyana the chance to remain the world’s fastest-growing economy.

Raúl Gallegos, director of Control Risks: Based on the latest numbers coming from ExxonMobil, it appears production has surpassed 100,000 barrels per day in recent weeks. Of course, low oil prices pose a challenge to any expensive oil development, especially offshore. That said, the commitment of oil companies operating in Guyana seems to be to continue to invest and develop offshore resources in that country regardless of the low-price scenario. Naturally ExxonMobil’s financial muscle is much more ample than that of other companies, so it looks likely that ExxonMobil and its partners will continue to make Guyana their primary investment bet even during a difficult time for the industry globally. Since Ali took office, the government has moved ahead with permits needed for the Payara development, after having conversations with the private sector, which is an encouraging sign for the continued development of the country’s energy assets. The Ali government will continue to take a business-friendly approach to dealing with oil companies, particularly because its intent is to make sure the oil sector develops quickly, and with it see an increase in oil revenues for the government.

The ability of the government to manage oil revenue responsibly and transparently is another matter. That is the big question for the entire Guyanese political class, not just the Ali government. The current structure of the natural resources fund managed by the central bank, and which is intended to save some of the windfall, is such that the country’s president has ultimate say over how those resources are spent and invested.

This setup risks becoming a petty cash fund for the leader in charge, which means the funds saved can be used for unsustainable, politically motivated projects by an irresponsible government. The incentive to use those resources to favor a particular ethnic group will grow the larger the fund becomes.

William Walker, Guyana-based oil and gas journalist: Covid-19 initially hit the local economy hard and affected oil sector operations, but ExxonMobil moved quickly to set up systems to safely rotate workers, so disruption was limited. Technical issues with the new floating production storage and offloading (FPSO) unit were more impactful, but it appears these are being overcome, with production at Liza Destiny close to its 120,000 barrel per day (bpd) nameplate capacity. Despite global price uncertainty, the timeline is firmly on track for two more FPSOs by early 2024 and 560,000 bpd. Indeed, as international oil companies move to make their portfolios more resilient, Guyana looks like a priority. John Hess recently talked of an FPSO each year for the next 10 years. The new administration has moved quickly to cut red tape for the sector, specifically when it comes to zoning and various permits for subcontractors supporting operations. One investor says they are ‘encouraged by the new government’s business-friendly demeanor.’ That said, there is some ‘analysis paralysis’ when it comes to formulating policy and a regulator framework. And executing policies will be a challenge given a significant deficit of key administrative personnel. There is also a need for supporting infrastructure and suitable land for shorebase operations. Despite that, the government appears keen to keep pace in developing the basin, talking of a ‘narrow window’ before what it sees as peak oil demand. Generally, the signs are positive for the industry and the country.

Jan Mangal, oil and gas consultant and former petroleum advisor to the president of Guyana: Only Liza 1 has reached production, yet ExxonMobil’s operations made Guyana one of the top five countries in the world for flaring gas (per capita). This is sad to witness, as I was successful in getting ExxonMobil to create a gas-to-power project in 2017, but which probably stopped after my involvement ended in 2018. Oil from Guyana’s approved projects is high quality and relatively cheap for deepwater production, which insulates it from near-term market conditions. Guyanese oil production is critical to the continued existence of a number of large multinationals, such as ExxonMobil and Hess. So, there are artificial variables affecting production.

The recent change in the U.S. administration has the potential to improve the negotiating strength of Guyana versus the oil companies, and this could affect production if Guyana leverages this strength. For Guyana to succeed, it has to maximize its share of the oil revenue, and then not squander it. The People’s Progressive Party (PPP) has not maximized the country’s share of revenue. Payara project approval was rushed instead of renegotiating the contract for the Stabroek block. The PPP has a bad track record with state projects from its time in power (zero transparency and white elephant projects, among others), and unfortunately there are no signs that the same politicians will behave any differently now. The PPP will attract investment, but the question will be whether it is good for the country. In 2015, the PPP awarded the Canje and Kaieteur blocks to unqualified contractors only days before ExxonMobil publicly announced that there was oil in the adjacent Stabroek block. This bizarre decision forfeited millions or even billions of U.S. dollars for the country. And one should ask why the PPP did not wait a couple days instead.

Thomas Singh, senior lecturer in the Department of Economics at the University of Guyana: Due to technical problems with gas compression that led to excessive flaring, oil production in Guyana has been kept below the 120,000 bpd expected of Liza 1. Production was 100,000 bpd in July, 27,000 bpd in June and 42,307 bpd in May, with the target 120,000 bpd projected for December. Delays have been attributed to the pandemic, though the early occurrence of technical problems might themselves have been caused by the record turnaround of the FPSO’s completion, in which case the need to reduce production reflects the risks of short-term thinking in the industry. On Nov. 17, ExxonMobil announced that its latest discovery in the Kaieteur Block ‘does not appear to be economic on a standalone basis,’ an unusual conclusion so soon after the discovery has been made, but an indication that marginal considerations are significant now. The company has benefited from lower rental and mobilization costs because of the lower prices, but lower expected upstream returns even in the low-cost, high-quality plays in Guyana have to be considered. After expressing initial concerns about the Natural Resources Fund, the government seems less interested in reviewing it, given the lower oil prices and the realities of now being the fiscal authority. While the U.S. International Development Finance Corporation and other agencies have announced $200 billion in financing to U.S. companies wanting to invest in Guyana, investors will be more calculating about risks and the fundamentals that determine expected returns.

 Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

 

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