The Cost – Price Relation: Indicative Production Cost for Guyana’s Oil & Gas Discovery
Introduction
Today’s column addresses the “cost-price relation”, likely to emerge as Guyana transforms its oil and gas “discovery” into an industrial success. To remind readers, this is the third of four features of Guyana’s “discovery” singled out for further amplification. The present column starts with cost and continues with price next week. Clearly, at this early stage of my presentation, this can only be an indicative exercise. Exploration of the “discovery” is ongoing, and attempts to determine cost before production commences are definitely speculative. Consider also, present best estimates expect production and export to take place 5-7 years from now. Indeed, the “consortium” of multinational companies, exploring and developing the Guyana play, seems to be only at the early phase of appraisal, mobilization, feasibility and project financing.
Highlighting this feature now, underscores the fact that the wider is the positive difference emerging between the overall unit cost of producing oil and gas and the market price for these products, the greater is the benefit for potential beneficiaries. As previously indicated, while these beneficiaries certainly include Guyana, they are, by no means, exclusive to Guyana. Shareholders, investors, and other stakeholders within the “consortium” enjoy legitimate expectations for benefits; given the financial and other risks they have undertaken, and their up-front resources provided for the exploration of the “play”.
Nonetheless, the eventual distribution of benefits between various groups of claimants, will be largely shaped by arrangements between the Government of Guyana (the resource owner) and the Consortium (the developer). Most of Guyana’s benefits will be reflected in its levels of consumption, income, wealth, employment, production, linkages, growth, and development during the production phase.
Fourth, the main descriptive statistics reveal the simple average (mean) of the overall unit cost values for the top 20 nations is US$27.10. And, fifth, the median value is US$28.50. Sixth, variation in the overall unit costs from the simple average (variance) is quite strong. The mean absolute deviation is 10.50 and the coefficient of variation in the values is 0.474 (and therefore the relative standard deviation is 47.4 percent).
Seventh, the average percentage distribution between capital expenditure and operational expenditure for all four groups of countries is 52:48. The data do not indicate a unique relationship between the size of national production and this ratio, except perhaps that the ratio is the worst (48:52) for the highest cost producers! However, the ratio does not consistently worsen across all four groups of countries, as their average size of production increases.