Formulating Decision Rule 2: A state-owned oil refinery

Introduction

Last Sunday’s column (September 3) marked one year of uninterrupted weekly articles addressing the topic: ‘Guyana in the coming time of its oil and gas industry, circa 2020’. A longer series on Guyana’s extractive sector has been ongoing since December 27, 2015. The topic currently being addressed: whether Guyana should establish a local oil refinery, is the penultimate one in the series.

These columns aim at fostering a critical mass of educated/informed Guyanese on the topic. They do not promote any sale of services, silent agendas, self-advertisement, or other hidden wares. My conviction is simply that, Guyana’s best defence going forward with the industry depends on its inclusiveness, nimbleness, innovation and creativity. In truth, there is a humungous variety of global experiences from which to draw lessons; indeed more than six decades of trial and error, as well as resource blessings and curses. There is nothing novel to this observation.

Decision Rules

Decision Rule 1 (recommended in last week’s column), will be added to, in reference to state investment in a local oil refinery. However, before proceeding with that topic let me first add further comment on circulating proposals for establishing privately owned modular mini-oil refineries.

In January this year, the African Business Roundtable had pushed back against the Country Manager of Exxon’s Esso Exploration and Production Guyana Limited, for claiming the building of an oil refinery in Guyana “would not make business sense”, because of scale, global competition, and efficiency concerns. The Roundtable responded by advocating the cause of small modular refineries: “in the range of 7,500 to 10,000 barrels per day, designed to underwrite Guyana’s industrial advance and have multiplier effects on sustainable development”. The Roundtable boldly asserted that: “saying no to a refinery is saying no to local content.”

I will indicate, in skeletal form, two private sector proposals along these lines. One is the Guyana Energy Self Reliance Initiative (GESRI), led by the Intellectual Dynamics Corporation (IDC) Group of companies and its partner, Refinery Equipment of Texas. Their proposal aims at establishing total capacity of 7,500 barrels of oil per day (BPD), based on three modular refineries ranging in size from 1,500 to 3,000 BPD. The projected installation and commissioning timeline for the three complexes is short, just 24 months.

The estimated initial project cost is US$145 million, with the “refinery and support infrastructure” accounting for 68 per cent, and “installation and commissioning”, together with “administration and management” the remaining 32 per cent. The proposed financing of this capital outlay is: 1) private equity and 2) structured agency financing. The latter, however, has not been amplified in the proposal, which does offer nonetheless “to sell refined fuel products at reduced rates” (30 per cent below current domestic rates).

The three modular mini-refineries are planned for Regions 3, 4 and 6.

G$100 per share

Asimilar sized proposal for a 6,000 BPD refinery was made by the Prime Energy group, back in 2011, before the Liza 1 find. This is promoted as a G$100 per share scheme, which makes it far more populist oriented than the GESRI proposal. Capital cost is estimated at US$100-200 million; a wide range. This project is located at Linden, in Region 10, former home of Guyana’s bauxite industry and an industrial area desperate for the revival of its extractive industry leadership status. Prime Energy is partnered with CHEMEX and Kuai Energy Systems, international developers and suppliers of oil and gas modular refineries.

Both these private refineries have limited capacity, capability and complexity. Thus Prime Energy speaks of a capability to produce gasoline, diesel, asphalt, naphtha, kerosene, diesel 2 and heavy Fuel Oil 6, but is planning to produce the first three, initially.

The decision rule governing these private proposals was given last week. Significantly, neither proposal has made an explicit call for out-of-the-ordinary government/state support, while they both partner Guyana (resident and diaspora) capital with foreign private investors.

State-owned refinery

These comments on private proposals for modular mini-oil refineries arise in the context of the problematic: should the Guyana state establish a local refinery? Typically, such a refinery’s scale would be in the order 100,000 + BPD, with the capacity/complexity/capability of the refinery exceeding that of proposed modular mini-oil refineries. Indeed, Exxon’s stand (rejected by the Roundtable), had envisaged a local refinery with a capacity of around that amount. Exxon’s Country Manager had declared “the projected production of about 100,000 barrels per day” as the base output of a state-owned local refinery would be unprofitable. He went on to urge that an even larger refinery was necessary, in order to reap economies of scale at levels prevailing in the hemisphere.

It is likely that such sentiments were behind the Ministry of Natural Resources’ request for a feasibility study on a government established local oil refinery. This task was given to Pedro Haas, Director of Advisory Services, Hartree Partners. I have not seen the terms of reference for this study, but did find a PowerPoint presentation of the talk on the topic by Mr Haas, on May 17, 2017. As readers would be aware, a PowerPoint presentation is, at best, the skeletal frame of a delivered talk. It would be most unfair, therefore, for me, or indeed for anyone, to criticize the document for not delineating what the reader personally wants, as against what its author has been instructed to undertake. On the content of this instruction, I have no information.

However, it is well recognized that a statesponsored feasibility/cost benefit analysis should be aimed at analyzing the viability of the idea, in order to determine whether to proceed or not. This is a crucial step, in the assessment of the feasibility of a state-owned oil refinery. In practice, there are several required dimensions to all such assessments, including financial, commercial and economic. And for a state project the economic dimension is key, as it implies using economic values along with commercial market ones, particularly where, as in Guyana, prevailing competitive markets do not ensure that domestic/international market prices/costs and their domestic economic counterparts (prices and costs) are broadly equivalent.

The study, as reported in the PowerPoint presentation, does not attempt to clarify such concerns. Instead, the author is very clear, the strategic question he seeks to answer is: “Given Guyana’s demand for fuels, and its oil and gas production prospects, what are the economics of investing in domestic refining assets?”

Conclusion

Because of the number of readers who have asked me to walk them through the “feasibility report,” I shall attempt this task, beginning next week, as I proceed to formulate Decision Rule 2.