More on for­mu­lat­ing De­ci­sion Rule 2: The Haas Guyana Re­fin­ery Study

Stabroek News Sunday - - LETTERS -

In­tro­duc­tion

To­day’s col­umn aims at walk­ing read­ers through the Guyana Re­fin­ery Study, pre­sented in a talk by Pe­dro Haas of Hartree Part­ners, in May this year. This study was con­ducted on be­half of the Min­istry of Nat­u­ral Re­sources (MoNR). The talk cen­tred on four items, with a pe­riod left open for pub­lic dis­cus­sion. Those items were 1) the strate­gic ques­tion, which the study sought to ad­dress; 2) a broad de­lin­eation of lo­cal and in­ter­na­tional oil mar­ket dy­nam­ics; 3) pre­sen­ta­tions on Guyana’s re­fin­ery eco­nomics; and 4) other oil re­lated com­mer­cial op­tions open for con­sid­er­a­tion.

Strate­gic ques­tion

The first item ex­pressed the idea, the vi­a­bil­ity of which, is typ­i­cally at the heart of ev­ery fea­si­bil­ity study: to pro­ceed or not. That query in this con­text is: “given Guyana’s de­mand for fu­els, and its oil and gas pro­duc­tion prospects, what are the eco­nomics of in­vest­ing in do­mes­tic re­fin­ery as­sets?” Pre­sum­ably, this ques­tion is framed for a state in­vest­ment; whether fully or par­tially state-owned is not spec­i­fied.

The main pe­tro­leum prod­ucts iden­ti­fied for Guyana in the study are: mo­gas, gasoil, kerosene, jet fuel, fuel oil, liq­ue­fied pe­tro­leum gases (LPG), and avi­a­tion gaso­line. Cur­rent an­nual de­mand for th­ese is about 13-14 mil­lion bar­rels (MB), all of which is im­ported. The growth in this de­mand has been rapid be­tween 2010 and 2012, ris­ing from 11.6 to 13.3 MB.

Oil mar­ket

Two ma­jor in­ter­na­tional de­vel­op­ments have been iden­ti­fied. One is the im­pact of surg­ing US shale oil pro­duc­tion. This has led to a struc­tural shift in the At­lantic Basin, from its be­ing a net im­port­ing re­gion of re­fined prod­ucts to a net ex­port­ing re­gion. Presently, re­finer­ies in the US Gulf Coast are now ma­jor ex­porters of re­fined prod­ucts to the Caribbean and Latin Amer­ica.

The sec­ond in­ter­na­tional oil mar­ket devel­op­ment high­lighted is the on­go­ing ef­fort by OPEC (and other lead­ing oil and gas pro­duc­ers) to cut their out­put in or­der to re­duce global sup­ply (in­ven­to­ries) thereby per­mit­ting global de­mand pres­sures to in­duce a re­vival in prices. As it has turned out, how­ever, the for­mer ef­fect has largely coun­ter­bal­anced the lat­ter.

Guyana re­fin­ery eco­nomics

The study refers to both a “brown­field” and “grass­roots” re­fin­ery, but op­er­a­tionally fo­cuses on the lat­ter. This type of re­fin­ery with its planned ca­pac­ity is built from scratch, and there­fore, in­cludes the re­fin­ery in­fra­struc­ture; and is ex­pected to be con­structed at one go. The method­ol­ogy em­ployed in the study fol­lows the lines of re­fin­ery eco­nomics, which th­ese col­umns have al­ready re­viewed.

Given ex­pected prices, ex­perts pro­vide cap­i­tal es­ti­mates, (con­struc­tion costs and their time­lines); op­er­at­ing costs and rev­enues have been prox­ied from ex­ist­ing re­fin­ery mar­gins, bear­ing in mind the es­ti­mated re­fin­ery con­fig­u­ra­tion and what this pre­dicts for ca­pac­ity, ca­pa­bil­ity and com­plex­ity, which de­ter­mine the re­fined prod­ucts pro­duced. Sev­eral tech­ni­cal terms are used in this dis­cus­sion, some of which read­ers may not be fa­mil­iar with and th­ese are ex­plained be­low.

Net­back method

One of th­ese terms is the op­er­at­ing net­back per bar­rel of oil. This is a tech­nique for valu­ing oil from both up­stream and down­stream per­spec­tives. From the down­stream per­spec­tive, it is the value of the re­fined prod­uct’s gross prod­uct worth, less costs of trans­port­ing and re­fin­ing the oil. And, from the up­stream per­spec­tive it is the sales price at the well­head less trans­port and pro­cess­ing (re­fin­ing) costs. In other words, the av­er­age re­al­ized price of a bar­rel of oil less all the costs of pro­duc­tion (in­clud­ing trans­porta­tion, mar­ket­ing, pro­duc­tion and roy­alty fees). In other words also, the net profit per bar­rel of oil. Such prices are used to in­di­cate (com­pare) vari­a­tions in prof­itabil­ity, al­though they do not ex­plain why th­ese vari­a­tions ex­ist.

PADD

An­other tech­ni­cal term used is the acro­nym PADD. This stands for the Pe­tro­leum Ad­min­is­tra­tion for De­fense Dis­tricts of the USA. Th­ese are ge­o­graphic ag­gre­ga­tions where PADD1 stands for the East Coast; and PADD2 for the Mid­west; PADD3 the Gulf Coast; PADD4 the Rocky Moun­tains; and, PADD5 the West Coast.

In the study, P1 rep­re­sents the price of Brent oil in the North Sea; and T1 the trans­port costs of this oil taken to PADD1, or the US East Coast. The price of Brent oil is then equal­ized to the tech­ni­cal spec­i­fi­ca­tions of Guyana’s crude oil. Th­ese lat­ter as given as: API = 32.1 and sul­phur con­tent = 0.51 per cent. De­rived from this, the Net­back for Guyana re­fined oil is its equal­ized crude oil price at the US East Coast less trans­port costs to Guyana. This lat­ter is prox­ied as the trans­port costs to Venezuela. Guyana’s Net­back per bar­rel of oil at 2016 prices, av­er­ages US$46.54

Net­for­ward method

In con­trast to the Net­back method­ol­ogy, Net­for­ward pric­ing is typ­i­cally used by buy­ers in or­der to de­ter­mine whether to pur­chase the oil at its sup­ply source and pay for its trans­porta­tion and other re­lated costs, or to pur­chase at the des­ti­na­tion re­gion. At the US Gulf Coast (PADD3) that price plus trans­port to the Guyana des­ti­na­tion has been es­ti­mated in the study for reg­u­lar gaso­line, premium gaso­line, and ul­tra-low sul­phur diesel, as US$59.73; US$65.30 and US$59.88 re­spec­tively.

Guyana re­fin­ery as­sump­tions

There are sev­eral as­sump­tions used for es­ti­mat­ing the vi­a­bil­ity of the Guyana re­fin­ery. Th­ese in­clude: first, the re­fin­ery, as con­fig­ured for the study, will be re­fin­ing 100,000 bar­rels of oil per day at the com­plex­ity level of fluid cat­alytic crack­ing.

This is the type of state-owned re­fin­ery which the study deems as needed to be com­pet­i­tive. Sec­ond, the 10-year av­er­age mar­gin of a 50/50 mix of a Louisiana heavy and light low sul­phur oil in a typ­i­cal US Gulf Coast re­fin­ery is US$5.84. This is ap­plied to the Guyana re­fin­ery. Third, the over­all cost for con­struct­ing the re­fin­ery is es­ti­mated at US$5.2 bil­lion.

Fourth, the cost of debt used in the economic mod­el­ling of the re­fin­ery is given as 2.88 per cent. This is equiv­a­lent to the Bank of Guyana’s 364-day Trea­sury, plus a 0.5 per cent premium. Fifth, the cost of eq­uity is put at 10 per cent.

This is based on me­dian to­tal share­holder re­turn in the chem­i­cal in­dus­try for the pe­riod 2011 to 2015. Sixth, the ex­change rate used is G$206.5 to US$1. Sev­enth, op­er­at­ing costs for the re­fin­ery are prox­ied by the IEA’s re­fin­ery mar­gin es­ti­mates and given as US$3.30 per bar­rel of oil. And, fi­nally, the time­line for con­struc­tion of the re­fin­ery is 60 months, with the project life that nor­mally ap­plied in such stud­ies ─ 30 years. Given the re­fin­ery ca­pac­ity, on com­ple­tion, it ex­ports the re­fined prod­ucts, which are not con­sumed lo­cally.

Con­clu­sion

Next week I shall present the key re­sults of the anal­y­sis per­tain­ing to the “vi­a­bil­ity of the state re­fin­ery idea”, which is the de­sired out­come of ev­ery fea­si­bil­ity study. Then I would be in a po­si­tion to state De­ci­sion Rule 2.

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