Evaluating Open Oil’s Financial Modeling of Guyana’s 2016 PSA - 1
Introduction Since its appearance in mid-March several readers (I suspect largely students) have been urging me to appraise and/ or review the recent financial modeling exercise carried in sections of the media, and which has been conducted by Open Oil, on Guyana’s 2016, production sharing agreement, PSA. Before turning to the next topic in the ongoing series on the PSA’s fiscal regime, I shall attend to this request, starting today. This task should take 2- 3 columns to complete. I do this in particular, because readers seemed to be intimidated by the financial modeling and all that implies in terms of rigor, precision, and the inevitable use of technical/ mathematical processes.
Open Oil’s modeling exercise has been published under what is perhaps a contentious or even provocative title: “Guyana’s oil deal is outlier low government takes just over half”. Its contents, as I shall demonstrate, however, portend this as an unjustified prediction. The local media have been harsher, with such titles as: “Analyst says…Oil deal with Exxon Mobil could cost Guyana $$ billions” Kaieteur News, March 20, 2018. the first field. That is, the Liza 1 discovery of recoverable resources of around 450 million barrels of oil. The model is based on this field, whose production life starts circa 2020. Thereafter production to final de- commissioning is modeled from 2020 to 2040. The project’s life cycle is therefore four decades, 1999- 2040.
The field’s production function envisages offshore production, utilizing a Floating Point Storage Operation, located offshore Guyana. This operation takes one year to ramp- up and subsequently six years to reach maximum output, then plateauing. Thereafter, production falls and the model sets the annual average rate of decline at 12.5 percent. Following this, de- commissioning of the field commences.
The price of crude oil used in the model is the February2018, Energy Information Agency’s (EIA) forecasted reference price to 2050. This is applied as a constant price per barrel. Estimates are: exploration cost is given as US $500 million, development cost US $4.4 billion, decommissioning cost US $ 980 million, operating cost US $ 3.7 billion. All these costs are based on Exxon’s public declarations. Of significance, given the local debates on leveraging and thin capitalisation, the model assumes zero project financial costs.