Guyana’s Infant Oil & Gas Sector: Assessing the likely 2020 Crisis Impacts

Introduction

In today’s column I begin my consideration, in some detail, of the problematic that I had posed several weeks ago concerning the likely impacts on Guyana’s infant oil and gas sector of the unfolding 2020 global general crisis. I had characterised this problematic, metaphorically and dramatically, as a baptism of fire and brimstone. This was done in recognition of how severe are the challenges, which I believe this crisis will throw up for Guyana, as a small poor open economy with a monthsold petroleum sector.

The column sets about three tasks. The first is to offer an introductory comment on the problematic, as I have presented it in this series of columns. Second, it provides a summary description of the current state of Guyana’s oil and gas sector. And, third, it presents a succinct catalogue of the performance of key variables in the oil and gas sector, such as production, marketing, price and government revenue.

The Problematic

My description of Guyana’s oil and gas sector as infant is intended to be taken literally. Crude oil production and sale have been taking place for only five months (since December 20, 2019). Natural gas production is yet to be commercialized. Thus far, the gas has been flared or re-injected into wells/reservoirs. As indicated earlier, the 2020 global general crisis has five features, all of which impact significantly on the demand and/or supply of crude oil in the world market.

To recall, these features are: 1) 2019 projections by agencies like UNCTAD based on trends evident in that year, which signaled an economic recession in 2020 along with quite a bad year for crude oil demand; 2) the COVID-19 public health pandemic; 3) the Saudi Arabia vs Russia oil war; 4) the United States shale/OPEC+, (Saudi Arabia) existential conflict for oil market share; and 5) the global “end of days’ forecast for fossil-fuel based carbon emitting energy sources.

On the demand side, the first two listed features signify a strongly depressed demand for crude oil. Clearly by how much, and for how long, is a function of, on the one hand, the rapidity or time frame, depth and severity, sectoral coverage, and national and regional distribution of the decline in demand for crude oil; and on the other side, the speed of economic recovery. This latter, in turn, is dependent on job creating consumer spending and private investment as well as government spending, including the provision of safety nets. Readers should note that the pandemic effects on demand pre-dominate. Regrettably, this feature is the least amenable to confident forward-looking analysis.

Contrarily, the last three features cited above, relate more to the structure of the future supply mix of energy sources available on the world market, than they do to the global demand for crude oil. A key concern here for Guyana, is the long term survivability of carbon emitting fossil fuels globally, alongside Guyana’s projected recoverable oil and gas reserves along with the country’s path for transitioning to the supply of renewable sources of energy.

Guyana’s Crude Oil: Condition & Performance

In this Section, I combine a brief description of the current condition of Guyana’s oil and gas industry with a summary portrayal of its brief existence, since First Oil on December 20, 2019. Following this discovery, the petroleum industry’s lead operating group was firmly established - ExxonMobil and partners. No other businesses in the field could match this group. Indeed, the group had now embraced three major core dimensions of the country’s Production Sharing Agreement (PSA); namely, exploration, development (project planning and implementation) along with the distribution, as agreed, of earned profits, among the group’s partners and the Contractor, the Government of Guyana (GoG).

After December 2019, another crude oil discovery was made by the group in January of this year – the Uaru well. This find happens to also be Guyana’s 16th crude oil discovery since the first of these was made in May 2015. Total discovered resources reported by the group stands today at over 8 billion barrels of crude oil. On the face of this, I have made the claim that, this has been the fastest rate of crude oil discovery, where substantial finds are involved, which can be found in the literature.

Current problems in the crude oil market have impeded performance of the operator. Output thus far has averaged only 75,000 to 80,000 barrels per day (bpd). This is down from the operator’s initially projected target of 120,000 bpd. Indeed this target is now set to be achieved during the second half of this year. The announced profit distribution arrangement is for the GoG to uplift its profit share of crude oil in lots of around one million barrels of cargo at a time. To date Guyana has already received two such lifts. Three more of these remain to be uplifted later this year.

Guyana’s crude oil profit share contained in its first three cargoes is due to be marketed by Shell Western Supply and Trading, which won the contract for its first sales. This contract holds until a substantial longer term marketer is recruited. That recruitment process is well advanced, with a short list of bidding companies set to be declared by June 25. Guyana has not hedged its sales so far on the world market, thereby exposing these to market variations. Indeed the Department of Energy (DE) says sales will be made at the ruling Brent price for the day, until Guyana’s crude oil specification is established in the market place. A price of approximately US$55 per barrel was earned on its first cargo sale. As earlier indicated, no natural gas has been commercially disposed of to date, all has been flared or re-injected into reservoirs.

Reported earnings from oil and gas, which have been deposited to date into the Natural Resources Fund (NRF) are: 1) about US55 million from the first profit oil cargo; and 2) two per cent Royalty payment of about US5 million paid quarterly on oil sold. Clearly the expectation is for lower oil prices, perhaps until at least year end; but higher Royalty payments as production increases to this year’s target of 120,000 bpd. There are no signs of any intended output cuts from ExxonMobil and partners. The first two wells to be exploited, Liza 1 and Liza 2 are on schedule, with the third, Payara under DOE consideration.

Conclusion

Next week I continue to assess these impacts