Intrinsic Competitiveness and Market Preference are two leading drivers behind global commercial success
Introduction
Last week’s column ended with an observation that is so revealing I repeat it as the title for today’s column. That is, two leading drivers; namely, the intrinsic competitiveness of Guyana’s crude oil discoveries along with its preferred demand quality combine to assure worldwide commercial success. Space in last week’s column made it impossible to provide more than one brief indication of its premium quality - medium sweet low carbon. That is, the recent International Maritime Organization’s ruling approving exclusive use of low sulfur fuel in maritime vessels; Liza crude has a 0.5 sulfur rating.
I continue this discussion here, focusing on the intrinsic competitiveness driver.
Competitiveness
Competitiveness in oil and gas is exhibited broadly in low and declining per unit output costs over time. The forces assuring such outcomes are: 1) Intense application of research and development ( R&D); improved knowhow and technical change 2) purposeful training and skills enhancement of the work force 3) consistent advances in best practices management of complex oil and gas offshore operations; and 4) continuous updating of the national regulatory and governance regime These four forces cover the activities of the traditional factors of production ( land, labour, capital, entrepreneurship) and therefore, their productivity, along with the industry’s operational environment.
Given the expected trend in Guyana’s unit cost (discussed below) it is important to record that the market expects the price of Brent crude to rise during 2021. Institutional price projections for 2021 range from lows of around US$49-50 per barrel, 2021 average, (Energy Information Administration, EIA and Statista) to US$66 (Oil Price. Com’s, various contributors). Outliers even suggest the return of US$ 100 per barrel crude! Personally though, I believe US$60 per barrel is the most likely outcome. The outcome that suits Guyana is for unit cost to fall and unit price to rise. This would improve the profitability of its crude.
Unit Cost
At present, the ExxonMobil and partners grouping constitute the only commercial crude oil producing entity in Guyana. Although ExxonMobil is the lead
Operator in the grouping, most of the official data on offshore Guyana costs have come from the Hess Corporation in its regular reporting and presentations at conferences, seminars and other shareholder/ stakeholder gatherings. Of significance Hess has reported that for the group breakeven cost was initially US$40 per barrel for Liza 1. This was expected to fall to US$35 per barrel when Liza 2 is fully on stream. And, to decline yet further, to as low as US$25 per barrel when Payara comes on stream. The breakeven cost establishes the price for crude that the group requires to operate profitably in Guyana. It also gives guidance as to how a rational producer is likely to respond to wide price fluctuations.
Given the above formulation there is no logical room for anyone to assert that, Guyana’s intrinsic competitiveness can be solely attributable to its petroleum geology ( nature) and serendipity (luck). While there is no doubt that these two considerations have played immense roles to date in Guyana’s infant oil and gas sector. It would be extreme foolishness to ignore or even seek to downplay the complementary roles of external capital, knowhow, R&D, and business organization in its commercial successes. In this regard therefore it is imperative to bear in mind at all times that, the 2020 general crisis has forced international oil companies, IOCs, to cut back robustly (around 30 per cent) on planned capital expenditure, CAPEX.
ExxonMobil has slipped significantly at the global level in this 2020 period of general crisis. It has nonetheless maintained deepening commitments to Guyana’s offshore oil and gas. Readers will recall its billion dollar losses, which as I had indicated previously, the company reported in its H1, 2020 financial results. Further, I had also reported that, as far back as Q4. 2019, UNCTAD had projected a big fall in global crude oil demand and price, leading to severe CAPEX cutbacks in 2020. The Covid-19 pandemic has resulted in making this prediction worse.
ExxonMobil has however, suffered other setbacks. It has been outperformed by Chevron, which is now considered to be the leading private oil company worldwide. Also, it has been replaced as a component on the Dow Jones Industrial Average Index, despite holding the honour for being the longest tenured company on that index. Additionally, a number of allegations, such as: causing environmental harm, reckless pollution, embedded corruption of regulatory authorities and more broadly practices promoting regulatory capture have been directed at it. In spite of these ExxonMobil has remained, in my view, very bullish on Guyana’s offshore petroleum finds. Thus readers should note the Payara/Pacora offshore well under consideration involves a whopping US$9 billion CAPEX.
This leads me to hold the view that the fortunes of ExxonMobil are inextricably intertwined with low cost Guyana oil and gas. Rather than the risk of a domino effect of collapsing CAPEX in Guyana’s oil and gas sector, I believe the explosive growth in the rate of investment is the more likely outcome. In the concluding section I note a few signals flowing from this prediction.
Conclusion: Signals
By way of conclusion I identify, in random order, issues I’ll address on this topic going forward. To begin, from the Operator’s standpoint I posit that, in the face of these challenges, ExxonMobil is taking concrete steps to re-brand itself over the long run as an energy supplier and not simply an oil company. Second, given my often declared position in this series on Guyana’s renewable energy potential, the country needs to take a similar long run option to re -brand itself as an energy supplier and not a crude oil exporter as it is now doing. Such a strategic repositioning of Guyana’s long term interests objectively rejects the noise and nonsense pamphleteering concocted from obsolete notions of big oil in small countries. Sadly, past employees of big oil, illinformed dabblers who echo them, sections of the print and social media peddle mischief and misinformation that can undermine the long term interests of Guyana’s poor and powerless. Next week I’ll continue this discussion.