Reflections on 2020 now that it is in the rear-view mirror

Introduction

Today’s column offers a few general reflections on the experiences of the 2020 crisis and its impact on Guyana’s newly established petroleum sector, now that we are into Q2, 2021 and, temporally at least, that year is firmly in the rear-view mirror. Henceforth, in proceeding with this weekly column I’ll shift its thrust more towards an interactive and perhaps “real time” treatment of topics. This replaces the previous focus I placed on a more deliberative or learning approach. Indeed, I concede the approach to date was designed to laser focus on information providing, rather than engagement in debates and public exchanges, whether polemical or otherwise.

These two approaches have their separate rationale and therefore, validity; one is not superior to the other. The premise behind the change is that, the novelty of Guyana’s oil and gas sector justified my initial bias towards information providing or sharing. And, more than a year after First Oil (December 2019), it is reasonable to assume readers are sufficiently aware of the main issues.

The reflections are indicated below in no intended order of ranking.

Reflections: 1-3

First, there is the global context. Arguably, a trifecta of successful policies (monetary, fiscal and public health) is required worldwide to restore a sustainable “new normal” to the global system, going forward. 2020 has witnessed both a rapid spread of the worst public health pandemic in a century as well as economic downturn in nine decades. Until there is recovery to pre-crisis levels and the emergence of a new normal, one can confidently predict continued market pressures directly suppressing global demand, and indirectly, the price of primary energy in general, and petroleum liquids in particular.

Second, related to the perspective above, I remind readers of the proposition advanced in recent columns. That is, Guyana is well-positioned strategically for the post-crisis petroleum market. As indicated, its crude quality is premium, market preferred. This year the crude oil price has traded around US$60 per barrel. Forecasts over the next couple of years vary in ranges from US$65/70 to highs of US$90/100 per barrel. Based on oil company reporting, Guyana’s crude is projected in a cost range of US$25 to $35 per barrel. This suggests a healthy profit margin per barrel, if the anticipated price ranges prevail.

Third, when the second reflection is matched with Guyana’s petroleum resources potential, which was explored at length in the two columns immediately preceding this, then one of the bedrock foundations on which 1) Guyana’s national comparative advantage and 2) firm/IOC-based competitive advantages rests can be seen. This has been the cornerstone for my proposition that the Guyana Authorities should decide before the next decade whether to 1) seek membership of OPEC/OPEC+ 2) adopt the market profile as a dedicated swing-producer or 3) establish a National Oil Company, NOC. The third option I strongly recommend.

Proposition 4

Fourth, because Guyana’s hydrocarbon resources are being commercialized under contractual arrangements, under which Government owns the resources and international oil companies, IOCs, are contractors/operators, mis-understandings, mis-information, mistakes and even mischief thrive. This confusing circumstance is further complicated by two considerations. One is the acknowledged asymmetry of information flows that has bedeviled upstream crude production. And, the other is the dated nature of Guyana’s petroleum legislation; essentially the 1986 (Petroleum [Exploration and Development] Act), PEPA.

Guyana ’s oil contracts (PSAs) were negotiated bilaterally and represent the price Government set for licensing areas to investors for exploration and commercializing.

Government holds no equity, leaving the investor fully responsible for financing and project risks. The key takeaway is: a rational investor in Guyana’s hydrocarbons will decide whether to invest and how much, based on 1) locational factors (size, quality, accessibility and other technical constraints) and 2) the price set under the PSA.

That price is variously referred to as Government Take, revenue share of net cash flow or the average effective tax rate, AETR. There have been several calculations of Guyana Government Take over the years beginning with Open Oil … and then recently the Infrastructure and Energy Section of the Inter- American Development Bank (Technical Note, August,2020) All these efforts I have previously reviewed. The estimated ratios range from 50 to 60 percent. Here I shall reference the August 2020 IDB effort.

On reflection, it is clear the PEPA, along its subsidiary regulations, is not the measured product of a grand design. Serendipity has realized a PSA governing ExxonMobil and partners, which makes that grouping the lead operator for Guyana’s hydrocarbon resources over the next several decades. In my view the ruling PSA constitutes a second bedrock on which both the country’s global comparative advantage, along with Exxon’s competitive advantage, rest. The details speak forcefully to this reality.

Details

The IDB has modeled Guyana Government Take at 51 percent. While admittedly this ratio is on the “lower end” for state revenue capture, it remains the most competitive regionally. Further, the modeled per barrel cost of production for the next five scheduled projects targeting 750,000+ barrels per day by 2026 is US$18.3 per barrel. Further, the itemized per barrel cost ratios are, in descending order, opex 40.4 %; capex 25.7%; decommissioning 15.8%; drilling 13.7%; and exploration 3.8%.

Of note, the IADB also models Government Take at US$300 million for 2020 and US$872 million for 2026. I mention this because the overseas-based elements of the noise and nonsense echo chamber promote the false narrative in social and print media that petroleum studies on Guyana claim the country would have earned billions of US dollars by the end of 2020. I believe I have read almost everything publicly available on this topic and never saw this in print. As observed earlier there is room for a trade-off between revenue capture and competitiveness.

Conclusion

When I began to put today’s column together, I had intended to add two other reflections; namely 1) ExxonMobil, the lead Operator, and 2) the global transition away from carbon-based energy supplies. Space ran out on me. This is not all loss as I plan to deal with these two topics comprehensively, going forward.