The intent was always to simplify my analysis of the oil sector
Reference is made to Deryck Daly’s letter to the Editor of Stabroek News dated October 18, 2022, with the caption, “Bhagwandin’s computing model seriously overestimates oil production OPEX and CAPEX”. Mr. Daly raised some valid points in his letter. There is really no right or wrong answer. Thus, this letter is not meant to engage Mr. Daly in a debate per se, as I have done with Professor Hunte and Ram et.al, but to offer some clarifications on the questions raised on the computation. Mr. Daly may not have been privy to the full analysis which included the explanation of the assumptions used in the forecast analysis and the background for doing same. For Mr. Daly’s reference, the full report can be accessed on my LinkedIn page here: https://www.linkedin.com/posts/joel-bhagwandin57481470_an-updated-outlook-of-guyanas-take-from-activity6958434256062693376-ENYr?utm_source=share&utm_medium=member_desktop.
Having examined the consolidated financials for EEPGL, HESS and CNOOC for 2021, the operating cost accounted for 42% of revenue of which amortization and depreciation expenses accounted for 14.41% of revenue. Typically, the operating cost may range from 12% - 40% of revenue. Also, with the assumption that the operating cost remains relatively constant throughout the productive life, after capital expense is recovered.
For easier reference, hereunder mentioned are the assumptions used in the Base Case Scenario Financial Model Assumptions. The base case scenario takes into consideration the project economics of the four approved projects separately, after which the findings were amalgamated.
● Fiscal framework in the PSA:
Royalty: 2% of gross revenue
Profit Oil: 50%
● Allowances:
Capital expenditure (CAPEX) depreciation:
3.4% straight line method
Cost Recovery Ceiling: 75%
Profit Oil = Gross Revenue – Cost Oil (OPEX + Capital Cost Recovery)
Profit oil split between the Government and the oil companies are as follows:
Total Government Take = 2% of gross revenue + 50% profit oil.
The average price used in the base case scenario is $60.
Operating expenditure (OPEX) for Liza 1 using FY 2021 actual figures was 42%.
OPEX for the other projects is likely to be relatively constant at 30% (maximum) or 12% (minimum) throughout the productive life of the projects. This is on account of a relatively low-cost environment owing to Guyana’s light and sweet crude coupled with the technology employed by the oil companies that aid in achieving greater efficiency.
A discount rate of 8% representing ExxonMobil’s weighted average cost of capital (WACC).
As the Development / Capital Cost is recovered, Government’s Take as a percentage of the gross revenue is expected to increase from 14.5% to 37%.
The 75% cost recovery ceiling is split 30% for OPEX and 45% for recovery of capital cost.
To determine the payback period for the invested capital using the rate of capital cost recovery, the payback method formula was used in the calculation.
The main reason I only used four projects in the forecast is because these are the only approved projects so far. So yes, I am aware of the others, but they were not included for this reason at this point in time. I am aware that the Liza 1 permit is for 20 years but the reason I modelled the recovery over eleven years, is because it is based on the reported estimated reserves for each field, and assuming that production at the nameplate capacity would be maintained throughout. But yes, Daly is correct, the productive life can go beyond the 11 years up to 20 years wherein in the latter years, there will be a decline in production for each field or reservoir. In the scenario I would have done, the full 20 years was not considered. Also, currently both Liza 1 and 2, production levels have been optimized above the nameplate capacity. I should mention, too, that a number of risks were also not considered in the current forecast, such as the impact of environmental risk, operational risk, political, geopolitical, and other economic risk factors. These, I intend to include in an updated forecast in due course, but as one can imagine, the assumptions for these other factors would make the forecasting much more complex and sophisticated – but far more practical and realistic.
Against this background, the observations made by Mr. Daly are not necessarily wrong or right. In doing these forecast, a number of scenarios with sensitivity analysis can be modelled with different assumptions. Proper justifications for the assumptions are also important. In the forecast done, I only did one scenario for simplicity. Of course, as more fields are developed and approved, there is much more economic rent for the country, potentially, and the model can be updated. I do intend to model a number of different scenarios to include some of the other assumptions as pointed out by Mr. Daly in due time as well, and as time would so permit. Bear in mind that someone like Mr. Daly would appreciate that this type of work, to model a number of different scenarios using excel (I do not have any sophisticated software as yet to make it easier) takes up a painstaking amount of time.
However, as explained herein, my main intention for now was to keep it as simple as possible. The objective of so doing was simply to ascertain reasonably, based on the current PSA, what could be Guyana’s earnings from the Stabroek block, and to have an informed basis for public discussions and debate on the subject matter. I found this to be absolutely necessary especially since there is an army of commentators and critics of the PSA and other related oil and gas issues, who have not taken the time to do any proper analysis to inform their public utterances and to at least have an intelligible discussion. Further, I subscribe to the view by a few others that a lot of time have been wasted by these so so-called pundits who continue to criticize the PSA but offer no meaningful contribution in how the country can properly utilize the resource for its development and economic prosperity.