Eval­u­at­ing Open Oil’s Fi­nan­cial Mod­el­ing of Guyana’s 2016 PSA – 2

Stabroek News Sunday - - REGIONAL NEWS -

In­tro­duc­tion

Within hours of the pub­li­ca­tion of my last Sun­day’s Stabroek col­umn, where I had in­di­cated my in­ten­tion to write a “three-part re­view of Open Oil’s re­ported fi­nan­cial mod­el­ing ex­er­cise of Guyana’s 2016 PSA”, its Founder and Au­thor of the ex­er­cise wrote to the Stabroek News Ed­i­tor “to cor­rect some in­ac­cu­ra­cies” (let­ter pub­lished, Mon­day, May 7, 2018). Not to be dis­tracted from my orig­i­nal aim, I will pro­vide a de­tailed re­sponse to these al­leged “in­ac­cu­ra­cies”, in the last part of my “three-part re­view”. To­day I shall con­cen­trate on wrap­ping-up the first part of the re­view; which is, the “de­scrip­tion of the key fea­tures and as­sump­tions” be­hind the mod­el­ing ex­er­cise.

Mean­while, the in­ac­cu­ra­cies that were iden­ti­fied in the let­ter, in­clude: 1) “Open Oil did not de­velop the FAST stan­dard” 2) Open Oil is not an NGO, but an in­cor­po­rated Ger­man Com­pany 3) the claim that it of­fers “unique spe­cial­ized train­ing” is in­ac­cu­rate 4) the claim also that it “of­fers its ser­vices for sale as an equal op­por­tu­nity con­sult­ing group is a phrase it has not used” 5) fur­ther, the claim that “the model is fo­cused on Liza I as the first field” is in­ac­cu­rate 6) and fi­nally, the use of the “Feb­ru­ary long-term fore­cast price by the EIA” is in­ac­cu­rate. I shall fully ad­dress each of these in turn in Part 3 of the three-part re­view.

To­day’s Col­umn Fo­cus

To­day’s col­umn wraps-up Part 1 of the eval­u­a­tion of Open Oil’s FAST fi­nan­cial mod­el­ing of Guyana’s 2016 PSA. The ba­sic aim is to sum­ma­rize the key fea­tures and as­sump­tions in­putted into the model ex­er­cise.

Those fea­tures in­clude: 1) Liza I rep­re­sents Guyana’s first oil and gas ex­trac­tion en­deav­our, thereby mak­ing Guyana an “early stage” pro­ducer 2) op­er­at­ing in a “fron­tier” re­gion 3) lo­cated off­shore 4) ex­ploit­ing its first “sig­nif­i­cant find” with con­sid­er­able “po­ten­tial”, while 5) fac­ing sig­nif­i­cant po­lit­i­cal, geo-strate­gic, tech­ni­cal, & tech­no­log­i­cal chal­lenges, in­clud­ing en­vi­ron­men­tal ones.

These fea­tures have been iden­ti­fied largely with the in­tent of lo­cat­ing the mod­el­ing ex­er­cise re­sults among those from a group of com­pa­ra­ble African and Asian oil-pro­duc­ing de­vel­op­ing coun­tries. These coun­tries are listed in Sched­ule 1. I read­ily ad­mit that, I am in no po­si­tion to as­sess the suit­abil­ity of this group of com­para­tors, but I am quite will­ing to ac­cept the list at face value, based on Open Oil’s rep­u­ta­tion.

Source: Open Oil, 2018.Those to­tal cost fig­ures shown last week came from the mod­el­ing ex­er­cise, which claims they have been ob­tained from pub­lic state­ments made by Exxon and its part­ners. The fig­ures are sum­ma­rized in Sched­ule 2, along with their per unit val­ues.

The pur­pose for the per unit ci­ta­tion is to draw com­par­isons (for read­ers’ con­ve­nience) with re­cent data on the per bar­rel break­down of cash cost to pro­duce a bar­rel of oil from a sam­ple of 12 dif­fer­ent ju­ris­dic­tions. The data on op­er­at­ing costs pro­vided in the Sched­ule be­low, are es­ti­mated for both fixed and vari­able cost. Fixed costs are es­ti­mated “at US$50 mil­lion a year fixed”. And, vari­able costs are es­ti­mated “at US$6 vari­able per bar­rel”. Both es­ti­mates, the ex­er­cise re­ports are “in line with es­ti­mates in sim­i­lar projects”.

The bar­rel break­down data were ob­tained from Rys­tad En­ergy, 2018 and are from a sam­ple of 12 coun­tries. These data show per bar­rel av­er­age cash cost ranged from less than US$10 (Saudi Ara­bia) to more than four times as large US$40 (United King­dom), (March 2016). How­ever, as the mod­el­ing ex­er­cise re­port notes “Es­ti­mates for the Brent bench­mark oil have been used since no in­for­ma­tion is avail­able on a pre­mium or dis­count for Stabroek crude”.

Fi­nally, the Rys­tad data also re­veal that five of the sam­pled coun­tries (Canada, Venezuela, Nige­ria, Brazil and the United King­dom) had cash costs per bar­rel that ex­ceeded Liza I mod­eled per bar­rel cost of US$23.23. Five coun­tries had a cash cost less than US$20 (In­done­sia, Rus­sia, Iraq, Iran and Saudi Ara­bia).

Note: (1) per bar­rel Open Oil, 2018.

Fi­nally, last week’s in­for­ma­tion makes clear the ex­er­cise on Guyana’s Liza I has been ef­fec­tively mod­eled for a pe­riod of four decades 1999-2040. The first two decades cov­ered the lease, ap­praisal, ex­plo­ration, and de­vel­op­ment phases; and, the last two decades (still to come), cover the pro­duc­tion and de-com­mis­sion­ing phases.

Model’s Rev­enue Flows

(2) to­tal pro­duc­tion of oil 447 mil­lion bar­rel­sSource:

Based on 1) the Liza I tar­get of 450 mil­lion bar­rels of re­cov­er­able oil 2) the pro­duc­tion pro­file as had been in­di­cated last week, in­clud­ing the ramp-up of pro­duc­tion to plateau­ing and sub­se­quent de­cline lead­ing into de­com­mis­sion­ing 3) the use of the Brent bench­mark price 4) and the costs as re­vealed; the model sim­pli­fies the fis­cal regime into six core el­e­ments. These el­e­ments are 1) the roy­alty placed on gross sales (two per­cent) 2) cost re­cov­ery (with a ceil­ing of 75 per­cent) 3) profit petroleum (based on 50/50 per­cent split) 4) in­come tax (which is paid out of Gov­ern­ment’s profit of 50 per­cent, on be­half of Exxon and part­ners) 5) mis­cel­la­neous (which in­cludes the one-off sig­na­ture

bonus, rentals, fees etc.) and fi­nally 6) a range of ex­emp­tions, in­clud­ing, VAT, Im­port du­ties, In­ter­est and Div­i­dends, With­hold­ing Tax. These are dis­played in Sched­ule 3 just as it is in the re­port on the fi­nan­cial mod­el­ling ex­er­cise. .Con­clu­sion Next week, I fo­cus on Part 2 of this re­view; namely, the re­sults. After that, I con­clude with a cri­tique. In or­der to ac­com­plish this task, I may have to ex­tend the num­ber of col­umns by one or two. I shall ad­vise read­ers as I pro­ceed.

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