Wrapping-up the discussion of the Sector and the National Budget 2021 - Part 8
Introduction
After seven consecutive weeks, today’s column draws to a close my rather extended (albeit selective) excursion into this year’s National Budget and its treatment of the country’s emergent oil and gas sector. Important areas of treatment in the Budget have not been considered; for example, the Budget treatment of policy recommendations on institutional capability and resource governance of oil and gas. My intention is to address these where appropriate as the column series unfolds.
It is important to acknowledge that the Budget gives no indication at all of a stressful relationship between the Government of Guyana, GoG, as the petroleum resource owner, and ExxonMobil and partners, as the Contractor, under the extant Production Sharing Agreement, PSA. Indeed, to the contrary, mainly on account of two recent occurrences. These are: firstly, the Contractor has indicated it is on trend to adjust upwardly its longstanding target of 750,000 barrels of oil equivalent, boe per day by 2025/2026; and, secondly, the role announced for ExxonMobil in the proposed natural gasto-shore project.
Through recently publicized productivity gains, ExxonMobil and partners now project a target for 2025/26, which is closer to one million boe per day. Gains are expected in its first field operation, Liza 1 taking it potentially to as high as 140,000 boe per day. Similar productivity gains are anticipated across all of the first five of the ten Floating, Production, Storage and Offloading vessels projected to be eventually operational offshore Guyana.
Further, as indicated earlier, the gas-toshore project construction is expected to be financed by ExxonMobil and recovered from cost oil under the PSA. This topic will be addressed in the next section, where I take the opportunity to advance a recommendation on this matter.
Re-negotiation and NOC
As matters stand today, I cannot envisage how the upfront financing of the natural gas-to-shore project by ExxonMobil, whether in the whole or part thereof with the GoG payback undertaken through the cost oil provisions of the ruling PSA, can be satisfactorily arranged without re-negotiating the PSA. Because of this requirement to renegotiate I recommend the formation of a National Oil (energy) Company to execute this project as a joint venture, JV, vehicle. About a year ago I had repeated an earlier recommendation made back in 2017, which called for Guyana to establish a NOC to shepherd its emergent oil and gas sector.
When recommending the establishment of a NOC in last year’s column I had stressed my explicit rejection of any notion of twinning this proposal to the construction of a state-owned (or joint venture, state-private) downstream oil refinery. This outright rejection on my part applies to mini-oil refineries, as recently evaluated in the Japanese commissioned consultancy study. Mini-refineries were once widely discussed in local circles.
Relatedly, I should add that, in similar manner, It is vital for readers to keep in mind that my recommendation to establish a NOC, is one envisioned along the lines of the NRC’s Charter. This declares the NOC: “offers policy options and practical advice… on how best to manage (Guyana’s) natural resource wealth”. The aim therefore, is to “ensure the NOC can draw on accumulated experiences… learn from history and avoid mistakes of the past”, NRC 2nd Edition.
I note here also that I reject the IMFtype proposal to create a State Holding Company. As conceived by the IMF, such a company is restricted to financial interests, with little or no operational involvement in decision making and execution. Indeed, my recommendation is biased in favour of the establishment of a broadbased energy company.
My arguments on this topic can be found in a score of previous columns over the period May 28, 2017 to October 29, 2017 and subsequently in August 2020
Climate change: Is natural gas the new coal?
Today’s environmentalists are quick to remind us that, as recent as a decade ago, American President Obama boasted the
USA was well underway to exceed the target set for cutting its greenhouse gas, ghg, emissions by switching from coal to natural gas. Emissions from natural gas releases half the carbon dioxide of coal. The fact is though, this is not the only ghg. Natural gas releases methane, a ghg. Experience has shown that natural gas has failed to provide “a bridge fuel or a middle ground’ in transitioning to sources of energy that can prevent climate disaster.
Thus, Vox recently proclaimed natural gas is a climate disaster. It has fallen out of favour with investors concerned with the environment. Comments highlight the risks it carries in use: odourless, flammable and toxic, thereby placing a high premium on safe storage and secure transport. While petroleum pipelines report fatalities spills and leaks at a rate close to one a day natural gas pipeline disasters are far less frequent. Despite this, recent analysts forecast stranded natural gas assets in the region of 109 billion US dollars
All told gas pipelines are expensive to construct and the proposed capex for Guyana’s is as high as one billion US dollars. To ExxonMobil and its partners, the options facing them are the traditional ones. That is, to burn, bury, or monetize the associated natural gas. Burning is prohibited. Burying is costly. If the GoG involves them in a no risk to them venture to monetize it, they will surely go to the bank happy to do this
Conclusion
Based on feedback from these columns, I’ll address next week, at the urgings of readers, a number of basic fake news items on the oil and gas sector in Guyana carried in social and print media.