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Stabroek’s Promise, Part II: Cash transfers of $5,000 (US) to each Guyanese household by 2025 are illusory and without factual foundation, and would constitute a non-refundable round-trip ticket from poverty to temporary gratification.

With low or no trust in Government competence and performance, many see direct cash transfers of oil revenues to Guyanese households as a means of ensuring all Guyanese realize some tangible benefit from Guyana’s new oil and gas sector. However, how much, to whom, when, and what form or manner, are details that require careful analysis and further discussion.

Recent news articles in Guyanese online news media (Demerara Waves, Sept. 29, 2019; Guyana Chronicle, Sept. 22, 2019; Kaieteur News, multiple dates) reported on well-known Guyanese political activist and economist Dr. Clive Thomas’ arguments in favor of direct cash transfers from Guyana’s oil revenues to Guyanese households. According to those reports, Dr. Thomas articulates the following:

  1. By 2025, Guyana’s oil production will “soar to about 1 million- to 2.5 million- barrels per day (bpd)”.
  2. Oil price in 2025 (and beyond) will be $70 (US) per barrel (bbl)
  3. At $70 per bbl, the Guyana government will be able to set aside at least $1 billion (US) annually for cash transfers to Guyana’s 210,000 households. Each household gets $5,000 (US).
  4. Transfers would/ should constitute 10% of after tax oil revenues.

This writing is not an attack on Professor Thomas who has been on the forefront of leading positive change in Guyana. Instead, this article examines the underlying assumptions of Dr. Thomas’ cash transfer proposal in the context of factual realities of Guyana’s oil and gas development and crude oil commodity prices.

By 2025, Guyana will produce 750,000 bpd of oil, not 1 million- to 2.5 million- bpd. Based on the Contractor’s (ExxonMobil and its partners) planned development of Guyana’s Stabroek Block, Guyana’s oil production capacity will reach 750,000 bpd by 2025. According to ExxonMobil (majority partner in and operator of the Stabroek Block):

  1. Beginning in 2020, Liza Phase I will produce up to 120,000 bpd of crude oil,
  2. In mid-2022, Liza Phase II will boost production by an additional 220,000 bpd
  3. By early 2023, Payara development comes online with an additional 180,000 bpd, and
  4. Turbot Area development comes online, in early 2025, with an incremental 230,000 bpd.

Together, these planned Stabroek Block developments combine for a 750,000 bpd crude oil production capacity by 2025. If things go according to plan, Guyana will likely see the 750,000 bpd production in 2025. On the other hand, if there is a significant downturn in major world economies during the next two years, demand for petroleum products could drop sharply for a prolonged period. The latter would result in sustained lower oil prices, and this could delay or scale back Payara and Turbot Area developments. In that scenario, Guyana’s 2025 oil production would be significantly less than 750,000 bpd.

Based on the foregoing discussion, Dr. Thomas’ 1 million- to 2.5 million- bpd production forecast lacks factual foundation and is grossly unrealistic.

Who knows where oil prices will be in 2025; $50, $30, $70 … any guesses? Crude oil is an international commodity traded in all major world commodity markets. World-wide supply and demand factors (including economic recessions, boom cycles, supply disruptions, etc.) and geopolitical events affect the price of crude oil. Moreover, most of the world’s oil supply comes from unstable regions of the world, and thus geopolitics is a significant contributor to oil price uncertainty (i.e., price volatility). Fig. 1 shows the spot price volatility of West Texas Intermediate (WTI) crude oil, from January 1986 to August 12, 2019. In our models, we use WTI as an index for Guyana’s light sweet crude that has similar physical properties.

Oil prices depend on many factors, and cannot be predicted with certainty
By 2025, Guyana’s Stabroek Block crude oil production capacity will be 750,000 bpd

Without providing any factual support, Dr. Thomas suggests (or perhaps hopes for) sustained oil prices of $70 per bbl in 2025 and beyond. Besides inherent inaccuracy of the $70 per bbl guess, forecasting an inflated crude oil price for planning or policy development purposes is reckless, dangerous, and intellectually dishonest. Crude oil comes with significant price risk, which must be quantified and accounted for by careful and sound technical analysis. Moreover, prudence requires a conservative approach when using oil price forecasts for planning or policy development purposes. For example, with WTI crude oil trading around $52 per bbl today, a responsible price forecast would reflect an expected value (of WTI) that is significantly less than today’s prices.

Cash transfer dividend of $1 billion (US) to Guyanese households by 2025 is technically infeasible. Come 2025, Guyana may not even receive $1 billion (US) in oil revenues, let alone have a $1 billion (US) dividend to transfer to Guyanese households. This is because, in 2025: (1) Guyana will likely produce no more than 750,000 bpd of oil (for reasons discussed previously in this writing), and (2) oil prices will likely be significantly less than $70 per barrel.

Our recent technical analysis of Guyana’s 2020 to 2040 Oil Revenue Outlook & Risk (for production from the Stabroek Block) shows that, in 2025, Guyana’s expected oil revenues are $1.9 billion (US). But, without mitigating price and cost recovery risks, Guyana may realize only $522 million (US) in actual oil revenues. As discussed in our September 17, 2019 article, Guyana’s 2025 revenue risk exposure is an astronomical $1.4 billion (US).

So, if cash transfers to households were 10% of $522 million (US) in actual revenues realized, $52 million (US) would be allocated for distribution to Guyana’s 210,000 households. This would amount to about $248 (US) per household. The billion dollar question is whether those $52 million (and the rest of the oil revenues) could be better invested, by a Guyana government, in needed projects (education & training, infrastructure, existing industry modernization and transformation, electricity from natural gas, etc.) that produce good and measurable returns with sustainable benefits that markedly improve the lives and economic outcomes of all Guyanese citizens.

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Stabroek’s Promise, Part I: Guyana is dreaming of an El Dorado of billions in oil revenues per year. But …. without a coherent energy strategy, the absence of resident Guyanese technical infrastructure, and runaway cost recovery, the Guyanese people will have to settle for mere millions.

Production of the first barrel of oil (from Liza Phase 1) in January 2020 will usher Guyana into an era of unprecedented economic opportunity. Oil and gas revenues, natural gas for local consumption (and export), and a meaningful local content regulatory framework will provide an opportunity for sustainable economic development of the country. If the opportunity is seized, it will be a positive game-changer for the Guyanese people, and indeed the Caribbean region.

Dream vs. Reality. With Guyana’s light sweet crude oil flowing on January 1, 2020, the Guyana government can expect about $207 million dollars (US) in oil revenues for 2020. However, because of commodity price risk (i.e., crude oil price uncertainty), Guyana might receive only $84 million (US) in oil revenues – a $123 million (US) revenue risk exposure (i.e., potential revenue loss). In the unlikely scenario of oil prices (WTI benchmark crude) remaining fixed at $50 per barrel, Guyana would earn $296 million (US) in oil revenues in 2020. The historical oil price chart, shown in Fig. 1, illustrates the inherent volatility of oil prices that are very sensitive to geopolitical events in addition to supply & demand factors.

Oil begins flowing from Liza Phase 1 at 120,000 bpd (barrels per day). On June 1, 2022, Liza Phase 2 brings an additional 220,000 bpd. With subsequent production additions from Payara and Turbot of 180,000- and 230,000- bpd, on 1/1/2023 and 1/1/2025, respectively, we arrive at 750,000 bpd in 2025. Fig. 2 displays the Stabroek Block 2020 – 2050 production forecast that is based on these initial inputs into our reservoir simulation models.

By 2025, when production reaches 750 thousand bpd , and the Government’s expected oil revenues approach $2 billion (US) for that year, the actual revenues realized could be only $522 million. Here, Guyana’s 2025 revenue risk exposure is an astronomical $1.4 billion. By now (2025), this potential loss or unrealized revenue is due to oil price risk and runaway cost recovery. Runaway cost recovery – because of uncertainty of the plethora of operating expenses the contractor can recover under the production sharing agreement (PSA) as cost recovery.

Table 1 summarizes Guyana’s 2020 to 2040 oil revenue outlook and revenue risk exposure for selected years during that time period. Fig. 3 depicts the same information, but in graphical format. Our analysis of these results indicate that:

  1. Relative to expected value, revenue risk exposure increases as production increases. Thus, higher production volumes bring absolute risk to Guyana’s revenues.
  2. Beyond 2025, cost recovery (comprising mostly of Opex) becomes a significant risk to Guyana’s revenues, and
  3. If these risks are not mitigated, Guyana could lose tens of billions of dollars in oil revenues by 2040.

Methodology. The results discussed in this article are derived from analysis of data produced by rigorous technical and economic modeling of PSA terms and conditions and Guyana’s Stabroek Block reservoirs, including the employment of proven Monte Carlo simulation techniques. We show the base model input assumptions in Table 3.

Commodity Price Risk. Because of its critical role in powering the planet, crude oil is an international commodity traded on all major world commodity markets. World-wide supply and demand factors (including economic recessions, boom cycles, etc.) and geopolitical events affect the price of crude oil. Moreover, most of the world’s oil supply comes from unstable regions of the world, and thus geopolitics is a significant contributor to oil price uncertainty (i.e., price volatility). Fig. 1 shows the spot price volatility of West Texas Intermediate (WTI) crude oil, from January 1986 to August 12, 2019. In our models, we use WTI as an index for Guyana’s light sweet crude that has similar physical properties.

Without resident Guyanese technical infrastructure to model, quantify, and manage the inherent oil price risk, Guyana will potentially lose tens of billions of dollars (US) in oil revenues.

Cost Recovery. Under the terms of the ExxonMobil PSA with the Guyana Government, the contractor (ExxonMobil and its partners) recovers all of its capital expenditure (CAPEX) and most of its operating expenses (OPEX) in Guyana. The PSA limits monthly cost recovery to 75 percent (%) of production revenues.

Because the Contractor recovers its OPEX from Guyana’s oil revenues, there is potential for runaway cost recovery that significantly eats away at Guyana’s revenues in perpetuity. And, this is what our modeling shows. For example, the 2035 base case ($50 per barrel oil price) shows Guyana having total oil revenues (including royalty) of $3.7 billion, while the Contractor’s total revenue including cost recovery is $4.94 billion – a 42.7% : 57.3% (Guyana: Contractor) split. See Table 4 for base case 2020 – 2035 projections of annual oil production revenues, royalty payments, and cost recovery for selected years.

Commodity Price Risk & Guyana’s Revenue Risk Exposure. Although cost recovery is a significant risk to Guyana’s oil revenues, oil price risk is a bigger risk factor that must be addressed. By 2035, Guyana could expect $32.6 billion (US) in cumulative oil revenues as its share of production (profit oil & royalty). But, with a $27.8 billion risk exposure, the country may realize only $5.7 billion for that 15-year period. By 2040, the risk exposure to cumulative revenues grows to $36 billion. Table 2 and Fig. 4 illustrate this problem.

To effectively address this issue, mitigate the risks, and prevent potentially enormous revenue shortfalls from production of the country’s hydrocarbon resources, it is imperative that Guyana:

  1. Develop and implement a coherent strategic energy plan to integrate, manage and optimize its energy resources (including oil & gas resources) and the benefits flowing therefrom, and
  2. Quickly put in place resident Guyanese technical infrastructure with the requisite human capital and tools necessary to effectively perform oil & gas business specific technical tasks and deliver good outcomes for the country. In effect, commission a local resource for energy and oil & gas planning, energy strategy, and quantitative analysis.

To this end, Guyana must engage its diaspora and acquire competent resources that will significantly close or eliminate the existing gap in skilled human resources.

Edwin M. Callender, Esq.

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Guyana’s Oil will bring much needed revenues, but it is its natural gas that will transform the country and be the true engine of Guyana’s economic and societal development …

To date, ExxonMobil and its partners estimate total recoverable hydrocarbon resources from the Stabroek Block at more than 5.5 billion barrels of oil equivalent (BOE). Resources contained in the Liza-, Liza Deep-, Payara-, Snoek- Turbot-, Ranger-, Pacora-, Longtail-, Hammerhead-, Pluma-, and Tilapia- reservoirs comprise of high quality light-sweet crude oil and significant amounts of associated natural gas. Additionally, the Haimara reservoir (announced in January 2019) is a natural gas reservoir containing high quality gas condensate. Natural gas is a clean-burning fuel, and Guyana has an abundance of it in its offshore petroleum reservoirs.

Guyana’s offshore hydrocarbon resource, in combination with the country’s abundance of other natural resources, presents the opportunity for transformative economic and societal development in Guyana and the broader Caribbean region.

Natural Gas will Energize, Stimulate, and Catalyze Economic Development. While ExxonMobil’s field development plan (FDP) for the Liza Phase 1 Project reinjects all of the extracted natural gas back into the reservoir, the Guyana Government should insist that Liza Phase 2 include an option to pipeline natural gas to shore.

Pipelining natural gas to shore will initiate a series of events culminating in an unprecedented era of sustainable economic development and opportunity for Guyana and its citizens. Building a natural gas pipeline and related infrastructure will stimulate the local economy by creating both short-term and long-term jobs. Training a workforce to perform those jobs through vocational training in the skilled trades is an essential need that could be met by both public and private educational institutions. Government Technical Institutes and the University of Guyana, in partnership with US technical colleges and others, can create relevant training programs to satisfy oil and gas industry workforce needs.

What is natural gas? Natural gas is composed primarily of methane gas (about 84 – 95%) and contains small amounts of other light hydrocarbons (ethane, propane, butanes, and pentanes) and nonhydrocarbon gases (like hydrogen sulphide, nitrogen, carbon dioxide, and helium). As extracted from a reservoir, the unprocessed natural gas is called wet natural gas. Before going to end users, wet natural gas is sent to a Natural Gas Processing Plant (NGPP) that removes any impurities and other hydrocarbons it contains. After processing, the purified natural gas is called dry natural gas. Other hydrocarbon products from the NGGP, collectively known as ‘natural gas liquids’ or NGLs, include ethane, propane, butanes, and natural gasoline. NGLs are valuable commodity products used in heating, fuels, and petrochemicals. Propane and butanes are sold in ‘liquefied petroleum gas’ (LPG) markets. Ethane, propane, butanes, and natural gasoline are sold as petrochemical plant feedstocks. Guyana’s NGLs can be exported or used in future Guyana-based add on industries like an LPG plant.

Facilities and Infrastructure. To facilitate the receipt, processing, transportation, distribution (e.g., to end users), and conversion of natural gas in Guyana, multiple job-creating infrastructure projects are needed. These projects include one or more ‘natural gas processing plant’, hydrocarbon storage facilities, gas transportation and distribution pipelines, gas-fired power plants, one or more ‘Liquefied Natural Gas’ (LNG) plant, modern port facilities, and electricity transmission and distribution grid upgrade and modernization. For all infrastructure projects and new facilities development in Guyana, the Government must mandate (direct) its contractors to: (a) maximize the utilization of Guyanese labor, and (b) train Guyanese to manage, operate, and staff the completed facilities.

The Guyana government has the onus to prudently develop and implement a long-term strategic plan for citing of industrial parks that are strategically placed to develop the country while maximizing environmental protection and facilitating commerce. To ensure economic viability of the projects, financing through public-private partnerships may be a prudent fiscal approach.

Natural Gas Processing Plant. While many have opined whether there should be a crude oil refinery in Guyana, the short answer to this multi-billion dollar (US) question is no, not now. An oil refinery is a very costly and complex undertaking, and I will address the question more fully in a future blog. Unlike the oil refinery question, a natural gas processing plant is a ‘no-brainer’ for Guyana.

A Guyana natural gas processing plant will produce dry natural gas and natural gas liquids (NGLs). Dry natural gas will supply domestic demand for: (a) direct consumption by industrial, commercial, and residential users; (b) electricity generation to power homes, businesses, and industry; and (c) Liquefied Natural Gas (LNG) production for export. Natural gas is also a raw material input for methanol and fertilizer manufacture. The valuable NGL byproducts will go primarily to export markets, and local and regional Liquefied Petroleum Gas (LPG) markets. Developing an LNG project for export markets requires securing one or more long-term (30 year or more) gas purchase contracts before starting the project. Hence, by its nature, an LNG project can take a long time to develop.

Natural Gas to Electricity. Electricity is the ultimate end-use energy source. Replacing inefficient, unreliable, high-polluting oil burning power plants with efficient combined-cycle natural gas fired power plants will catalyze industrialization and modernization of Guyana. With upgrade and modernization of Guyana’s electricity transmission and distribution grid, power plants fired by Guyana’s natural gas will deliver the energy that drives Guyana’s economic development. Availability of cheap, reliable, relatively clean natural gas will enable Guyana to build sufficient electric power capacity facilitating modernization, improved efficiency, and competitiveness of all of Guyana’s existing industries. The bauxite, sugar, rice, and other agri-businesses will benefit from Guyana’s energy revolution.

Moreover, building sufficient electric power capacity for energizing an aluminum smelter will transform Guyana’s bauxite industry from a producer of raw material (bauxite) to manufacturer of value-added aluminum metal. A Guyana aluminum smelter, producing aluminum locally, will spark local manufacturing and stimulate investment in and relocation of new industrial enterprises to Guyana. For example, manufacturing of automobile and airplane parts, building materials, and durable goods (like refrigerators, washers and dryers) could likely find a home in Guyana. Guyana’s location on the Atlantic coast of South America is very attractive for shipping finished products to the Caribbean and the Americas, and serving those markets. If these scenarios become reality, Guyana and its Caribbean neighbors will benefit from Guyana’s economic boom. Because of its small population, the demand for workers in the new Guyana will source skilled labor from other CARICOM states … and thereby, causing spillover economic benefits in those islands.

Guyana’s Energy Strategy. Because of its vast hydropower potential, initiating Guyana’s energy revolution with natural gas should be just a start. For successful outcomes, Guyana must employ a strategic, comprehensive, and integrated approach for developing and optimizing Guyana’s energy resources to realize maximum, sustainable economic and societal benefits for Guyana while minimizing election-cycle impacts. This is a Guyana government responsibility. As a critical tenet, Guyana must develop and implement long-term (30 yr., 20 yr.) and intermediate-term (5 yr., 10 yr.) Strategic Energy Plans that integrate crude oil, natural gas, electric power, LNG, hydropower, NGLs, and solar into a national economic development plan. As an unparalleled resource, Guyana has relevant oil & gas and energy expertise in the Guyanese diaspora who are willing and very able to assist Guyana. Instead of employing expatriates in this sphere, Guyana must engage its expertise resource from the Guyanese diaspora.

While I could continue writing on this subject forever, I will stop here and leave you with the following takeaways:

  • Bringing Guyana’s natural gas onshore for electricity generation, local consumption, and LNG production (for export) is Guyana’s opportunity for sustainable economic development and positive growth, and modernization of the society.
  • Natural gas is a relatively clean-burning fuel, and Guyana has lots of it in its offshore petroleum reservoirs.
  • Readily available, clean, and relatively cheap electricity (generated from Guyana’s natural gas) will catalyze industrialization, modernization, and positive economic development that will create many jobs for Guyanese.
  • Building natural gas pipelines and infrastructure projects for receiving, processing, transportation, distribution, and conversion of natural gas to electricity will be significant job creators that directly boost the economy.
  • New gas processing and power generation plants will create long-term jobs for skilled Guyanese.
  • Having one or more natural gas processing plants and an LNG plant creates new higher value petroleum products as exports to foreign markets bringing additional revenues to the country.
  • Building sufficient electricity generation capacity, from Guyana’s natural gas, to power a Guyana aluminum smelter will transform the bauxite industry from merely producing commodity bauxite to manufacturing value-added aluminum metal … and stimulating downstream manufacture of aluminum components and products.
  • The Guyana Government should insist that Liza Phase 2 include an option to pipeline natural gas to shore.
  • The Guyana government has the onus to prudently develop and implement a long-term strategic plan for citing of industrial parks that are strategically placed to develop the country while maximizing environmental protection and facilitating commerce.
  • For all infrastructure projects and new facilities development in Guyana, the Government must mandate (direct) its contractors to: (a) maximize the utilization of Guyanese labor, and (b) train Guyanese to manage, operate, and staff the completed facilities. A robust and well thought through local content law/ policy is essential to ensuring the benefits from Guyana’s oil and gas industry flow to the Guyanese society.