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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.