In our columns, we have analyzed on several occasions the astounding rise of Guyana, arguably the hottest spot for oil drilling in the past couple of years. Almost every single exploration well spudded in the South American country’s offshore yielded a significant oil discovery, boosting Guyana’s already impressive portfolio of projects in the pipe. Yet Guyana’s forthcoming ascent is inextricably linked to its political life, a microcosmos replete with stories of ignominy and disunity, reflecting the hardships of poverty-stricken life in the country. With a prolonged political impasse stirring up tensions in Guyana, ExxonMobil and its partners are waiting it out, until the dust settles.
The ongoing political deadlock saw its culmination a month ago when the Caribbean Court of Justice ruled that the no-confidence vote which the government led by David Granger lost in December 2018 (one of MPs from the governing party voted with the opposition, tilting the balance against the government that held a one-seat majority all along) was perfectly legal and that Guyana should see new elections before September 18, 2019. It took more than a month after the CCJ ruling to nominate a new head of the Elections Commission. Generally speaking the past weeks were marred by almost all possible forms of foot-dragging and almost childish finger-pointing.
In a telling illustration of just how odd things in Guyana might go, look no further than the country’s preparation for the game-breaking elections. The list of eligible voters which transpired in early May this year contains 633 156 names which is almost 200 000 more than the actual number should be (Guyana’s population is approximately 777 000). Confronted with the unsavory task of finding out whether the surplus voters on the list died, migrated or never existed in the first place, the government has been advocating a full revamp of registration, in a somewhat flagrant attempt to delay the date of the next elections, whilst opposition forces have been demanding a swift cleanup of the list so that the imbroglio does not impede the election process.
Why the fuss, you might ask. Well, the thing is that the next government will be presiding over one of the most spectacular oil production ramp-ups in the 21st century when an impoverished country, whose only notable export articles are gold, rice and aluminum ore, witnesses 20-30 percent annual GDP growth. It is assumed that after the Lisa field starts producing in 2020, its first-phase production would surge to 120kbpd within less than 12 months. By 2025, Guyana should be already producing 0.5mbpd crude from its offshore deposits – according to ExxonMobil the country would be already on 0.75mbpd by that time however doubts persist whether such an aim is tenable under the circumstances.
One must bear in mind that Guyana’s oil industry is in its nascent phase with no layers of oil industry specialists, no seasoned executives to rely on. Consequently, whoever manages to steward in the “golden era” would substantially boost their ties to the oil industry, thus solidifying their political posture for years to come. The main opposition party, the Jagdeo-led People’s Progressive Party, understand this and is using inadequately negotiated PSAs as a political tool against the “caretaker” PNC party. Granger’s caretaker government has been mooting the issue of higher royalties for quite some time already yet has repeatedly denied that it would apply it to the ExxonMobil-operated Stabroek Block.
Mark Bynoe, the head of Guyana’s Energy Department, stated that higher royalties are envisaged for the upcoming 2020 licensing round which would put on offer both shallow and deep waters block that remain untaken. In spite of the above, the Guyanese State Asset Recovery agency is still running an investigation into how blocks were allocated, naming only the Kaieteur and Canje blocks so far. Both blocks were initially awarded to a group of Guyanese businessmen with no expertise and experience to develop them exactly one day before ExxonMobil drilled its Lisa-1 well. Then came a string of remarkably odd transactions when world-leading oil majors ExxonMobil and Total bought out most of the Canje/Kaieteur shares from the Guyanese companies. The obscure story did not end there, Mid-Atlantic still owns 17.5 percent of the Canje block.
But let’s get back to royalties. ExxonMobil’s activity in Guyana dates back to 1999 when it concluded an agreement with the Guyanese government, stipulating a 1 percent royalty rate and 50 percent of profit oil. This was modified in the wake of the Lisa discovery, with the royalty rate hiked to 2 percent and the profit oil rate kept intact on the whole of the Stabroek block. It ought to be said that this is quite out of tune with general developments in Latin America – producers in Argentina pay a 12 percent royalty rate, in Brazil it’s 5-10 percent, in Colombia the royalty rate depends on the field’s overall production rate and can be anywhere between 8 and 25 percent, whilst Venezuela takes in 30 percent.
Now that Guyana wields almost triple the reserves Colombia has (currently standing at 5.5 BBbls against the latter’s 1.9 BBbls), the political weight of the ExxonMobil production-sharing agreement has become a real nuisance for the political elites in Georgetown. Neither the ruling PPP party nor the opposition wish to alter the ExxonMobil PSA, despite acknowledging that its conditions are too generous and “could have given Guyana a fairer share of its oil”, both sides concur that disrupting Exxon’s development of Lisa would deal an insurmountable blow to Guyana’s investment reputation. For everyone else, however, the door for a judicial review remains open. The opposition PPP party pledged not to uphold all the contracts that were signed after the Stabroek contract with ExxonMobil and renegotiate them with the country’s socio-economic interests in mind.
This creates a unique work environment for ExxonMobil and its partners Hess Energy and Nexen, allowing them to fully avail themselves of the favorable government intake rate. It should be also noted that the Stabroek block is by contemporary standards quite massive, spread across an area of 6.6 million acres (almost 27 000 km2). No wonder it has witnessed 13 commercial discoveries already and will see even more as the stakeholders expand the geographic sweep of surveying and appraisal (for now most of discoveries are located in the block’s southeast part). Other oil and gas companies who entered the Guyana race later will have to content themselves with higher royalty and local content rates.
Whoever might lead the new government, they must keep in mind that any reputational damage brought about by the inadequate handling the royalty issue might have far-reaching consequences for other oil majors active in Guyana, too. Tullow Oil has recently spudded its first exploration well in the country’s offshore, called Jethro Lobe in the Orinduik Block only to drill another one on the Joe prospect in September, whilst Spanish major Repsol intends to start drilling in its Kanuku Block in September, similarly spudding its first exploration well in Guyana’s waters. Qatar Petroleum has entered both above mentioned blocks this week by buying 40 percent of Total’s 25 percent stake (i.e. 10 percent of the total) so the aggregate lineup is increasing both in scope and background.
This post was originally posted on OilPrice.com Daily News Update – View Original Article