Introduction
As noted in the column’s conclusion last week, today will wrap up my current efforts to interrogate the IDB’s report on the Guyana Oil Opportunity and its estimate of the Guyana Government’s (GoG) likely revenue. I focus on three areas of concern. These are, respectively: 1) BID estimates and comparative government estimates; 2) some of the economic characteristics revealed from the modeling of the five projects; and 3) a brief comment on a few of the policy implications drawn by the IDB based on its modeling results.
In what follows, the three topics are addressed in the order listed.
Taking Comparative Government
I have never seen official estimates of the expected net cash flow share ratio made by either of the Parties to the current Stabroek Block PSA – contractor or GoG. I have seen results for six independent measures of Government Taking. Three of these have been conducted by non-commercial organizations; that is Open Oil, a global NGO; the Faculty of Engineering, University of Trinidad and Tobago; and the Inter-American Development Bank (IDB). The other three were conducted by two petroleum intelligence business consulting firms. These are Rystad Energy (one) and Wood Mackenzie (two). These data are shown in Schedule 1 below.
Although I have not had access to their worksheets, I have benefited from extensive access to notes and reports on the models used in the modeling exercises carried out by the three non-commercial bodies described in Schedule 1, Access to commercial body information is fee based and I cannot afford to buy these reports. This is the reason why in earlier columns I was able to extensively report on the Government’s estimate, Open Oil and the ongoing takeover of the IDB. In fact, I have reviewed the Open Oil modeling exercise over eight consecutive columns during 2018.
Table 1 portrays the range in estimates of government intake is from 50 +% (Wood Mackenzie) to 60% (Rystad Energy). The mid range is, therefore, around 55%. The value is 60% more external as four of the five outcome clusters are in the narrower range of 50+ to 54%. The BID result of 51% seems consistent with the pattern of results obtained in such exercises to date. As stated above, Rystad Energy’s result is the external value.
The Model Economics
Table 2 below has extracted some useful economic data derived from the IDB modeling of the five projects: Liza 1, Liza 2, Payara, and the as yet unnamed Projects 4 and 5. The Table shows data on: 1) cash flow. for the five projects, prior to the closure or decommissioning fund; 2) net oil revenue flowing from the five projects; and 3) their overall production cost, as well as individual items per barrel.
Table 2: Reported Cost of FARI IDB Model per barrel
The data reveals that the operating expenses of the item, opex, are the largest single item responsible for the cost of producing a barrel of crude oil on the Stabroek block, with ExxonMobil as the main contractor. Opex refers to ExxonMobil’s day-to-day operational costs such as wages, rent, utilities, legal and accounting, general and administration, overheads, R&D, etc. These expenses keep the company operating and account for US $ 7.4 per barrel of crude oil produced. This represents 40.4% of the estimated US $ 18.3 required to produce one barrel of crude oil in the model.
Capex spending or spending at US $ 4.7 per barrel is the second largest item, accounting for 25.7% of cost per barrel. While opex focuses on the contractor’s ongoing short-term expenses, capex focuses on significant longer-term spending designed to improve ExxonMobil’s future performance beyond the current financial year. Typically, such long-term expenses include property, plant, equipment and other fixed assets. The emphasis is on longevity; that is designed for use beyond the current financial year. Taken together, the model reveals that opex and capex together account for about two-thirds of the cost of producing a barrel of crude oil.
Having almost one-sixth of the cost of producing a barrel of crude oil devoted to a decommissioning fund belittles the noise and nonsense narrative in print and social media about Guyana undecided about giving up to its oil and gas structures when the reservoirs are depleted. Similarly, the narrative of the endless burden of gargantuan exploration debt runs counter to the reality that audit debt is projected to account for only 70 cents or 3.8% of the cost of producing each barrel of crude oil on the Stabroek block
Concluding Remarks
Based on its main findings, the IDB has observed that, independently of the quality of the current PSA: it is self-evident, improved governance in the nascent hydrocarbons sector (institutional organization and regulatory oversight) is a high priority for raising Guyana’s ability to contain value drops as well as enhance its share of value capture. This is indeed a recurring theme that undermines my columns from the very beginning.
While my main concern about the IDB report for this series of columns was its modeling of government revenues, I reiterate my earlier strong recommendation for readers to read their document. Indeed, its last two sections, 5 and 6, make recommendations on: 1) value capture and why organizations matter; and 2) governance and organizational arrangements. The latter briefly draws lessons from other countries’ experiences; namely, Norway, Brazil, Colombia and Mexico.
Collection
The series continues next week.