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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Exxon Is By Far The Best Bet On Guyana’s Offshore Oil Boom

  • Exxon’s operations offshore Guyana are proving to be highly profitable
  • Breakeven costs for its projects are expected to drop from $35 per barrel to $25 per barrel, an industry low
  • ExxonMobil has a very favorable production sharing agreement and low royalty rates

Global energy supermajor ExxonMobil is one of the few Western energy companies to invest in developing Guyana’s burgeoning oil industry. Since making the first high quality oil discovery during 2015 in the 6.6 million acre Stabroek Block, where Exxon is the operator and owns a 45% interest, the oil supermajor has experienced incredible success. By the end of 2020, when global oil companies were tightening their belts and learning to live in a sub-$50 per barrel world Exxon announced it was focusing capital spending on offshore Guyana. That decision is paying off in spades for the global energy supermajor. Guyana is shaping up to be South America’s and potentially the world’s hottest offshore drilling location. By October 2021, Exxon had announced its 23rd crude oil discovery in the Stabroek Block with the Cataback-1 well which came hot on the heels of September’s find at the Pinktail well. The latest discovery along with the spate of earlier high-quality oil discoveries in offshore Guyana saw Exxon upgrade its estimated recoverable petroleum resources in the Stabroek Block, from an earlier appraisal of more than eight billion barrels, to 10 billion barrels. 

Aside from the considerable drilling success and exploration upside to be unlocked in the Stabroek Block, operations are proving to be highly profitable. Hess, which owns a 30% interest in Stabroek with the remaining 25% held by China’s CNOOC, stated in February 2020 that Liza Phase One, which in December 2020 achieved full production capacity of 120,000 barrels per day, has a low breakeven price of $35 per barrel.  That is expected to fall further to an industry low of $25 per barrel when the Liza Phase Two development comes online. The Liza Unity FPSO, which set sail from Singapore for Guyana in August 2021, is on schedule to commence operations during early 2022. The FPSO has installed production capacity of 220,000 barrels per day and will develop around 600 million barrels of crude oil in the Liza field.

Exxon is also developing the Payara oilfield in the Stabroek Block, located to the north of Liza one at a water depth of around 2,000 meters. The Payara field is expected to breakeven at $32 per barrel, highlighting the operations considerable profitability in an environment where Brent is selling for over $85 per barrel. It is anticipated that Payara will commence production during 2024 and have capacity to pump 220,000 barrels of crude oil per day. This means that by mid-2024 Exxon expects to be pumping around 560,000 barrels of crude oil from the Stabroek Block.

More importantly, a combination of low breakeven prices for the oilfields in the Stabroek Block and a very favorable production sharing agreement with Guyana’s government, with a low royalty rate and the means to recover development costs, makes Guyana a highly profitable jurisdiction for Exxon. The energy supermajor plans to further expand its operations in the Stabroek Block targeting the Yellowtail field as the next, and fourth, development. This was Exxon’s 13th oil discovery in the block and the 5,622-meter Yellowtail-1 well which drilled into what the company classified as a new reservoir. The Yellowtail-2 well completed during the first half of 2020, which was the 17th oil discovery in the Stabroek Block, confirmed the presence of the oil-bearing sandstone reservoir identified by the Yellowtail-1 well. That project according to Exxon will include the nearby Redtail oilfield which was discovered with the drilling of the Redtail-1 well completed in September 2020. Exxon anticipates that by 2026 the Stabroek Block will be pumping more than 750,000 barrels of crude oil per day That solid development runway coupled with the Stabroek Block’s substantial exploration upside indicates that recoverable oil resources will keep growing to well beyond 10 billion barrels. 

Stabroek is shaping up to be a crucial asset for Exxon not only because of the large volume of quality petroleum discoveries but also characteristics of the crude oil discovered and being produced. Exxon’s Liza grade crude oil has an API gravity of 32 degrees and sulfur content of 0.58%. That not only signifies that it is easier and cheaper to refine than heavy and super-heavy crude oil blends, which are typically found in onshore South America, but has a far lower carbon footprint than many other blends when extracted. Those characteristics are important in a world where governments are working feverishly to reduce their carbon footprints and keep global warming to well below 2 degrees Celsius. That has seen considerable pressure placed on global energy companies to become carbon neutral. After some resistance, Exxon committed to reducing the carbon footprint of its operations by developing, as part of its upstream operations, low carbon emitting sources of fossil fuels. The development of the Stabroek Block and the light sweet crude oil contained within its reservoirs forms an important part of that strategy. This is especially important to consider when it is accepted that oil and natural gas will remain important sources of energy even in a world where global warming is limited to less than 2 degrees Celsius.

Guyana’s national government in Georgetown is focused on ensuring the deeply impoverished South American nation benefits from the vast petroleum wealth discovered by Exxon since 2015. This not only incudes in sharing in the profits generated by the Exxon led consortium developing the Stabroek Block but also building out infrastructure to supply energy to Guyana’s rapidly growing economy. Investment in petroleum production coupled with oil export revenues was responsible for gross domestic product expanding 43.5% during 2020, at a time when all other regional economies contracted because of the pandemic. The IMF expects Guyana’s economy to grow by an impressive 20% during 2021 as petroleum investment and production expands. Georgetown is seeking partners to build a 220-kilometer subsea natural gas pipeline connecting the Liza oilfield to an onshore natural gas processing facility and a gas-fired powerplant. Exxon has provided guarantees to Georgetown that the pipeline will be able to transport 50 million cubic feet of natural gas per day from its Liza oilfield by 2024. That will reduce Exxon’s need to flare the natural gas produced by its Liza operations, which cost the supermajor $400 million in flaring fees earlier this year, thereby reducing the carbon footprint of the Liza field. As additional petroleum industry infrastructure is developed breakeven prices for energy projects in Guyana will fall, making it a highly profitable and hence attractive destination for foreign energy companies.

By Matthew Smith for Oilprice.com

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