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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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ExxonMobil’s Large Offshore Discovery Faces Political Risk

ExxonMobil’s Large Offshore Discovery Faces Political Risk

For Guyana, a small nation on the northern coast of South America, Exxon Mobil is a welcome potential savior. Even as the energy industry grapples with low oil prices and countries around the world struggle to adjust to a new paradigm, it’s worth keeping in mind the example of Guyana. The country produces no oil currently and is relatively poor with a GDP per capita of around $8,000 annually. All that appears poised to change thanks to Exxon Mobil.

Last year, Exxon Mobil announced that they had found a massive offshore column of oil which may hold 700 million barrels or more. The value of that oil dwarfs the roughly $3 billion gross domestic product of Guyana and as Exxon continues development of the well, the small nation is likely looking at a windfall in royalties. For a country of less than a million people, the find changes everything. Within a decade Guyana could be completely transformed by the find going from unpaved roads and sporadic power to being a developed nation. Related: Cheap Oil Hits Housing In North Dakota, Texas, and Others

For Exxon as well the find could be a major boon. Exxon has seen declining production rates for several years, but true to the stereotype, this one find will help change that dramatically. Guyana will become a significant oil exporter, and Exxon’s proven reserves and production will be greatly bolstered. This is the type of find that also helps bolster the beleaguered offshore drilling industry which has been hammered first by an oversupply of capacity, and then by a glut of oil. Finds like the one in Guyana help remind oil majors of the value in investing heavily in offshore E&P. Such discoveries may be rare, but when major discoveries do occur, they can significantly move the needle, even for the biggest of companies like Exxon Mobil.

Yet for all of the optimism on the Guyana find, there is a fly in the proverbial oil ointment for both Guyana and Exxon Mobil; Venezuela. Guyana’s much larger oil rich neighbor openly covets much of the Guyana’s territory and claims Guyana’s recent discovery as its own. Venezuela has long maintained that much of Guyana should belong to Venezuela based on historical grievances in the area. Yet as long as Guyana remained poor and backward, Venezuela had little reason to risk international condemnation by annexing part of a sovereign rival. The new oil find may change that calculus. Related: Saudi Aramco IPO More About Geopolitics Than Finance

Venezuelan president Nicholas Maduro has been vocal about Guyana’s oil belonging to Venezuela. Furthermore, with Venezuela’s own oil production declining slowly since its ill-thought out seizure of various corporate assets years earlier (including significant seizures from Exxon Mobil), Guyana’s new find could help offset what Venezuela is losing in production declines. Maduro needs all the advantages he can get as oil prices have wracked Venezuela’s economy, and the socialist model trumpeted by Chavez has only led to national decay and rampant inflation. Against this backdrop, in December, Maduro and his party lost their majority in Venezuela’s legislature for the first time in 17 years.

With Venezuelan opposition increasingly looking ascendant, Maduro needs any popularity boost he can get. One way to aid that popularity would be a military action against tiny weak Guyana. It’s almost inconceivable that Guyana could resist a military incursion by Venezuela, and while Maduro has ruled out using military force, it’s certainly within the realm of possibility that could change in the future. Venezuela would face some international condemnation for a military action of course. Yet unlike in the past, Maduro now has 40 billion reasons to ignore international complaints; the approximately $40 billion value of Exxon’s discovery.

By Michael McDonald of Oilprice.com

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  • Don Clifford on January 14 2016 said:
    Who might come to Guyana's aid against Maduro's aggression? They have ties with the UK. Will the US possibly intervene? The Falkland Islands is similarly sitting on an oil bonanza, coveted by Argentina. When these relatively small nations and enclaves strike oil, the greed of more powerful neighbors is disconcerting.

    For the moment, development is on hold until the current oil glut dries up. No sense selling into an oversupplied market...
  • Carlos Leiro on January 18 2016 said:
    700 million total or 700 millon by day?

    If is 700 million of barrel total, Is it so largest???

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