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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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Guyana Poised To Become A Leading Offshore Producer Within Years

The tiny South American nation of Guyana is poised to become one of the leading offshore drilling jurisdictions in South America. Global energy supermajor Exxon, has established a dominant foothold in offshore Guyana, acquiring a 45% interest in the 6.6-million-acre Stabroek Block, with partner Hess holding 30% and Chinese national oil company CNOOC controlling the remaining 25%. Exxon has made a series of large high quality oil discoveries in the block.

The latest was the September 2020 Redtail discovery which saw Exxon revise upwards its oil resources in offshore Guyana, stating that it had more than eight billion barrels of recoverable oil resources in the Stabroek Block. Since then, Exxon’s Liza Phase 1 project, which commenced production in December 2019, reached full capacity pumping 130,000 barrels per day. Exxon is currently developing the Liza Phase 2 and Payara projects. It is anticipated that Liza Phase 2 will come online during mid-2022 and produce 220,000 barrels of crude oil per say. The Payara project will commence operations in 2024 and is projected to pump 220,000 barrels daily. By 2025 Exxon estimates it will be producing over 750,000 barrels per day in offshore Guyana from the Stabroek Block. Related: The World Still Needs Hundreds Of Billions Of Barrels Of Oil

Offshore Guyana is fast becoming an especially attractive destination for foreign oil companies. The crude oil being pumped from the Liza oilfield is characterized as a light grade with an API gravity of 32 degrees and relatively sweet possessing a sulfur content of 0.58%. Those attributes make it cheaper and easier to refine into high quality fuels than the heavy sour crude oil grades which are typically found in onshore South America. According to Hess oil produced at Liza Phase 1 has a low breakeven price of $35 per barrel, which is significantly lower than petroleum operations in many other Latin American countries. It is anticipated that the breakeven price for oil produced in the Stabroek Block will keep falling as additional infrastructure is installed and new assets are brought online. The breakeven price for the second FPSO at the Liza oilfield is expected to be an incredibly low $25 per barrel per barrel of crude oil extracted, placing it among some of the lowest cost for offshore operations in South America. Analysts believe that crude oil projects in offshore Guyana will on average possess a breakeven price of $35 per barrel making it one of the lowest cost and hence most profitable jurisdictions on the continent. That is a particularly important attribute in an operating environment weighed down by volatile sharply weaker oil prices and the impending arrival of peak oil demand, which could occur as early as 2026.

Despite a recent slew of poor drilling results the Guyana-Suriname Basin is attracting considerable interest making it one of the hottest offshore drilling prospects globally. This will see Guyana emerge as a major South American oil producing nation with the petroleum-rich country’s natural resources minister Vickram Bharrat recently stating it will be pumping one million barrels per day by 2027. That will catapult a deeply impoverished Guyana into the upper echelons of crude oil producing countries globally and see the former British colony become Latin America’s third largest oil producer. For that to occur Guyana must attract considerable additional investment to fund offshore exploration and development activities. This will require the national government in Georgetown to establish a stable, sustainable and attractive regulatory environment for foreign oil companies while maximizing Guyana’s benefits from the vast offshore crude oil resources. The wealth available is highlighted by the IMF estimating Guyana’s economy will experiencing strong growth, with gross domestic product forecast to expand by 16% this year and then by a whopping 46.5% for 2022 when the Liza 2 FPSO commences operations, more than doubling oil production. By 2024 it is believed that Guyana’s GDP will have slowed to its long-term growth trajectory of around 3% annually.

Related Video: Guess What? Offshore Oil Is Cleanest Producer

Georgetown is already receiving a substantial financial windfall from Exxon’s Stabroek Block operations. It received the fifth oil lift payment, totaling $61 million, during February 2021, giving Guyana’s government total oil income of $246 million since Liza 1 commenced production in December 2019. Industry consultancy Rystad Energy estimates Guyana’s oil revenue will near $30 billion once crude oil production exceeds the one million barrel per day production milestone. Those numbers indicate that Guyana has the potential to become one of the wealthier nations in South America if it can avoid the oil curse and related pitfalls that have afflicted oil rich countries in the region such as Venezuela. To minimize the risk of Guyana squandering its oil wealth, the Inter-American Development Bank has proposed that the impoverished South American country adopt an expenditure rule to prevent excessive spending and mismanagement of the vast anticipated oil revenue. There are also pressures on the administration of President Irfaan Ali to renegotiate the contract with Exxon on the basis that it is unjust and deprives Guyana of its rightful share of its vast offshore oil wealth. While Ali’s government has pledged to review how Guyana’s petroleum industry operates, the President has indicated the contract with Exxon will remain intact. The 2016 contract established a 50% profit sharing agreement between the partners in the Stabroek Block (Exxon 45%, Hess 35% and CNOOC 25%) and Guyana’s government as well as a 2% royalty payable to Georgetown. The consortium can recover 100% of development and operating expenses as well as decommissioning costs from Guyana’s government. Those conditions diminish the impoverished South American country’s cash inflows and delays Guyana’s ability to fully benefit from the asset until 2028.

There has been considerable speculation that Guyana’s regulatory framework is not robust enough to deliver the desired outcomes and that Exxon received an overly favorable deal when it began operations in the Stabroek Block. In March 2021, Guyana’s Ministry of Natural Resources announced a 24-month project to review the oil-rich country’s regulatory and legal framework. The focus of that work is to develop and establish a structure to manage the former British colony’s petroleum industry that is attractive for foreign energy companies and maximizes the benefits for Guyana as well as its people. The plan is for the project to lay the groundwork to establish a hydrocarbon regulator the Petroleum Commission which while responsible for regulating Guyana’s oil industry, will not collect oil revenue. That task will fall into the responsibilities of the Guyana Revenue Authority.

By Matthew Smith for Oilprice.com

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