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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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This Emerging Oil Hotspot Threatens The OPEC Deal

A day before Christmas 2019 ExxonMobil and its partners have lifted the first commercial crude from the Liza field. In and of itself this might seem innocuous enough for us not to pay attention, yet one should remember the name as Liza will bring about a transformational path for one of the most impoverished nations of South America, Guyana. Heralding a new petroleum-abundant epoch, Liza is in many ways a phenomenon – Guyana’s first-ever offshore discovery (in fact, a deepwater offshore find), brought from discovery to final commissioning in less than 5 years, it will inaugurate the largest GDP growth rate in the 21st century so far for any established nation. Merely a couple years ago Guyana was largely known for its insane suicide levels, now it is on OPEC’s radar as an OPEC+ disrupting element.

Liza already loaded its first cargo over this weekend and the Suezmax vessel Yannis P is already heading to a refinery on the US Gulf Coast. In many ways the fact that Guyana managed to reach the first-oil threshold before it tries to disintegrate politically is a good sign. On March 2 the country will witness long-delayed general and regional elections, pitting current President David Granger (backed predominantly by the Afro-Guyanese part of the population) against former President Bharrat Jagdeo (backed by the ethnic Indians in the country). In the emotionally complex world of Guyanese politics, Jagdeo repeatedly criticized Granger for selling out the Stabroek Block to ExxonMobil on the cheap, even though he was the prime minister to sign the original deal with the US major.

Although Guyana has seen violent protests during past elections on the back of ever-recurring accusations of electoral fraud, this time there seems to be a pervading sense that the entire Guyanese political spectrum wants to shield oil development from potential political infighting. Both leading presidential candidates have boasted of their staunch support for the South American nation’s nascent hydrocarbon industry which is widely perceived by the people as the chance to lift Guyana from the list of underperformers. This is understandable as the IMF expecting Guyana’s GDP to be in double-digit annual growth territory throughout the 2020s (spiking with an unprecedented 86 percent year-on-year jump this year), allowing the next President to control the incoming financial streams. Related: Libya Is Facing A New Oil War

Source: author’s estimates.

Production from Liza’s first-phase development will be fed into the Liza Destiny FPSO (120kbpd), with a second FPSO named Liza Unity with a capacity of 220kbpd already undergoing topsides integration work in Singapore and should be ready well before its nominal mid-2022 commissioning date. ExxonMobil declared that it expects to have a total of 5 FPSOs producing oil in Guyana’s offshore by 2025 – of the 14 discoveries so far Payara seems to be almost certain to become a production hub, boasting a 180kbpd capacity FPSO, with the Turbot-Longtail emerging as another suitable area. As drilling in other offshore blocks (Kaieteur, Canje, Orinduik) intensifies, the number of platforms is sure to surge even further.

As insinuated above, the future of Guyana’s oil sector exceeds the possibilities of the Stabroek block. Tullow Oil, partnered by Total, Qatar Petroleum and Eco Atlantic in the Orinduik Block, has already announced two successful discoveries last year. The Jethro-Lobe and Joe fields will most probably be developed jointly – since the unearthed reserves exceeded the expectations of Tullow, the stakeholders will be now looking at the possibilities of using a floating production, storage and offloading unit (FPSO) that would hypothetically also allow for the inclusion of additional discoveries from the Orinduik Block. As things stand currently, the Jethro-Lobe field might be able to reach a 35-40kbpd production plateau, whilst Joe would peak at some 25kbpd. Related: Has Natural Gas Hit Rock Bottom?

Inevitably, regardless of their allegiance virtually all Guyanese political parties and entities came to understand that the terms and conditions offered in the pre-2015 setup seem completely naïve now, with the Stabroek Block becoming one of the hottest drilling spots of the past 5 years and the others blocks most probably following suit. Guyana’s fiscal regime for oil production (the government takes in roughly half of the generated revenue) is significantly more gracious than comparable tax regimes in Brazil, Mexico or even neighboring Suriname. Even the International Monetary Fund (IMF) has recommended Guyana to introduce a higher royalty rate and take in more of the revenue for future contracts which, contrary to the previous practice of direct negotiations, will most likely take place by means of auctioning, again to maximize the government’s income.

Thus, anyone willing to commit to Guyana’s ever-increasing upstream appeal should be ready for a tougher government position vis-à-vis royalties and local content policies. The above notwithstanding, Guyana in 2020 might see further discoveries that would de-risk its offshore zone – the upcoming exploration wells to be spudded are located very close to the initial Liza discovery (Uaru-1 is 10 miles to the east, flanked by Hassa-1, whilst Mako-1 is 6 miles to the south of Liza), implying a relatively high chance of success. ExxonMobil will try to drill as much as it can in the upcoming years – having already spudded 25 wells up to the present day, it presented an intense 31-well exploration program to the Guyanese authorities to strike while the iron is hot.

There are obstacles to Guyana’s drilling spree, mainly territorial in nature. Notice how little drilling has taken place in the western part of the South American country’s offshore – this territory (the offshore continuation of the disputed Guyana Esequiba) is still claimed by Venezuela, a remnant of a centuries-long altercation first started by the Spanish and Dutch colonial empires. Venezuela has reacted more or less adequately to drillings in undisputed territory yet almost every attempt to drill (and as Anadarko’s example showed, also to conduct bathymetric assessments) in zones that represent offshore extensions of the Amacuro River Delta have resulted in the Venezuelan army harassing drillships and staff. Unless a territorial resolution is found, this territory will remain a no-go zone.

By Viktor Katona for Oilprice.com

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  • Mamdouh Salameh on January 21 2020 said:
    How could OPEC which has been battling a glut in the global oil market estimated at 4.0-5.0 million barrels a day (mbd) worry about a cargo of a few thousand barrels of oil exported by Guyana. And how could an oil upstart which has just produced a few thousand barrels threaten the OPEC+ deal.

    OPEC has faced crisis after crisis and even wars between some of its members and also manipulation of oil prices by the United States and still managed to survive. So Guyana and its oil are the least of its worries.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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