IN just a few months, Guyana is set to receive its first share of the oil production from the Liza Phase 1 well and the first installment of Guyana’s 50% of profit oil and additional royalties will be delivered. How Guyana will sell that oil on the global market, translating it into revenues, is a subject on the minds of many across the government and civil society.
Like other commodities, crude oil is traded in a complex global market. While much of the world’s oil is sold under long-term contract for future delivery, the remainder is traded between suppliers (oil companies, oil-producing countries, international trading houses) and buyers (typically refiners or trading houses operating on behalf of refiners) in one-time transactions for near-term delivery.

Since oil is a global commodity that is produced and consumed all over the world, spot prices usually reflect the current global supply and demand balance. Other factors that could impact oil prices include weather, geopolitical concerns, world economic conditions and supply decisions by the Organization of the Petroleum Exporting Counties (OPEC), a cartel of key oil producers that can adjust production levels in an attempt to influence prices.

Another factor that influence the price of oil for a specific transaction is the quality of the crude. Not all oil is the same – oil can contain differing levels of sulfur or different amounts of specific hydrocarbon molecules, for example – all of which can affect its value.
Sometimes prices are expressed as a differential to an international benchmark crude that is widely traded on the spot market (like Brent Blend, a North Sea crude oil or West Texas Intermediate (WTI), a U.S. crude. A benchmark is considered an indicator of fair market value. Since Liza crude is a low density, low sulphur crude oil produced in the Atlantic Basin, it will likely be sold at a differential to Brent.

Crude cargos can also be sold in relation to a daily price or index established by third-party pricing services. Such services, like S&P Global Platts and Argus, base their price determinations on data gathered from actual trades, mathematical analysis and discussions with traders active in the daily market.

While some producing countries sell their oil entirely on the spot market and others issue tenders where they invite bids for the cargos, the larger and more established producers like Saudi Arabia, Mexico and Nigeria focus on longer-term contracts and market the oil through their own state oil companies.

Term contracts provide security of supply and demand for refiners and producers and make it easier to schedule tankers. This could be an option in the future for Guyana once production rises and the play matures. But initially, Guyana will probably sell its oil on the spot market, perhaps for a fee through an experienced international trading house.
Another option could be to have Exxon or one of the other oil companies to market the crude and sell it on Guyana’s behalf as it would provide the country with more time to establish its own trading operation to handle sales itself.

First oil is coming fast, and Guyana will need to make important decisions about how it wants to get its oil to international markets. The revenue is important to help pay for infrastructure, education and more.