Understanding Energy | Breaking down Guyana’s share of first oil

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ENERGY Department Director Mark Bynoe’s press conference last week provided a wealth of information and updates for Guyanese curious about first oil next month and general preparedness. Amongst other items, he explained how the first “lifts” of oil will be shared and highlighted that the government is already looking for an agent to market and sell Guyana’s share of profit oil.

Guyana will lift its first cargo of petroleum produced at the Liza Destiny during February or March. This follows a handful of lifts by the Contractor Group, which includes ExxonMobil, Hess and CNOOC. The order follows international conventions for a “fair” lifting order that goes by whomever has the next largest entitlement percentage at that time. The government will have the largest outstanding entitlement to lift by February – though of course royalties will be paid on all of the earlier cargoes. During all of these lifts and for all future lifts, the oil-lifting process will be monitored by both independent third-party auditors and two additional government representatives.

Dr. Bynoe’s remarks have drawn criticism for the fact that Guyana will receive less than 50 per cent of the first round of production later this year. Such criticisms do not, however, consider production holistically and overlook the critical cost recovery mechanism in the Stabroek PSA.

Per the terms of the 2016 PSA, of volumes of oil produced and sold, 2 pe cent will immediately go to Guyana as a royalty. Then the operating companies receive 75 per cent of profit oil to be put towards the recovery of expenditures made over recent years to explore, drill and build the facilities that make production possible. That’s dollar recovery for dollar spent without profit or interest. That leaves a final 25 per cent which is the “profit oil,” to be split between Guyana and the oil companies down the middle.

It is important to note that the 75 per cent cut is only in place until costs are recovered, just a few years down the road. After that, nearly all of the oil produced will be considered “profit oil” and will be split evenly. By that time, Guyana will also be producing substantially more oil—around a quarter-million barrels every 8-10 days from the Liza Phase 1 project alone, according to Dr. Bynoe. The factors account for recent statements by officials that Guyana’s revenue streams will not be reaching maximum levels until the mid-2020s.

While 75 per cent seems like a large figure, consider the concept of cost recovery as an analogy. Two business partners build a factory together and decide to split future profits 50/50, but only one partner pays for the costs of all construction. The partners agree that once the factory starts to turn a profit, the partner who put up all of the funding should be able to recover their investment before either of them can put the money in their own pockets. After all, the funding partner has to pay the contractors, suppliers and workers who helped build the factory. Once those expenses are paid, the partners split the remaining profits.

This is essentially the nature of the partnership between Guyana and the Stabroek operators. The deal was made because it attracted investment at a time when few were interested and because it allowed the government to reap half the profits and a royalty without putting any money into the project.

Cost recovery is a type of low-risk financing but, in this case, without earning any interest on the money invested by one of the partners. If exploration and production had been a failure, Guyana would not have had to pay a dime. It was a big risk for the companies since about 40 wells had been drilled in Guyana before ExxonMobil drilled its first well.

Some countries take alternative approaches, choosing to invest their own money in oil projects and contribute a share of development costs in exchange for an increased ownership stake. Because they take on some of the risk, those countries recover their costs the same as any company if production is successful.

Understanding these provisions and why they exist is vital to mapping Guyana’s path as a major oil producer. This path commences with the royalties that we will start earning on the first cargoes. The government is contracting a marketing firm to sell [its] share of the oil.
The tendering process for that is ongoing but critical agreements will be in place in time for liftings early next year.