WHILE the local news cycle is consumed by elections controversy, a global pandemic and a price war between two of the world’s largest oil producers will have strong implications for Guyana’s emerging energy industry.

Nearly everyone already knows that the pandemic Wuhan Coronavirus or COVID-19 is moving rapidly across borders. It has already inflicted sharp short-term pain on stock markets and economic outlooks all around the world. Nowhere has this been felt more acutely than in oil prices, which had already dropped more than 20 per cent between December and late February based on forecasts that Chinese economic growth, global demand and travel will suffer. Since then, they have plunged as low as $30 per barrel.

Commodity prices are known for volatility —a key reason why companies make investment decisions for expensive new projects so carefully — but this drop is unusually severe due to the impacts of the virus and could be long-lasting. Last week, yet another development rocked global oil markets that might mean more for Guyana and offshore exploration long term. Since 2014, a deal between Saudi Arabia and Russia, two of the world’s three largest oil producers, has helped stabilise global oil prices by agreeing to limit production.
That deal collapsed last week after Russia refused to continue output restrictions that had kept prices high and decided to increase production. Saudi Arabia vowed to increase its production in response. A primary goal of both countries is to hit back at American shale oil producers, who have made the US the world’s largest oil producer in the past few years but who operate on thin profit margins and comparatively high costs.

By creating a sustained low-price environment, analysts believe Russia and Saudi Arabia hope to drive many of these competitors out of business and hit each other’s bottom lines. News of the deal collapse and this new standoff between oil giants caused the biggest collapse in oil prices since 1991. With oil prices already low due to Coronavirus, the new price war drove them from the mid-$60s US per barrel in December into the low $30s before stabilising slightly.

What does this all mean for Guyana? Existing production from the Exxon consortium’s Liza Phase 1 is very unlikely to slow, but in the long run the multi-billion-dollar US investments that Exxon and its partners plan to make for future projects might face cutbacks.
Deepwater offshore oil extraction is one of the most high-cost aspects of the industry and tends to suffer heavily in price collapses. But compared to some high-cost deepwater areas, Guyana is not as costly to develop which should help insulate us from some of the downturn’s worst impacts. But much depends on a variety of costs – production, exploration, development, transportation and marketing costs – as well as market conditions, available technology, above-ground risks such as political instability, regulatory regimes and other factors. Exxon, the operator in the Stabroek Block where most discoveries have been made, is a global supermajor with expertise in deepwater development and should be able to ride out low prices easier than smaller companies. It also has a reputation for careful cost-efficient operations and a long-term view of development.

A prolonged slump in prices might hit the smaller independent exploration and production companies in the region. But companies of all kinds will be looking back at their analyses to determine if the economics still work for oil projects all over the world. Some projects might be pushed back or brought forward given that the economics of oil extraction look very different now than they did just a few months ago. If this low-price environment persists, it’s very possible that companies will also scale back exploration.

Even by the lowest price estimates, Guyana will almost certainly take in upwards of US$100M this year, but future revenues will be highly dependent on prices. This kind of slump is a normal, temporary feature of an industry that fluctuates with global commodity prices. It’s also an excellent example of why it’s important to have attractive fiscal terms for things like taxes, production sharing and royalties to help attract and retain investments as well as sustainable spending and saving policies.

Projects are huge, decades-long investments that need to make sense at a variety of different price points. High taxes or royalties can make sense during high-price environments but can quickly snuff out investment and drive away companies if prices fall enough that the economics of a project no longer make sense. No matter the eventual outcome of the elections, global events will continue to have a greater impact on Guyana now that we are intricately linked to a global market. That makes it more important than ever that Guyana be prepared.