THE world is currently experiencing a huge oversupply of oil. The COVID-19 pandemic has led to a staggering drop in demand as businesses around the world shut down. Economic activity has slowed significantly as airlines ground flights and manufacturing grinds to a halt.

But COVID-19 is not the only pressure being exerted on oil prices. A vicious price war between Saudi Arabia and Russia, which started in early March, has oversaturated markets with even more cheap oil.

The resulting supply glut poses a major challenge for oil companies. Some companies, like Shell, have resorted to renting tankers to act as floating storage tanks for millions of barrels of oil for which they cannot find a buyer.

Guyana is somewhat insulated from the worst impacts of this price crash in a few ways. Reports indicate that the cost of production here is lower than in many other oil producing regions, which should keep production profitable. But if oil remains in the US $30 range, even the lowest cost production regions will feel the pain in the near term.

We also have the benefit of having ExxonMobil, a supermajor, operating the Stabroek Block. Supermajors are the largest and most diversified private oil companies and the ones that have the resources to ride out the most severe downturns.

But we should not be complacent. The share prices of Exxon and Hess, its partner in the Stabroek block, show just how difficult this operating environment is. Both companies have seen their share prices fall by around 50 per cent since mid-January. Other large companies like Chevron and Shell have suffered almost identical hits to their share prices since the oil price slide began in January.

Some small companies have been even harder hit. The driller of the Maka Central well in Suriname, Apache Corp., has fallen from a high of more than US$32 in January to less than $6 per share last week.

Public responses by oil companies have been relatively encouraging for Guyana. Hess announced that its focus was on “preserving cash and protecting our world class investment opportunity in Guyana.”

While these statements are reassuring, it’s important to consider the larger industry environment. Hess may be doubling down on Guyana, but ExxonMobil remains the operator and major player. As the operator, ExxonMobil does the actual exploration, production, contracting and development in the block. The other companies own an equity stake in the block but don’t actually extract the oil.

Ultimately, ExxonMobil’s choices about how to move forward in Guyana will be the deciding factor. If an operator leaves, that’s usually the end of a project no matter how committed the other partners are.

Thankfully, there’s no indication that Exxon is going anywhere. But they will almost certainly be looking hard at its exploration and development plans with prices this low. Elsewhere, oil and gas projects are already facing delays of a year or more elsewhere.
The political instability as a result of this year’s election has only increased the level of concern among other governments and investors as the process drags on without a clear end in sight. The prospect of drastic measures like international sanctions is also unlikely to enhance Guyana’s investment environment.

But Guyana still has many options. A political solution could be reached within days. And if we can reach a resolution that’s accepted by both parties and the regional community, that would go a long way towards reassuring investors that Guyana’s future is stable and prosperous. To secure our future, we should keep looking for ways to secure and incentivise investments and development, especially at a time of volatile oil markets.

Guyana’s existing production-sharing agreement was able to attract major investors to a high-risk unproven region. But what may have been attractive at oil prices prevalent a year ago, are not so attractive now. We must be mindful of the very different landscape when we talk about radically changing contract terms now.