LAST week, we quantified Guyana’s developing energy industry by looking at estimated production figures in terms of barrels of oil produced per day. Putting those barrels into dollar figures helps to give a sense of the value of the new oil project.

As we discussed, much of that value will be dependent on multiple factors, such as the production timeline, global oil prices, technical limitations and actual daily production rates.
However, what most Guyanese want to know is simply how will all the revenue to be used, and how much will Guyana receive. To explore these questions we must discuss cost oil and profit oil.

Discovering, extracting and bringing oil to market is a massive and expensive process. Our oil is located in “ultra-deep water” making this process even more costly. Therefore, much of the early revenue produced from selling the oil goes directly towards paying for that process. The early revenue that goes to pay for project development costs is call “cost oil”.

Some examples of project costs include rental rates on the drillship Noble Bob Douglas, installing sub-sea gathering lines, bringing the oil up to the floating production storage and offloading (FSPO) vessel and transporting the oil to markets where it can be sold. Each of these steps requires infrastructure, employees, vehicles, pipelines, chemicals – the list goes on.

Due to the size and scope of the process of bringing oil to market, many groups have to be involved. No one can do it all on its own. And each of the parties involved must get paid – it is business, not charity, after all.
In future columns we will discuss the different parts of the value chain, including looking at the oil field services industry involved in Guyana and how revenue is being shared here.
After all the costs are paid then we get to the question of how the profit oil is shared.

Obviously, most of us are aware of the big contract with ExxonMobil, which gives Guyana and Exxon a 50/50 split of the profit oil. In addition, we are set to receive a 2% royalty rate and revenue from withholding tax. These aspects of the contract, which we’ll dive into in coming weeks, determine the total revenue Guyana will receive.
It’s difficult to determine the exact percentage of the total profit that will go to Guyana this far, from first oil, but international consultancies have given some idea of the baseline figures that can be expected.

Rystad Energy, a Norwegian research company, estimated that the government’s take will be approximately 60 percent of the profit. UK-based Wood Mackenzie put that number at over 50 percent.

So what will end up in Guyana’s pocket? Estimates from Exxon and the International Monetary Fund say Guyana’s take from Liza Phase 1 in the first few years will be about US$300M per year at a modest oil price of US$50 per barrel. But, remember that current projections for oil prices in 2020 are closer to $65 per barrel which would mean a larger take for Guyana.

By 2025, government revenue is projected to increase to more than US$1B annually from Liza Phase 1. This would approximately double the government’s budget from what it is now, and those numbers only reflect Liza Phase 1. If a second or third Phase is installed, meaning a second or third FSPO, start producing – as most expect will happen – that number could increase massively.

Think about that – potentially more than double the current budget with two or even three boats producing offshore oil. Even that initial US$300M per year is a huge opportunity for us. We all know there’s no shortage of areas that need that type of investment in Guyana – what do we need? What do we want?

Guyana will finally have a chance to invest in Guyana and the Guyanese people – new hospitals and schools; more money for education and school resources. We could finally pave the road to Brazil or build a world-scale deep-water port or fix up Georgetown by repairing drainage systems. All this and more will be possible.

Needing to decide which priorities to fund is a great problem to have. But we need to start thinking and planning for it right now. There is a chance to transform this country for the better, but responsible policies must be put in place now. Guyana has had major resource developments in the past and people have questioned why it did not change things for the better, but this time the contract and the government’s revenue numbers are all out in the open and we can all have a say about where this money should go.

In upcoming columns we will explore what other resources rich nations have done with their wealth and any lessons these examples may hold for Guyana.