WITH first-oil production in 2020 fast approaching, many Guyanese are naturally curious about the costs of exploration and development and what role the Government of Guyana played in approving them. For example, last week it was widely reported that the government did little or no verification of the pre-contract and development costs for the exploration of the Stabroek block and the ongoing development of the Liza Phase 1 project.

Given the complexity of both the operations and their related costs, it is worth examining the development process in Guyana and comparing it to other projects in an international context.

The increase in pre-contract costs, beginning with US$100,000 in 1999 to a cumulative total of US$460 million in 2015, is indicative of the general cost of offshore exploration activity. Though it is a large figure, the $460 million is not surprising, given that the significant deep-water, oil-exploration efforts such as those that occurred in the late 2000s and mid 2010s are costly.For example, just the drilling of Brazil’s deep-water discovery Tupi well in 2007, is said to have been $270 million and the costs leading up to the drilling would be much higher.

According to figures that Exxon’s subsidiary Esso Exploration and Production Guyana Limited provided to the government, they spent approximately $140 million for seismic surveys on 20,000 km of ocean floor and more than $65 million to pay geologists, geo-scientists and engineers to identify promising oil formations. It also cost $230 million just to drill the first exploratory well at the Liza site.

It’s important to note that pre-contract costs are not “paid” by the government. The Exxon-led consortium risked their capital on these exploration efforts, with no guarantee of finding oil. Now that oil has been discovered, these expenses are part of cost-recovery, a standard provision in production-sharing agreements (PSAs) across the globe. Cost recovery allows companies to recoup all of the costs, without profit or mark-up, for exploration and development — mostly in the first few years of production – from the initial oil produced, and before profit oil is shared between the government and the consortium. The $460 million was the cost already incurred and accrued under their 1999 Petroleum Agreement and has been carried forward into the current agreement.

Reports have also drawn attention to the treatment of Exxon, its partners and in fact, the entire offshore oil and gas industry under tax laws. Guyana’s tax terms under the contracts were purposely designed in a way that would attract foreign investment to what was, at the time, an unproven and risky Region. Typically, the tax and royalty conditions in production contracts vary, based on the estimated potential of the reserve at the time that the agreement is drawn up.

That tax plan has paid off, with Guyana looking at sizeable investment and the potential for tens of billions of U.S. dollars in oil revenues by the mid-2020s.

Former petroleum advisor Jan Mangal has also publicly said that the $4.4 billion cost of developing the Liza Phase-1 project could be reduced by as much as 20 percent; however, he provides no insight into where this saving could come from. In reality, the $4.4 billion figure is simply an estimate of project costs for a project that is not yet complete. These costs can’t yet be audited, because the companies are still in the process of incurring them and final numbers won’t be available until after the project is complete.

If the actual costs billed to ExxonMobil are lower than the $4.4 billion estimate, then the company simply has less cost to recover. Exxon and its partners must outlay their own capital for development, so they are incentivised to keep costs as low as possible, while maintaining project integrity and safety.

Whatever the final figure, by most international measures $4.4 billion seems far from unusual. Oil and gas projects are highly capital intensive. For instance, a new deep-water oil-drilling project off the East Coast of Canada that was announced in July, will cost Norwegian driller Equinor and the regional government an estimated $5.2 billion U.S. to develop. That project is estimated to produce only 300 million barrels of oil, compared to an estimated 450 million for Liza Phase 1.

Guyana’s oil find is also unique, in that the country must develop production capacity from scratch. Frontier exploration and development is inherently more expensive, since so much of the equipment and materials have to be brought in from far away, local personnel must be trained and the supporting infrastructure – such as ports and roads – must be improved.

Floating production storage and offloading vessels (FPSOs) themselves cost around $500 million to $1.5 billion dollars. The Girassol FPSO, for example, which now operates off the coast of Angola, cost a reported $756 million. Exxon and its partners are already in the process of building a larger FPSO for the Liza Phase 1, the Liza Destiny, which is slated to cost around $1.2 billion and will produce 120,000 barrels per day.

Exxon is also employing two deep-water drilling ships, which can cost upwards of $300,000 U.S. per day on multi-year contracts. All these costs are on top of the costs of laying undersea pipe; installing control and pumping systems; drilling wells; building shore bases; renting, maintaining and crewing support vessels and helicopters and employing hundreds of trained staff.

Examined in the context of the resources required for offshore development and compared to other international development projects, the numbers seen here are less shocking and really quite normal.

If questions remain about whether and how exactly the government verified all these costs, an audit should be conducted, and it needn’t be a contentious matter. Audits are a routine part of doing business in the oil and gas world; and the IMF and World Bank have well-established programmes to aid countries in conducting them. Guyana would be right to continue accepting this kind of help to ensure that costs are accurately accounted for under Article 23.2 of the PSA, which allows Guyana to audit all recoverable costs.