SINCE first oil in late 2019 and its first commercial lift in early 2020, Guyana has generated more than US$250 million in revenues from oil production. While that’s an impressive number, many people may not understand how the country’s oil is marketed and sold, or how a price point is settled upon.

Crude oil is sold in a complex international commodity market with several key stakeholders including sellers, marketers (also called traders), and buyers. Thanks to growing production in the Stabroek Block, Guyana is poised to become a sizable seller during this decade. Countries with production sharing agreements like Guyana’s can elect to receive their share of production either in cash or in physical oil cargos that they can then sell themselves, which is the option that the government chose.

As oil is produced, the government and the three oil companies that jointly operate the block each get a share. Because oil can only be offloaded to one tanker ship at a time, the four stakeholders take turns according to an established formula and receive “lifts” of oil of approximately one million barrels each.

When it is the government’s turn for a lift, it has a few options for selling the oil cargo. It can hire international trading firms and marketers to sell it for them, it can sell individual cargos in “spot sales,” or it can enter into a longer-term agreement to sell oil to a specific buyer for a given length of time. Countries can also issue a tender to invite bids from multiple buyers who agree to purchase and market the crude oil.

In mid-2020, the government issued a Request for Proposal for companies to bid on a one-year contract to market Guyana’s oil. Companies interested in marketing the crude oil submitted tenders to the government, and, according to Vice President Bharrat Jagdeo, selections will be finalised this month, coinciding with Guyana’s next oil lift. The government followed a similar procedure for its first three lifts, which it sold to Shell Western Supply and Trading. Longer term contracts like this have the advantage of securing a guaranteed buyer for future oil.

The ultimate buyers of this oil are generally large companies that own refineries or have relationships with refiners. After the process of negotiating and securing oil purchase contracts, the price-point for individual cargos is typically based on international and public benchmarks.

Sale prices and the subsequent revenues that a government receives are derived from several factors, including the grade and type of crude oil produced, type of sale contract and global supply and demand.

Crude oil is classified based on two main characteristics: being “light” or “heavy” and “sweet” or “sour”. High quality crude oil is classified as light and sweet because it requires less energy to refine. Conversely, heavy and sour crude oil has more contaminants that must be extracted, requiring more energy, in order to create a consumable final product, like gasoline.

Fortunately for Guyana, its crude oil is high quality – light and sweet – which makes it attractive for refiners. This grade, simply called Liza Crude, now has its own international price that fluctuates alongside other well-known grades of oil like Brent Crude and West Texas Intermediate (WTI). Commodity prices for specific grades are synchronised globally and change in response to supply and demand from buyers, refiners and speculators.

While this sets Guyana up for success to win high prices for its oil, the country is still subject to swings in international oil prices. As Guyana’s Liza 1 came online in early 2020, international oil prices fell dramatically due to the COVID-19 crisis. This significantly reduced revenues for Guyana and its operators. However, as oil prices begin to recover in 2021, Guyana is generating more revenues from its oil. Compared to the third oil lift in May 2020, revenues for the February 2021 lift have doubled, for roughly the same amount of oil.

Prices for Brent Crude, a widely used benchmark for the market, have been hovering around US $55-60 per barrel, but some forecasters believe that prices could increase even further in the second half of 2021. This should continue to benefit Guyana, especially as additional projects like Liza 2 come online and nearly triples production offshore in 2022. However, commodity prices are notoriously hard to predict, which is one reason that oil companies constantly seek to reduce costs and many oil-producing countries save some portion of revenues for low-price periods.