Dear Editor,
REFERENCE is made to Kaieteur News article captioned, “Every citizen at present owes ExxonMobil $9m — IEEFA Financial Analyst,” published in its May 25th edition.
In the article, the author argued that with the planned development, ExxonMobil will rack up some US$75B which will drive up the debt burden for Guyana.

This view; however, is contextually incorrect and grossly misleading. It is not a case where the Government of Guyana somehow would have to find US$75 billion by 2070 to repay ExxonMobil. The investment of itself will repay the investors their capital investment and will yield a profit which is shared between the government and the oil company through a 50/50 split. The Production Sharing Agreement (PSA) has a 75 per cent cost-recovery threshold from which the contractor will recover the initial investment. The projected capital investment for the Stabroek block over the life of the project is some US$60 billion and the life of the project is 30 years.

At the very outset it must be understood that ExxonMobil and its consortium partners, inter alia, the 1999 agreement, commenced exploration shortly after that agreement was signed and discovered oil only in 2015, 16 years, while all this time incurring exploration costs. Following the successful discovery, the development stage of the field began which took five years, bringing it to a total of almost 21 years of exploration and development before going into production. That means, Exxon and its partners waited for just over two decades before they started to produce oil in commercial quantities and to recover their initial capital investment and ultimately profit. Using Liza phase one for the sake of this discussion, the Liza phase one total development cost alone stood at US$4.3 billion, almost 100 per cent of Guyana’s pre-oil GDP.

It would appear, too, that Tom Sanzillo does not seem to comprehend that because of the 75 per cent cost-recovery threshold, the recovery period for these investments will be very short. Liza phase one, for example, using an average price per barrel of US$45 at an annual production capacity of 43.8 million barrels of crude, the investment cost of US$4.3 billion will be recovered within three to four years using the payback method. With the Net Present Value (NPV) investment appraisal method and a discount rate of 10 per cent, the investment can be recovered within four years. As such, from the Liza One alone, Guyana can earn over US$2 billion in the first five years and up to US$6 billion within 10 years – taking the post-recovery period into the equation. In other words, Guyana’s projected earnings from the Liza One development alone over the first decade is equivalent to 120 per cent of current GDP; 3.5 times current level of total public debt and five times government’s revenue, using 2019 figures.

The highest cost is usually the development cost and, therefore, when the development cost is recovered, the operating expense is minimal since the infrastructure to extract the crude is already in place. To substantiate this view with reasonable certainty, a perusal of Exxon’s 2018 annual report confirmed that total operating cost was just about 27 per cent of total revenue. Hence, this means that in the post-recovery period, profit share will be greater assuming for example, that operating costs will be 30 per cent of total revenue, then effectively there will be 70 per cent of revenue for profit share of which 50 per cent is Guyana’s share. Consequently, Guyana’s profit share can be as much as 35 per cent post-recovery period, two per cent royalty resulting in a total take of 37 per cent; up from 14.5 per cent during the recovery period in the first three to four years for Liza Phase One development alone. Then there is Liza phase Two and many other FPSOs and development fields that will be operationalised over the decade.
(Author’s note: A more comprehensive counter analysis to Tom Sanzillo’s, by this author is forthcoming).

Yours sincerely,
Joel Bhagwandin
Financial Analyst