Rystad Energy Updated Report on Guyana’s Upstream Industry
RYSTAD Energy, an international energy-consulting and analytics firm recently published their updated report on Guyana’s upstream sector which was carried widely in the local press. Director of Corporate Finance | SPHEREX Analytics, Joel Bhagwandin, also participated in a panel discussion with the author of the Rystad Report which was hosted and moderated by Dr Terrence Blackman of the Guyana Business Journal and Magazine.
The Rystad report, based on their financial model, showed that Guyana will earn approximately $7.5B by 2035 on the back of a forecasted daily production rate of 1.5 million boe/d by 2035, amounting to a cumulative $157B by 2040.
However, SPHEREX Analytics observed a few notable shortcomings surrounding the financial model assumptions with the Rystad updated forecast which arguably rendered Rystad’s forecast to be somewhat inflated. Hereunder mentioned are the referenced observations:
a) The analysis focused on the entire Stabroek Block, thus, considering all of the other projects that are currently being developed but not yet in production stage or even granted approval by the authorities.
Currently, there are four approved projects in Guyana, namely: Liza 1, 2, Payara and Yellowtail. The analysis conducted herein by SPHEREX Analytics considers the project economics of the four approved projects only:
two of the approved projects are already producing (Liza 1 and 2) while Payara is scheduled to commence production by 2024 and Yellowtail by 2025. As such, when all four projects are producing simultaneously by 2025, production will peak at approximately 810,000 boe/d versus 1.5 million boe/d which was used in the Rystad analysis.
b) There is a lack of clarity on the methodology employed to determine how many new projects that Rystad’s financial forecast model assumes will be approved by or before 2035, the reserves, development cost, revenue, operating expenditure, etc., for the anticipated additional projects for that timeline.
c) Rystad’s financial forecast model included corporate tax for the oil companies as part of the revenue stream for the Government’s Take. However, in the current PSA framework, the oil companies are exempted from paying corporate taxes under the regular national tax regime. In this respect, where it states in the PSA that the oil companies’ corporate taxes are to be paid from the government’s share of profit oil, it should be understood that this ought to be treated as a nominal tax. Therefore, it would be incorrect to include same in the revenue stream. Consequently, Rystad’s forecast for the Government’s Take is effectively inflated by these amounts.
Notwithstanding the explanation at (c) above, Government’s Take in the form of profit oil at a rate of 50 per cent can be considered from a technical standpoint as a form of tax which translates to 12.5 per cent of revenue, plus the two per cent royalty during the cost-recovery period; and potentially a high of 35 per cent of revenue during the post capital cost-recovery period plus royalty.
Corporate income taxes are typically applied to the operating profit made by corporations at various rates in Guyana. Thus, in principle, the Government’s Take in profit oil at a rate of 50 per cent is no different from this basic fundamental in terms of the application of corporate taxes.
The corporate tax rate applied to telephone companies in Guyana is 45 per cent on chargeable profits; 40 per cent on chargeable profits of a commercial company other than a telephone company; and 25 per cent on the chargeable profits of any other company.
Against this background, the oil companies are effectively subject to a higher tax rate than any other local and foreign company operating in Guyana under the regular national tax regime.
DISCUSSION AND ANALYSIS
RESULTS OF THE ANALYSIS: BASE CASE SCENARIO
Across the four approved projects, the estimated reserves to be recovered is approximately 2.64 billion barrels of crude of which Liza 1 accounts for an estimated 438 million reserves, Liza 2 an estimated 600 million reserves, Payara an estimated 600 million reserves and Yellowtail an estimated 1 billion reserves.
The total estimated capital investment across the four projects amounts to $29.3B. Liza 1 has an estimated productive lifecycle of 10 years; Liza 2, eight years; Payara eight years and Yellowtail 11 years.
The estimated gross revenue is approximately $177.3B; the total Government’s Take is an estimated $49B or 28 per cent while the Oil Companies’ Take is an estimated $42B or 24 per cent. Notably, Government’s Take will peak at approximately $4.8B annually during the period 2025 – 2029 when the four projects will be producing concurrently. The four projects altogether have an estimated NPV of $35.4B; an average IRR of 22 per cent and average ROI of 332 per cent.
Summary of Analysis USD Billions Unless Otherwise Stated (Base Case Scenario)
Oil Companies’ Take
Project Lifecycle (1999-2036)
332% Source: Author’s calculation/Data from publicly available sources/ExxonMobil Guyana website
The Liza 1 project started production in December 2019 at 120,000 barrels per day. Liza 1 has four drill centres with 17 wells in total; eight oil-producing wells, six water-injection wells, and three gas-reinjection wells. Based on the estimated reserve of Liza 1 and the daily production rate, the project has a lifecycle of approximately 10 years.
The forecasted revenue over the productive life of Liza 1 is approximately $27B; NPV of $4.3B, payback period of five years, IRR of 21 per cent and ROI of 298 per cent. Of this, the forecast for Guyana’s Take in profit oil and royalty is approximately $3.9B and the Oil Companies’ Take is $2.8B.
The Liza 2 project started production in February 2022 at 220,000 barrels per day. Liza 2 involves a second floating, production, storage and offloading vessel (FPSO).
The development has six drill centres with 30 wells in total; 15 oil-producing wells, nine water-injection wells, and six gas-reinjection wells. Based on the estimated reserve of Liza 2 and the daily production rate, the project has a productive lifecycle of approximately eight years.
The forecasted revenue over the productive life of Liza 2 is approximately $42.76B; NPV of $5.3B, payback period of three years, IRR of 21 per cent and ROI of 410 per cent. Of this, the forecast for Guyana’s Take in profit oil and royalty is approximately $6.2B, while the Oil Companies’ Take is $4.5B.
The Payara development involves a third FPSO and is expected to start producing by 2024 at 220,000 barrels per day. The development has 10 drill centres which will have 41 wells in total; 20 oil-producing wells, 21 water-injection and gas wells. Based on the estimated reserves of Payara and the daily production rate, the project has a productive lifecycle of approximately eight years.
The forecasted revenue over the productive life of the Payara development is approximately $42.76B; NPV of $2.9B, payback period of four years, IRR of 10 per cent and ROI of 250 per cent. Of this, the forecast for Guyana’s Take in profit oil and royalty is approximately $14.8B while the Oil Companies’ Take is $13B.
The Yellowtail development involves a fourth FPSO and is expected to start producing by 2025 at 250,000 barrels per day. The development will have six drill centres with 51 wells in total; 26 oil producing wells, and 25 water injection and gas wells. Based on the estimated reserve of Yellowtail and the daily production rate, the project has a productive lifecycle of approximately 11 years.
The forecasted revenue over the productive life of the Payara development is approximately $64.8B; NPV of $22.8B, payback period of four years, IRR of 37 per cent and ROI of 369 per cent. Of this, the forecast for Guyana’s Take in profit oil and royalty is approximately $23.9B while the Oil Companies’ Take is $21.4B.
Table (1b) Rate and Timeline of Capital Cost Recovery
Liza 1 Liza 2 Payara Yellowtail Cumulative CAPEX ($) (4,300) (6,000) (9,000) (10,000) (29,300) Gross Revenue ($) 27,000 42,768 42,768 64,800 177,336 Project Life (Years) 10 8 8 11 Payback (Years) 5 3 4 4 Cost Recovery (%) 33% 45% 45% 45% 39% Capital Recovery ($) 8,910 19,246 1,144 – 29,300 Capital Recovered ($) (20,390) (1,144) (0) – (0)
Table 1 (b) above demonstrates the rate and timeline of capital recovery for the four approved projects. The analysis takes into account the general financing model employed for the development – that is, the current / producing projects will finance the future developments. This is an important aspect of the analysis to determine how long these projects will repay for itself plus the CAPEX of future developments within the Stabroek block by means of the 75 per cent cost recovery ceiling: where 30 per cent of cost oil represents the OPEX and the other 45 per cent allocated towards capital recovery. In so doing, the profit share for Guyana will potentially increase to about 35 per cent of gross revenue, up from the 12.5 per cent of gross revenue during the cost-recovery period.
In view of this background, the findings of the analysis demonstrate that Liza 1 will recover its CAPEX in five years following which it will generate sufficient cash flow to finance about 77 per cent of the total estimated CAPEX for Liza 2, and Liza 2 will recover the remaining 23 per cent of the total estimated CAPEX. Liza 2 will then generate sufficient cash flow to finance 100 per cent of the estimated CAPEX for Payara and 89 per cent of the estimated CAPEX for Yellowtail. By the time Payara starts producing, it will only have to recover 11 per cent of the CAPEX for Yellowtail which will be covered from Payara’s first year’s production.
In other words, it can be safely deduced that of the four approved projects, Liza 1 and 2 plus a mere 1.8 per cent of the gross forecasted revenue for Payara would finance 100 per cent of the CAPEX for all four of the approved projects (those that are currently producing and the future developments). Consequently, about 98.2 per cent of Payara’s gross revenue and 100 per cent of Yellowtail’s gross revenue will be subject to a higher profit share for both the oil companies and the government – where the operating profit could potentially increase from 25 per cent during cost recovery of CAPEX to 70 per cent post recovery of the capital cost. (To be continued)