THE project full lifecycle of the oil and gas business is around 30 years or more. During the exploration and development stage, which spans about 20 years before production, the oil companies continuously inject capital to explore and develop the resource. Then, 20 years later, as in the case of Guyana, starts to produce to generate the revenue, which, in turn has to recover the capital investment, operating cost and provide a decent profit for the company and the Government. After the exploration, and if no discovery was made and/or not in commercial quantity, then the capital invested in the exploration stage would be a loss for the oil companies.

The nature of the oil and gas business is one that is of high investment risks and capital intensive. To put this into perspective, the exploration and development cost for Liza 1 alone amounted to about US$4 billion, the total estimated development cost for Liza 1, Liza 2, Payara and Yellowtail is about US$29.3 billion, representing 100 per cent of Guyana’s pre-oil GDP in the case of Liza 1 and for the four approved projects combined represents 7.3 times Guyana’s pre-oil GDP. This simply means that the financial resources of the entire country (the sum total of private sector, households, and government) are not enough to develop even one phase of the development. With this in mind, it is important to appreciate the high-risk nature of the business in general and the natural outcome for that is it carries a higher risk premium – meaning, the investors require a decent return on their invested capital.

Taken together, given that major countries are already accelerating climate change policies, designed to transition from a fossil-fuel driven energy system to renewable energy. One can observe that all of these, combined, amounts to hundreds of billions in U.S. dollars to fuel these massive investments which ultimately means, that these developments are going to have a direct impact on global oil prices which will be on a downward trajectory, at some point into the future. The ultimate effect would be that global demand for crude oil will fall steadily until it will reach to a point where it may no longer be feasible.

BACKGROUND
There is a group of persons both locally and abroad advocating for the renegotiation of the Production Sharing Agreement (PSA) between the Government of Guyana and the oil companies (Esso Exploration and Production Guyana Limited (EEPGL), Hess and CNOOC). More recently, proponents of this view have argued that with rising oil prices – the Government should press for renegotiation.

The Government’s position is that it will not renegotiate the current PSA for the Stabroek Block, however, for future PSAs will have different fiscal terms. The oil companies on the other hand have stressed the importance of the stability clause. Further to note, the Government has committed to ensure better contract administration as an alternative means to extract more value for the country from the existing PSA framework without renegotiation. To this end, it is important to distinguish between what constitutes “Government Take” and what constitutes “the Country’s Take”. In this context, it is also important to analyze whether through contract administration the country is getting more value versus defying the odds and proceed straight to renegotiation – bearing in mind the many ramifications of renegotiating the contract especially if this is not a desirable outcome on the part of the oil companies.

This article is the first of a series of articles that will seek to address this issue and to examine in an in-depth manner the ramifications and the different options of deriving more value for the country.

DISCUSSION AND ANALYSIS
Project Lifecycle, Capital Investment and Risks
First, let’s understand the project lifecycle of the oil and gas business, the high capital-intensive nature and some of the key risks involved. The project lifecycle encompasses three stages: The exploration stage, which can last for about 5-10 years or even15 years; the development stage, once the resource is found in commercial quantities, which is another 5 years and then the productive life another 10 years per project. The full lifecycle is therefore around 30 years or more. More importantly to note, during the exploration and development stage which spans about 20 years before production, the oil companies continuously inject capital to explore and develop the resource. Then 20 years later as in the case of Guyana, starts to produce to generate the revenue which in turn have to recover the capital investment, operating cost and provide a decent profit for the company and the Government.

It should be noted as well that after the exploration and if no discovery was made and / or not in commercial quantities, then the capital invested in the exploration stage would be a loss for the oil companies.

The nature of the oil and gas business is one that is of high investment risks and capital intensive. To put this into perspective, the exploration and development cost for Liza 1 alone amounted to about US$4 billion, the total estimated development cost for Liza 1, Liza 2, Payara and Yellowtail is about US$29.3 billion, representing 100 per cent of Guyana’s pre-oil GDP in the case of Liza 1 and for the four approved projects combined represents 7.3 times Guyana’s pre-oil GDP.

This simply means that the financial resources of the entire country (the sum total of private sector, households, and government) are not enough to develop even one phase of the development. With this in mind, it is important to appreciate the high-risk nature of the business in general and the natural outcome for that is it carries a higher risk premium – meaning, the investors require a decent return on their invested capital.

Let’s consider the risk of an oil spill. Interestingly, the same group of advocates calling for renegotiation of the contract are also chanting for the oil companies to give some form of guarantee other than the insurance – that it has full responsibility for the liability in the worst-case event of an oil spill, which is important and not to be discounted. Just over a decade ago the Valdez oil spill costs exceeded some US$7 billion, in today’s money that’s roughly US$9 billion. In a worst-case scenario for Guyana assuming an oil spill to this magnitude where the costs might exceed US$10 billion, the oil companies’ take across the four approved projects is 24 per cent or US$41.7 billion according to an updated forecast conducted by SPHEREX Analytics. Assuming a US$10 billion oil spill lability, this will erode the cumulative profits of the oil companies by 24 per cent across the four approved projects.

Notwithstanding the worst-case scenario of an oil spill above, it is worthwhile to note that the oil and gas industry is a highly regulated global industry where health and safety is a number one priority. And the industry is so big that with any eventualities such as an oil spill which is catastrophic, the technology employed in the sector develops and evolve at a fast rate. So, the technology, equipment, and resources today to mitigate the risks of an oil spill or at best to minimize the impact of a catastrophic oil spill, never existed over a decade ago. Guyana is therefore fortunate to be the beneficiary of these new and advanced technologies and therefore the risks of an oil spill, while it is real, is low-to moderate, and should be quickly contained.

However, the insurance as well as these state-of-the-art technology and equipment to manage and contain these risks, comes at a premium cost as well which has to be deducted from cost oil.