THE decision by Tullow Oil to exit the Orinduik license last week points to an underappreciated fact of Guyana’s rapid oil development: companies still face considerable risks offshore. Despite the major series of finds in the Stabroek Block, there have been only a handful of finds to date in other blocks. These have largely been uncommercial, meaning they would not be economical to develop under present conditions.

Tullow held 60 percent equity in the block and sold it to Eco (Atlantic) Oil and Gas for just US$700,000 with additional payments and a small royalty if oil is ever found in commercial quantities. Tullow made two discoveries in Orinduik in 2019 but both proved to be uncommercial. The company is pivoting to focus on its African assets and just applied to extend leases offshore Gabon.

Other companies are facing similar challenges. Following their recent joint venture, Frontera and CGX Energy are evaluating their future offshore Guyana as the commerciality of the Wei-1 discovery in their Corentyne Block is still to be determined. A decision on whether to ask the government for a development license is expected within three months.

CGX’s previous find, at the Kawa-1 well in the Corentyne, was ultimately plugged and abandoned after more than US$141 million was spent on exploration and drilling. The company had been exploring in the area since 1997 and had given up initial drilling attempts due to the border dispute with Suriname. Even ExxonMobil Guyana, which has made the 30-plus discoveries in the Stabroek Block, has been unable to make a commercial find in its other leases on the Kaieteur or Canje blocks.

These challenges illustrate the high risks and costs inherent in the oil industry. Offshore drilling remains one of the most capital-intensive parts of the industry—requiring careful analysis, considerable luck, and huge tolerance for financial risk.

Outside the prolific Stabroek Block, Guyana’s oil potential remains unknown, with no current production. Risks remain high. While the discoveries in the Stabroek have been extensive and production is nearing 400,000 barrels per day, the country had zero proven oil reserves just a few short years ago. More than 40 well-drilling efforts before 2014 failed to yield results and large companies like Shell wrote off Guyanese leases at a significant loss.

As part of Guyana’s production sharing contract, the country does not have to invest anything into exploration or development—everything is funded by companies. That puts these financial risks solely on oil companies when drilling does not work out. When companies take huge losses after failed exploration, Guyana is fully insulated from risk.
The fiscal terms in the model PSA were recently revised to reflect the country’s changed status, but the original ones undoubtably played a major role in attracting investment to high-risk zones like the Stabroek, Orinduik and Corentyne blocks despite Guyana’s frontier status at the time.

Smart fiscal terms can balance the government’s interest in more revenue with the high risks of the industry. If companies see too much risk with too little potential payoff, they will go elsewhere.

The fate of the Orinduik block remains uncertain. Eco (Atlantic) previously held 15 percent alongside Tullow’s 60 percent and TOQAP’s 25 percent. TOQAP is a partnership between France’s TotalEnergies and Qatar Petroleum.

Tullow was operator of the block and responsible for exploration and drilling. Eco (Atlantic) has told reporters after the sale that it will look to craft a “farm-in” agreement with another company in the aftermath of Tullow’s departure. Farm-in deals allow small companies like Eco (Atlantic) to sell part of their equity to a larger company with experience and manpower to drill offshore. That new partner will likely take on Tullow’s mantle as operator and lead exploration and development.

The level of interest will be an important sign for Guyana. So far, the global oil industry has seen Guyana as an extraordinary opportunity. The Stabroek Consortium alone has made or committed as much as US$40 billion to exploration and development and Guyana continues to attract some of the largest investments in the offshore space.
But oil and gas is a highly competitive industry evaluating an uncertain economic future. Keeping Guyana an attractive and competitive opportunity must be a priority.