By Gerard Kreeft
Whisky Galore! A 1949 British comedy film based on a true event concerning a shipwreck off a fictional Scottish Island. The islanders have run out of whisky because of wartime rationing.
Then they discover the ship is carrying 50,000 cases of whisky, which they salvage. The film is a cat and mouse chase between the islanders, anxious to preserve their precious cargo, and government officials, eager to seize the contraband.
A story of islanders eager to preserve their pot of gold.
Could a similar tale be told about Guyana? This South American country has a population of only 782,000 persons but had been constantly in the news since May, 2015, when ExxonMobil and its partners Hess Corporation and CNOOC International announced the discovery of more than 90 metres of high-quality, oil-bearing sandstone reservoirs about 200 km off its coastline.
The Liza-1 well was drilled to 5,433 metres in 1,742 metres of water, and was the first well on the Stabroek block, which is 26,800 square kilometres in size.
ExxonMobil’s Stabroek Block
According to ExxonMobil the gross recoverable resource for the Stabroek Block is now estimated to be more than Eight Billion boe (barrels of oil equivalent). In total, 18 discoveries to date.
One source predicted : “This small nation is likely looking at a windfall in royalties. For a country of less than a million people, the find changes everything. Within a decade Guyana could be completely transformed by the find, going from unpaved roads and sporadic power to being a developed nation”.
The International Monetary Fund (IMF) in a recent report warned of the dangers that oil wealth could bring, noting that by 2024 oil could generate 40% of the country’s GDP. As a result the Government of Guyana has set up its Natural Resources Fund (NRF) for managing its oil wealth.
This is where the optimism stops.
In a blistering critique of Guyana’s new found oil wealth the Institute for Energy Economics and Financial Analysis based in Cleveland, Ohio (IEEFA) sketches a somber picture: “Over the next five years, revenues from Guyana’s newly discovered oil reserves will be insufficient to cover the country’s deficits, support new spending and build its wealth. New oil revenues will provide Guyana with some choices, but will not generate enough revenue to satisfy all of these needs. Longer term, the declining oil and gas sector faces challenges that will result in it becoming even smaller and an increasingly less reliable partner for Guyana.”
IEEFA argues that:
- Oil revenues to Guyana will be constrained during the next five years by low global oil prices and the price of oil is likely to remain below $50/bbl.
- For the next five years, oil revenues will not fully cover Guyana’s budget deficit likely leading to an aggregate shortfall of between $160Million to $482Million.
- At the end of five years Guyana will carry a minimum $20Billion outstanding balance owed to its oil producer partners. This amount must be paid, along with other contractually obligated development costs, before the country can fully enjoy any long term benefits that might materialize.
Some Inconvenient Truths
- On June 27, 2016 the Government of Guyana signed a Production Sharing Agreement with a consortium consisting of ExxonMobil (45% working interest), Hess Corporation (30% working interest), and CNOOC International (25% working interest). ExxonMobil is headquartered in Irvine, Texas, a suburb of Dallas. Hess Corporation is based in New York City. CNOOC International is owned by China National Offshore Oil Company (CNOOC) and is one of the largest national oil companies in China and is based in Beijing.
- The agreement outlines how oil production will take place, how costs are calculated, and how ‘profit oil’ is divided among the parties. ‘Profit oil’ is the amount left over after the oil is extracted and sold and recoverable contracts have been fulfilled.
- As a 50% partner the Government is expected to be a full financial and technical partner. Both in terms of exploration and development costs. According to IEEFA, up to and including 2024, total project costs are expected to be more than $39Billion, half of which must be paid by the Government of Guyana.
- The size of the concession is huge: extending between Guyana’s border with Venezuela to Guyana’s border with Suriname, a total of 26,800 square km. In comparison, oil blocks located offshore USA Gulf of Mexico are approximately 214 square km, 100 times smaller than Guyana. Even offshore Angola, which has huge blocks – between 4000 to 5000 square km—are small compared to that of Guyana. The size of the concession is virtually a monopoly position.
- The virtue of such a large concession also offers the following advantage: allowing the consortium to charge exploration and field development costs for new projects in the block against the cost of a revenue producing field, as in this case the Liza Field.
- The contract also stipulates that the Government will fully pay the consortium’s income tax for a five-year period: $653Million, a windfall for the consortium.
- IEEFA concludes that ” if the Guyanese government follows prudent fiscal planning for the use of the anticipated revenues during the next five years, the new resources will be insufficient to cover the country’s expected annual deficit. … aggregate revenues available for the budget after contributions are made to the sovereign wealth fund would be insufficient to cover budget deficits in 2020, 2021 and 2022, leading to a shortfall of $152Million over the full five years. The revenue level during the next five years indicates that new spending of any kind would have to be delayed. The choice is whether to use the revenues to balance the budget and grow Guyana’s sovereign wealth fund or to spend the money now on new budget priorities.”
According to the New York City-based Natural Resource Governance Institute (NRGI), which provides advice on economic, fiscal and public policy to resource-rich countries, the Government of Guyana collected a signing bonus of only $18Million. The NRGI categorically stated, “Guyana needs to stop collecting chicken feed in the form of signature bonuses. It must demand what it deserves…”
This amount is in sharp contrast to the $3Billion that Sonangol, the state oil company of Angola, collected in signing bonuses back in 2006 for three deep water blocks, Blocks 15/06, 17/06/ and 18/06 which were the relinquished parts of the oil producing Block 15, operated by ExxonMobil, Block 17 operated by TOTAL, and Block 18 operated by BP. True, times have changed and Angola was then the golden boy of the deepwater plays. Yet the contrast is startling to say the least.
The New Reality
In 2007 ExxonMobil had a market capitalization of $528Billion and today has been reduced to less than $140Billion. Annual revenues peaked at $486Billion in 2011 and in 2019 were reduced to $265Billion.
Then there is the matter of impairment charges. In a recent filing with the US Securities and Exchange Commission, ExxonMobil indicated that it is possible it will write down its Kearl Project of proved reserves in the Canadian Oil Sands of its Canadian affiliate Imperial Oil Limited, which account for 20% of the company’s 22.4 BOE ( billion barrels oil equivalent) reported in 2019.
ExxonMobil is also expected to reduce the 1Billion BOE of proved reserves from its unconventional operations in the Permian Basin, Texas.
Proved reserves, linked to RRR (Reserve Replacement Ratio) is the Holy-of-Holies for the industry. An indicator how well a company’s reserves stand. To have them declared as impairment charges has basically destroyed the entire petroleum classification system.
The sly culprit was the major French energy company, Paris-based TOTAL. In the summer of 2020 TOTAL took the unusual step of writing off $7Billion impairment charges for two oil sands projects in Canada. Both projects at the time were listed as ‘proven reserves’.
TOTAL’s candor has unwittingly opened a Pandora’s Box of potentially explosive proportions. All of the majors are showing red ink but increasingly attention is being given to impairment charges and the loss of proven reserves. Have proven reserves become the equivalent of stranded assets?
TOTAL’s strategy is focused on the two energy scenarios developed by the International Energy Agency (IEA): Stated Policies Scenario(SPS) is geared for the short/ medium term; and Sustainable Development Scenario(SDS) for medium/long term.
Taking the “Well Below 2 Degrees Centigrade” SDS scenario on board, TOTAL has in essence taken on a new classification system for struggling oil companies seeking a green future.
This comes at a time that ExxonMobil is coming under closer scrutiny. It has announced the sacking of 14,000 employees. Capital spending is being reduced by $10Billion to $23Billion. It is feared that if oil remains under $45 per barrel ExxonMobil could face a cash crunch.
The twin folly that ExonMobil nows faces is the following:
- Guyana is now being touted as ExxonMobil’s leading strategic investment. In essence that is why ExxonMobil and its consortium have frontloaded the contract costs and the reimbursements. Guyana is now viewed as ExxonMobil’s leading cash cow.
- Yet because the long established hydrocarbon classification system has now been superceded by the IEA’s climate scenarios, this will downgrade considerably the value of Guyana’s deepwater oil and gas assets with the fear of being reduced to stranded assets.
The present situation could grant the Government of Guyana a position of strength perhaps leading to major contract revisions or perhaps even pushing the government to declare the present contract a basis for force majeure.
Needless to say, with the Stabroek Block held 75% by American oil companies, ExxonMobil and Hess Corporation, and 25% by one of the largest national oil companies of China, such a move could cause consternation in Washington and Beijing.
The Government of Guyana does not at the present time have the technical and financial expertise to properly act on behalf of its people or guard its public oil and gas interests.
A Final Warning
Post-Paris Climate Agreement, those companies who have developed a green scenario, a Plan B, and who use such a plan to butress up their reserve count will have the resilence to develop deepwater projects and make them bankable. This could prove to be most invaluable.
Ignoring the Paris Climate Agreement, signed in 2015, is dangerous for oil companies and their investors. The importance of the Paris Accord is reconfirmed by the latest news coming out of Washington that President-elect Joe Biden is reportedly planning to issue executive orders to quickly reverse some Trump measures, such as Trump’s exiting of the Paris Climate Accord, as soon as Biden takes office in January.
Look to players such as TOTAL, now working in deepwater Suriname, to jump into neighbouring Guyana if ExxonMobil begins to flounder.
Equinor and even Shell could also become potential partners.
Not only are these companies greener than ExxonMobil, but the investor community has green growth on their radar screens. A green perception will also aid deepwater developments. A stable share price is a guarantee that deepwater projects have the resilence to develop and grow.
Only having hydrocarbons in your portfolio has become hazardous to your health.
Additional actions should be taken:
- Strengthening the Natural Resources Fund (NRF)to ensure it can fulfill its mandate.
- Establishing a National Energy Agency to be responsible for the country’s concessions, and oil and gas legislation. In short the eyes and ears of the Government.
- Establishing a State Energy Company to be the negotiating partner of all oil and gas activities.
- Canada and Norway, both steeped in the oil and gas tradition, and seen as honest brokers could most likely provide financial, economic and technical expertise to help set up such institutions.
- The country requires an energy roadmap in order to build up a diversified economy.
Fast forward 10 years and perhaps the people of Guyana will by then have found their version of Whisky Galore!
The following is from the website of the Institute for Energy Economics and Financial Analysis (IEEFA): The IEFFA examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. IEEFA receives its funding from global philanthropic organizations and individuals. IEEFA gratefully acknowledge our funders, including the Rockefeller Family Fund, Energy Foundation, Mertz-Gilmore Foundation, Moxie Foundation, Rockefeller Brothers Fund, KR Foundation and Wallace Global Fund, and some who choose to remain anonymous.
The Natural Resource Governance Insitute (NRGI) says that its objective as stated on its website is “Ensuring that countries rich in oil, gas and minerals achieve sustainably inclusive development and that people receive lasting benefits from extractives and experience reduced harms”. Amongst its distinguished Board of Directors is Dr. Paul Collier, professor at Oxford University in the UK and world renown authority on economic and public policy.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil + Gas Report.