At current oil prices in February 2017, the Liza deposits could generate some US billion directly for Guyana, more than 6 times the size of its 2016 annual GDP and some 15 times the size of the 2017 annual budget. Guyana is what is known as an “early-stage exploration” which has two major risks – one, it takes as long a decade to properly develop such a facility and thus the real money can flow anywhere between 2022-2026 and two, the full-scale production in Guyana’s case, is contractually linked to the price of oil being above US per barrel. So when I listened to the alternative facts from the Minister of Public Security Mr. Ramjattan in Washington DC when he visited, it was mind-boggling.
Bigger chunks of the revenue stream will be applied early in the life of this project towards paying off the debt holders (the bond holders and other contributors of the initial investment), leaving less available to be distributed to the equity holders like Guyana. Any politician who chooses to tell the people that they are going to see lots of money in their pockets before 2021 should not be trusted since they are trying to sell the people the Brooklyn Bridge.
I was fortunate to be at an energy gathering in early February in Washington DC and it reinforces for me that even senior decision makers in Guyana do not get this oil deal. Minister Trotman seems to be one of the few in the Granger administration who seems to properly understand the risks and the general framework of this oil deal but he is in the minority. Thus it would be advisable for him and only him to take lead on the distribution of public information on this matter. The bottom line is, this project will advance when EXXON says it will advance; full stop!
These investors are literally paying a “rent” to Guyana for them to occupy portions of its territory to extract crude oil. But this is not abnormal in an early-stage exploration especially in a small country with “under-skilled” negotiators. The current agreement facilitates a situation where most of the revenues are reserved for the four main sets of investors, (Exxon, Hess Oil, the Chinese and the bondholders). Guyana must prepare itself mentally for the residual income. If the risk increases or the price drops below a certain mark, Guyana will get an even smaller portion of the pie. So even that projected US$15 billion that should be assigned to Guyana as “oil rent” on the Liza well is not a certainty.
This brings me to the pertinent point of this entire project vis-à-vis Guyana. How are we being paid? If we are being paid in dollars we may not get fair value for our real estate. There are two hidden costs in the mix that can extract fees from assigned US$15 million for Guyana; a decline in the oil prices and the marketing fee that EXXON will charge to sell our portion of the crude.
That is why the more sensible financial option is to ask for payment in actual crude. But what will Guyana do with the crude? Take up the offer from Trinidad to refine our portion so that they can reap all of the profit from the value-added refining operations or build our own refinery? That is an unintelligent question but if answered intelligently it shall expose a real opportunity for Guyana.
Today the price of a barrel of crude is around US$52. A barrel of crude can make about 19 US gallons of gasoline, 10 gallons of diesel, 4 gallons of jet fuel and another 6 gallons of other oil products. Some 3 gallons are attributed to processing loss. If Guyana builds its own refinery in a public-private partnership by using a portion of its US$15 billion, in this scenario, it will earn some US$57.62 per barrel (see computation below). This is an immediate additional value of US$5.62 per barrel.
I shall continue developing this idea next week.
