Complex economics of a local oil refinery

With the prospect of earning huge revenue from the budding oil industry, there is much chatter about a local oil refinery, with even Government announcing its intention to pursue this avenue.
While the decision has not been carved in stone, the consultant who was retained to advise Government on whether such an investment is a viable economic option has made it clear that a project of that magnitude will not be profitable. As a matter of fact, the UK consultant Pedro Haas said, at a public consultation in the city, that even if Government goes ahead with the project, there will be extremely thin profit margins.
To his credit, Natural Resources Minister Raphael Trotman, who was present at the consultation, did not accept the findings wholeheartedly, but rather pointed to the fact that this could not be a unilateral decision. He also said that such a decision would be a political one, adding that there are refineries in other parts of the world which may not be turning an economic profit, but they provide other benefits.
Hartree Partners, for which the consultant is a director of advisory services, is a merchant commodities firm specialising in energy and its associated industries. The company offers proprietary trading and arbitrage services that include identifying value in the production, refinement, transportation, and consumption of tradable commodities, and anticipating opportunities in the supply chain, where they may be under or over-valued.
However, Hartree Partners, first established in 1997 as Hess Energy Trading Company LLC (HETCO), has 30 per cent interest in the Liza 1 Block. ExxonMobil is the operator, and holds a 45% interest in the Block, Hess Guyana Exploration Ltd holds a 30% interest, and the Chinese CNOOC Nexen, 25% interest.
Having taken this into consideration, can this feasibility study be a conflict of interest?
The feasibility study was done for a refinery that would produce 100,000 barrels of oil per day. This, according to the study, will cost US billion and have a construction period of 50 to 60 months. This US billion price tag will also have to take into consideration the additional cost of hydrogen supply, water, energy and docking.
As it stands, if 100,000 barrels of oil are produced per day, consideration has to be given to the fact that 75 per cent of each barrel has to go back to investment/production cost, or what is commonly known as cost of oil. It therefore means that 25 per cent of the value of each barrel, at least in the initial stage, will be split between the operator and the Government of Guyana. Guyana must, however, 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.
As such, the Government must think not only of its political standing, but consider the changing patterns in fuel demand and the complexities of a refinery before committing a huge chunk of this new oil money to such a grand project.
Consideration should also be given to the growing globalisation and trade in refined fuels and the new dynamics to the economics of refineries, which have shifted the drivers of refinery profitability. There is no doubt, while examining the lessons of other countries, that the economics involved in an oil refinery are complex, and after it has been built, it is expensive to maintain and operate.
It can be agreed that, should Guyana build its own oil refinery, it has the potential to create between 3000 and 6000 jobs. However, if this is done and it operates at a loss, then taxpayers’ money would have to be spent to grant subsidies. Before making a final decision, Guyana and Guyanese should be placed first and foremost in ensuring profitable operations that can deliver adequate returns on investment.