Local Financial analyst Joel Bhagwandin responds to Tom Sanzillo, IEEFA

Dear Editor,
Reference is made to a local newspaper article captioned “Every citizen at present owes ExxonMobil $9m – IEEFA Financial Analyst”, published in its May 25th edition.
In that article, the author argued that, with the planned development, ExxonMobil will rack up some US$75B, which will drive up the debt burden for Guyana. This view, however, is contextually incorrect and grossly misleading. It is not a case where the Government of Guyana somehow would have to find US$75 billion by 2070 to repay ExxonMobil. The investment of itself would repay the investors their capital investment, and would yield a profit, which is shared between the Government and the oil company through a 50/50 split.
The Production Sharing Agreement (PSA) has a 75% cost recovery threshold from which the contractor would recover the initial investment. The projected capital investment for the Stabroek block over the life of the project is some US$60 billion, and the life of the project is 30 years.
At the very outset, it must be understood that ExxonMobil and its consortium partners, inter alia, the 1999 agreement, commenced exploration shortly after than agreement was signed, and only discovered oil in 2015, sixteen years later, while all this time incurring exploration cost.
Following the successful discovery, development stage of the field began, which took five years, bringing it to a total of almost 21 years of exploration and development before going into production. That means that Exxon and its partners waited for just over two decades before they started to produce oil in commercial quantities, and to recover their initial capital investment and ultimately profit.
Using Liza Phase One for the sake of this discussion, Liza Phase One’s total development cost alone stood at US$4.3 billion, almost 100% of Guyana’s pre-oil GDP.
It would appear, too, that Tom Sanzillo does not seem to comprehend that, because of the 75% cost recovery threshold, the recovery period for these investments would be very short. Liza Phase One, for example, using an average price per barrel of US$45 at an annual production capacity of 43.8 million barrels of crude, the investment cost of US$4.3 billion will be recovered within 3-4 years, using the payback method. With the Net Present Value (NPV) investment appraisal method and a discount rate of 10%, the investment can be recovered within 4 years.
As such, from the Liza Phase One alone, Guyana can earn over US$2 billion in the first five years, and up to US$6 billion within ten years – taking the post-recovery period into the equation. In other words, Guyana’s projected earnings from the Liza Phase One development alone over the first decade is equivalent to 120% of current GDP; 3.5 times current level of total public debt, and 5 times Government’s revenue, using 2019 figures.
The highest cost is usually the development cost, and therefore, when the development cost is recovered, the operating expense is minimal, since the infrastructure to extract the crude is already in place. To substantiate this view with reasonable certainty, a perusal of Exxon’s 2018 Annual Report confirmed that total operating cost was just about 27% of total revenue. Hence, this means that, in the post recovery period, profit share will be greater, assuming, for example, that operating cost will be 30% of total revenue, then effectively there will be 70% of revenue for profit share, of which 50% is Guyana’s share. Consequently, Guyana’s profit share can be as much as 35% post-recovery period plus 2% royalty, resulting in a total take of 37%; up from 14.5% during the recovery period in the first three to four years of Liza Phase One’s development alone.
Then there is Liza Phase Two, and many other FPSOs and development fields that will be operationalised over the decade.
(Author’s note: A more comprehensive counter-analysis to Tom Sanzillo’s by this author is forthcoming).

Yours faithfully,
Joel Bhagwandin
Financial analyst