Response to Tom Sanzillo, Director of Financial Analysis at IEEFA (Pt 2)

Tom Sanzillo provided a response to this column’s edition that was featured last week, which was a direct response to Tom’s analysis on several issues on the Guyana’s oil and gas sector. This columnist is extremely pleased and elated that Tom Sanzillo responded to an open public debate on these issues.
In his response, Tom basically regurgitated his analysis that is already in the public domain and which this author briefly touched on last week. This is not only unfortunate but also disappointing on the part of Tom as he failed to offer any new and in-depth analysis – thus warranting his analysis inherently weak and unscholarly.
To summarize Tom’s response, he is basically contending that failing markets and weak revenues will result in anything but small benefits for Guyana and that revenue outlook is dim owing to declining markets for crude. However, he failed to provide and substantiate the underlying assumptions for this and the time frame in which one can expect an oil market crash – based on his analysis.
He is also contending that Guyana will saddle itself with burdensome debt by virtue of pursing ambitious development projects – that the country badly needs; which will position the country for bankruptcy. Not only did he not substantiate his absurd assumptions which are all speculatory – he did not fail to validate and prove the insanity contained in his baseless ramblings which leaves much to be desired.
While Tom is correct, however, on one point only – that the global oil market is diminishing though he did not forecast by what timeframe one can expect an oil price crash, this author in March 2018 would have argued that the global oil market has safely another 20 years before oil price becomes unsustainable. This is attributed to the notion that the world economy is moving towards adopting climate change policies and alternative sources of energy.
This obviously will not occur over night of course and it is for this reason in the said referenced article by this column wherein it was contended that Exxon will need to increase production capacity to as much as 1 million barrels per day by the end of the first decade. See link here for ease of reference: https://guyanatimesgy.com/the-changing-dynamics-of-global-oil-economics-part-3/. Notably, Exxon appears to be well in line to achieve these targets based on its disclosed projections for increased levels of production capacity – reaching over 500,000 barrels per day by the end of the first five years.
More so, the Organization for the Petroleum Exporting Countries (OPEC) in its 2019 World Oil Outlook 2040 report, provided a forecast that is consistent with those of this author with respect to global demand for oil and gas in the global energy mix. To this end, the report noted that total primary energy demand is expected to increase by 25% between 2018 and 2040 with renewables leading the way in terms of growth, but oil and gas are still forecast to meet more than 50% of the world’s energy needs by the end of the forecast period (2040 / 20 years’ time). (see link to report here: https://www.energy-tomorrow.eu/wp-content/uploads/sites/15/2019/11/world-oil-outlook_executive-summary_2019.pdf).
The report cited as well that these trends can also be viewed in similar forecasts from other reputable organizations with long-term energy outlook. Hence, it is rather safe to conclude that oil price, though volatile will remain sustainable between US$40 – US$50 per barrel until the end of the next two decades while noting that oil will remain profitable above US$35 per barrel.
He further went on to say that Exxon is stumbling with the global market, but be that as it may it is not just the declining market that has been a contributory factor to Exxon’s poor financial performance. Other factors that led to Exxon’s poor financial performance include expenditure incurred owing oil spills globally – which amounts to over 300 oil spills from the period 2005 to 2018. Another important factor to consider includes the highly regulated industry in other markets which increases the cost imposed upon Exxon to operate in those countries.
In the case of Guyana on the other hand, Exxon has benefited from a favorable fiscal regime in addition to the fact that Guyana has a lighter and sweeter crude which is less costly to refine. These favorable conditions coupled with the need to rapidly increase production capacity are what makes the Guyana petroleum industry an attractive one against all the odds highlighted earlier with respect to the changing dynamics of the global energy market. So, here again Tom is wrong and does not fully understand the market dynamics globally and in the case of Guyana.
For these reasons, Guyana has to be wary of the pretentious lords in developed countries who want to stymie developing countries from prosperity so that they can lord over us. We, Guyanese, must not allow this to happen and must not allow so-called foreign experts to insult our intelligence.
The manner in which the IEEFA puts forward its contentions gives one the impression that for Guyana to become prosperous it is solely dependent on the oil and gas industry and that it seems Guyana is solely reliant on natural gas to solve its energy problems. This view by the IEEFA suggests that the IEEFA truly does not understand anything about the Guyana economy. Guyana is not dependent on oil, oil and gas is just a bonus. Guyana is rich in natural resources and has a relatively diverse economy to build upon which the Government is committed to so do.
In fact, in a previous response some months ago during the elections period, this author would have responded to the former Minister of Finance positing that we need not get excited about oil and gas as it is merely a premium. For Tom’s and the IEEFA’s benefit this article can be accessed here for my full analysis therein https://jbconsultancy.info/we-need-not-get-excited-about-oil-and-gas-as-it-is-merely-a-premium/.
The IEEFA concludes that Guyana will not earn much and that the earnings will not be sufficient to offset budget deficits. Now, let’s look at some analysis using Liza Phase 1 project alone. Liza phase 1 has a production capacity of 120,000 barrels per day and comprise of 450 MMbl.
About the Author: JC. Bhagwandin is an economic and financial analyst, lecturer and business & financial consultant. The views expressed are exclusively his own and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]