{"id":6797,"date":"2023-10-29T17:54:28","date_gmt":"2023-10-29T17:54:28","guid":{"rendered":"https:\/\/infundpros.com\/business\/jewel-in-the-crown-chevron-follows-exxon-to-guyanas-oil-riches\/"},"modified":"2023-10-29T17:54:28","modified_gmt":"2023-10-29T17:54:28","slug":"jewel-in-the-crown-chevron-follows-exxon-to-guyanas-oil-riches","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=6797","title":{"rendered":"\u2018Jewel in the crown\u2019: Chevron follows Exxon to Guyana\u2019s oil riches"},"content":{"rendered":"
\n

Chevron\u2019s deal to buy Hess last week for $53bn gives the US supermajor access to one of the hottest prospects in the global resources industry: Guyana\u2019s 11bn barrels of offshore oil.<\/p>\n

There was little interest in the Latin American country\u2019s potential as a fossil fuel producer when ExxonMobil began exploring Guyana\u2019s waters for oil in 2008.\u00a0That changed in 2015 when an Exxon-led consortium, including Hess and Chinese giant Cnooc, made a significant discovery at the Liza field, in the 6.6mn acre Stabroek Block.<\/p>\n

The consortium has made more than 30 significant discoveries since then, with the latest announced on Thursday.\u00a0The steady stream of oil output should help sustain Exxon\u2019s \u2014 and now Chevron\u2019s \u2014 crude business for decades.<\/p>\n

It should also transform one of Latin America\u2019s poorest nations, home to just 800,000 people. Oil output has gone from zero to 390,000 barrels a day last year. The unusually fast ramp-up could push production to 1.2mn b\/d by 2027 \u2014 equivalent to about a third of Exxon\u2019s current daily production. <\/p>\n

Last year Guyana\u2019s economy grew by a record 62.3 per cent, the highest rate in the world, as the petrodollars poured in. The IMF expects it to expand by another 38 per cent in 2023. <\/p>\n

Its rise comes as the world plots a move away from fossil fuels, climate campaigners object to the very principle of further oil and gas development, and opponents worry about oil companies\u2019 chequered history of operating in poor countries. <\/p>\n

Even so, the US oil majors\u2019 investments look set to make Guyana one of the last petrostates to emerge in the oil era. <\/p>\n

\u201cIt is a jewel in ExxonMobil\u2019s crown. It\u2019s a significant resource. It fits very well with the execution capability of ExxonMobil,\u201d Alistair Routledge, Exxon\u2019s Guyana president, told the Financial Times.\u00a0\u00a0<\/p>\n

\u201cClearly what\u2019s attractive to Chevron is that ExxonMobil is operating at a very high level\u2009.\u2009.\u2009.\u2009From first discovery in 2015 to first oil in 2019. I mean, [it\u2019s] just unheard of really to develop a new resource and in a brand new basin where there\u2019s no existing infrastructure in that short a timeframe.\u201d<\/p>\n

Wall Street analysts have labelled the Exxon-led investment in Guyana \u201cthe best oil deal in modern history\u201d. It has a low break-even price of $25-$35 per barrel at a time when global oil prices are above $90 a barrel. But the US supermajor and its Guyana project have also drawn criticism. <\/p>\n

The Stabroek Block produces high quality light sweet crude, which has a 30 per cent lower greenhouse gas intensity than the average of Exxon\u2019s portfolio. But climate campaigners warn the sheer size of the reserves make them a \u201ccarbon bomb\u201d that will accelerate climate change if they are produced. They also worry about the potential damage caused by offshore drilling to Guyana pristine environment. <\/p>\n

Others caution that Guyana risks falling victim to the \u201cresource curse\u201d, in which sudden natural resource riches hollow out other domestic industries and breed political division and corruption. A bitter dispute over the transfer of power following the 2020 general election underlines the political fragility of a country divided on ethnic lines. <\/p>\n

\u201cThere are hundreds of millions going into a country with a small population so they\u2019re not complaining,\u201d said Tom Mitro, a senior fellow at Columbia University\u2019s sustainable investment centre and a former Chevron manager who helped negotiate its contracts in countries including Angola, Nigeria and Papua New Guinea.<\/p>\n

But he and other experts argue that the production-sharing contract signed with Guyana in 2016 is unduly generous to Exxon, and some say it should be renegotiated.<\/p>\n

\u201cIt was an unusually sweet deal,\u201d Mitro said.<\/p>\n

Guyana\u2019s government now has money for hospitals, housing, transport, flood management infrastructure and a sovereign wealth fund, which should bolster public finances. But the record profits generated by Exxon last year and Chevron\u2019s purchase of Hess\u2019s 30 per cent stake in the Stabroek Block have brought renewed scrutiny of the contract terms. <\/p>\n

In that deal, Guyana agreed to split profits 50:50 with the developers it wanted to attract. But up to three-quarters of revenue go first to cover the consortium\u2019s costs. Among other perks, Guyana also agreed to pay the companies\u2019 income and corporation tax from its share of the profits.<\/p>\n

Mitro points to the absence of a \u201cringfencing\u201d clause. Revenues from already producing oil sites \u2014 such as the Liza field \u2014 are not ringfenced but can be used to recover costs for exploration across other sites in the block. The IMF expressed \u201cconcern\u201d in 2019 that this could \u201caffect the projected flow of government oil revenues\u201d. <\/p>\n

Ringfencing has drawbacks, said Graham Kellas, an analyst at consultancy Wood Mackenzie. \u201c[Guyana] could get more money out of Liza quicker but they\u2019ll get money out of the next development slower,\u201d he said.\u00a0<\/p>\n

The fiscal terms are \u201cappropriate\u201d, he said. \u201cThe risks were extremely high\u2009.\u2009.\u2009.\u2009In high-risk, high-cost, deepwater exploration anything could happen.\u201d\u00a0\u00a0<\/p>\n

Mitro argues that the risks were lower because Exxon had already discovered Liza when it signed the deal with Guyana. \u201cFrom all the evidence, Exxon knew it was going to be a large discovery,\u201d he said. \u00a0<\/p>\n

Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis, points to potential trouble for Guyana years from now, when output is exhausted and someone must pay to decommission the oil infrastructure. <\/p>\n

\u201cIt\u2019s kind of like musical chairs,\u201d said Sanzillo. \u201cWhen the music stops, who gets the benefit and who is left without a chair?\u201d\u00a0<\/p>\n

Industry practice normally involves establishing a fund for decommissioning costs, which are taken from oil revenues over the length of a contract, according to Kellas. This does not form part of Guyana\u2019s 2016 contract. <\/p>\n

That is \u201cunusual, but not totally unheard of\u201d, said Kellas, adding that large companies could afford to shoulder any costs without setting up a fund. <\/p>\n

\u201cBut it does raise the risk of [ExxonMobil] selling the assets late in life to a smaller company that then defaults on the decommissioning.\u201d\u00a0<\/p>\n

Exxon\u2019s Routledge defended the contract, saying the terms were competitive for a deepwater, frontier development that had attracted limited interest until the big recent discoveries. Just two companies \u2014 Hess and Cnooc \u2014 replied to 35 letters sent out by Exxon seeking partners when Shell pulled out of the consortium in 2014, he said. <\/p>\n

Routledge said returns to Guyana could exceed $100bn over its operations\u2019 decades-long lifetime. There would be no renegotiation of the agreement as \u201ccontract sanctity is super important for investors\u201d, he added.\u00a0\u00a0\u00a0<\/p>\n

\u201cEverybody can cherry pick certain things but at the end of the day, it\u2019s a collective economic return\u2009.\u2009.\u2009.\u2009for an economy [whose current] national budget is only around $3.5bn-$4bn. It is quite transformational,\u201d he said.\u00a0<\/p>\n

Joel Bhagwandin, a Guyanese financial analyst who has worked with both Exxon and Guyana\u2019s public procurement commission, said the deal was \u201cheavily criticised\u201d in the country when it was first signed.\u00a0<\/p>\n

But recent government laws that oblige oil companies to procure from Guyanese businesses and nationals for some services would help spread benefits to the country\u2019s economy, he said. Exxon said it had spent $1.2bn with 1,500 local suppliers since 2015.\u00a0<\/p>\n

Guyana is pushing for more favourable terms from future deals and is negotiating royalties of 10 per cent on upcoming contracts, far above the 2 per cent it agreed with the Exxon consortium. <\/p>\n

But companies and analysts do not believe the government will rewrite existing terms, as other Latin American countries such as Chile and Mexico have done when they sought greater state control of their lithium reserves.\u00a0<\/p>\n

A Guyana government representative did not reply to a request for comment. <\/p>\n

Meanwhile, some Guyanese people who oppose the oil development on environmental grounds have recently enjoyed some success with court challenges. In May the country\u2019s high court ordered Exxon to provide an \u201cunlimited guarantee\u201d in case of any oil spill damage in the country\u2019s waters.<\/p>\n

Exxon is appealing against the ruling, and has limited costs to a $2bn guarantee until a full hearing. Experts have speculated that the original ruling could dent companies\u2019 appetite to invest further in the region. <\/p>\n

Melinda Janki, a former BP lawyer who is fighting against Exxon\u2019s appeal, said the suit was designed to ensure Exxon would minimise its operations\u2019 risk to the environment and would pay for any damages caused, calling the original contract with the supermajor \u201cabusive and exploitative\u201d. <\/p>\n

The court\u2019s original ruling was a \u201csurprise\u201d, Routledge said. \u201cWhat\u2019s important to us is that we follow all the rules, the regulations, the laws, and I believe that if we do so then we should not have any significant issues,\u201d he said. <\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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