Guyana should increase production as oil prices recover- Energy expert

By Bibi Khatoon

Low oil prices around the world are disparaging to oil-producing countries but analysts believe Guyana as an infant oil producer is in a lucky position and should use 2020 to strengthen production.

“Guyana should be increasing its production in this decade when oil prices are recovering,” Robert McNally, President of The Rapidan Group –a leading energy consulting firm – told the News Room during a recent interview.

The current crash in oil prices is fueled by a trade war among major producers and the lockdown of key economies around the world to stop the spread of the Coronavirus Disease 2019 (COVID-19).

But with years of experience in the industry, McNally believes “busts will be followed by booms.”

He noted that as the restrictions on movement decreases, there will be increased demand for transportation fuel which has seen a 25% to 30% abrupt drop in demand.

The current recession is also expected to have an impact on the penetration of electric vehicles into the market and slow major shifts to renewable energy which are both expensive ventures, McNally said.

As a result of the low price, coupled with the fight for storage space, several producers have cut supply voluntarily or involuntarily.

Some of these places, the Rapidan Energy President believes will not see a quick return to production.

“…when you have a stronger demand for consumption of diesel fuel and gasoline and jet fuel even, but you have less supply because some places in the world will not see a quick return to production or some places will end production or close in some fields so these busts sow the seeds of a next boom,” he explained.

Guyana began oil production in December 2019; its crude is being traded against the Brent North Sea Crude which has moved from over US$50 per barrel in January to US$26 on May 4.

Despite a reduction in the price for the commodity, Guyana is not one of the countries which will see a decreased supply as its operators are now working to regain revenue invested in the project since 2008.

McNally explained that “Big big projects where you have so many years and billions of dollars of capital upfront, and you start to produce, your operating cost at that point are fairly low and so you have an incentive to want to earn back a return on that enormous multi-year multi-billion-dollar investment you made so the planners and owners of that project are going to want to prioritize producing from that asset.”

Exploration and production is ongoing offshore on the Stabroek Block by an ExxonMobil-led consortium where it has discovered more than 8 billion barrels of recoverable resource in the Liza Phase 1 development alongside partners Hess Corp and China’s CNOOC Ltd.

Exxon on Friday last declared a loss of US$610M in the first quarter of 2020. It is the first loss seen by the company in 32 years but it noted that “production in Guyana at the Liza Phase 1 development continues to ramp up, while the first oil shipment was successfully processed at the company’s refinery in Baytown, Texas.”

Having these large companies operate in Guyana’s waters are also positive for the new producer, according to McNally, who explained that they have “an easier ability on their balance sheet to even operate where they are making much less money but they can do that more easily than the small companies.”

In Guyana, the startup of the Payara development has seen 6-12 months set back.

Lessons to be learnt

Guyana was projected to see an 86% increase in revenue this year by the International Monetary Fund (IMF).

This projection was made in September 2019 but due to the reduction of oil prices, the World Bank tempered the projection to 51.7% this year

In an invited comment to the News Room, Director of the Energy Department, Dr Mark Bynoe recently said: “…in the current scheme, prices are down by more than a 100% of where they were when Guyana’s first cargo was sold and thus, if we were to sell a cargo at today’s price, the revenue coming to the country will be lower than when the first cargo was sold.”

 

Guyana sold its first cargo at US$55M.

The second and third lifts for Guyana are expected in May and July, he said.

He is unsure like everyone else, how long the fundamentals affecting the oil market will persist but the reduced revenue “can likely translate into downstream impacts on the country’s development programmes and projects.”

Along this line, McNally said Guyana should use the current crash in the demand for oil to learn lessons for future investments.

He cautioned against spending and borrowing.

“In the good times when the price of oil is higher than expected, don’t spend them, don’t borrow against them, be very cautious and save,” McNally noted.

This view was shared by local economist Dr Sydney Armstrong.

The Development Economist who lectures at the University of Guyana said, “we have to be very cautious and responsible especially with projected growth rates and more importantly, growth rate coming from oil prices or from oil resources.

He believes in the time leading up to oil production, too much attention was placed on the revenue coming from this industry as opposed to balancing the other sectors.

“…we as a nation, as much as we’re getting into oil production, we can’t see oil production as the factor that is really [going] make us a rich country in a sense that we cannot depend on oil to take us to the next level or up and beyond. Oil price or oil resource should be seen as an addition to what we already have,” he reiterated.

“If we have that big high expectation of the millions of dollars that we’re going to collect from the oil, we can count that out of the way now,” he added.

Last month, over 30 companies from Singapore, Switzerland, USA, UK, Bahamas, Belize, Japan, China, Trinidad, Norway and the Netherlands and others submitted bids to market the Guyanese government’s share of the country’s crude.