By Arthur Deakin
In Vienna last week, the 23 members of OPEC+ agreed to increase oil production by 500,000 barrels per day (bpd) starting in January 2021. As they observe improving market fundamentals for oil, they decided to gradually reduce their record cuts of 7.7 million bpd to 7.2 million bpd. Although the number is negligible, equivalent to less than 2 percent of OPECs daily production in November, it indicates that the demand for oil is beginning to improve.
As demand increases, it is likely that there will be a continued rise in the price of Brent crude. Promising COVID-19 vaccine news, the end of newly imposed European lockdowns, and a rebound in personal travel will all contribute to higher oil consumption. Oil-dependent countries that require higher oil prices to balance their budgets will gasp in relief.
Despite a more positive outlook, the past nine months have been brutal for major oil producers. The Economist predicts that the “golden age” of oil producers has come to an end. It estimates that Brent crude’s price will remain around $50 a barrel, a far cry from its historic highs. BP’s Energy Outlook also outlines three potential scenarios for oil consumption in the upcoming decades. In its most optimistic scenario for oil, BP forecasts demand increasing slightly until 2030 and then declining continuously after that. Just last week, the Wall Street Journal reported that the pandemic could cut business travel by 36 percent permanently. Many have predicted the “decline of oil” in the past, but never before has it been done with such scale.
Suffering from this year’s decline in crude prices and a collapse in oil demand, ExxonMobil recently announced it would incur a $17 to $20 billion write-down of its North and South American natural gas fields, the largest write-down in its history. Despite the magnitude of the numbers, Exxon is not alone. The eight largest oil companies in the world have written off $80 billion since Q42019. These companies also expect to cut employment and capital spending during the next couple of years.
The silver lining is that Exxon will prioritize near-term spending of “advantaged assets with the highest potential future value.” This includes its chemical business, the US Permian Basin, Guyana, and targeted exploration in Brazil. Brazil and Guyana, which can be considered Exxon’s “golden jewels,” have relatively low breakeven costs at below $35 a barrel. They are also known to have high-quality crude, providing a lower sulfur content that satisfies stricter fuel emissions in ships. Both of these factors are highly coveted by oil companies as they adapt to changing global demand and stricter environmental policies.
Guyana, in specific, continues to announce new offshore discoveries in its Stabroek block, bringing its oil resources to an estimated 9 billion barrels of oil equivalent. Exxon is the lead operator of the 6.6 million-acre Stabroek block, in addition to the neighboring Kaieteur block, where it continues to explore new wells.
Within just five years of its first major offshore discovery, Guyana is already producing 105,000 barrels per day (bpd) from its Liza Field. This month, they expect to commission the natural gas injection system which will allow the field to reach its peak production capacity at 120,000 bpd.
Phase 2 of the Liza Field development will utilize the Liza Unity FPSO, a floating vessel used to extract hydrocarbons from the bottom of the ocean. First oil is projected by early 2022, with an expected 220,000 bpd at peak production. This will be followed by the commissioning of the $9 billion Payara field, a project recently approved by the new government. The start date for Payara is scheduled for 2024, and it will bring in another 220,000 bpd. By 2024, two more FPSOs will be operational as production grows to 560,000 bpd. By mid-2030, Guyana’s total production is projected to be 1.4 million bpd, placing it within the top 20 oil producers in the world.
Just this week, in Guyana’s Oil and Gas Summit, president Irfaan Ali welcomed local and foreign investors with open arms. He also said that they are developing a local content rule in such a way that local businesses will have “optimum participation” in the sector. Although local participation is essential for any country, Guyana should develop a local content framework that is balanced; one that fosters local participation while simultaneously encouraging foreign investment.
With the recent approval of the Payara permit and Ali’s commitment to not pursue any changes to the original Stabroek contract, investors should feel more comfortable operating in Guyana. The Guyanese people should also be pleased that Exxon has reiterated its commitment to developing the resources in the country, regardless of crude price fluctuations and cuts in capital spending. Exxon’s large resources and proven experience allows it to effectively weather any storm, reflected by its limited disruption during the pandemic.
Despite encouraging signs of a business-friendly government focused on cutting red tape, Ali is expected to take a firmer stance on future oil contracts as new discoveries are announced. As large revenues start flowing, the public will naturally increase its pressure for tangible results, especially when it comes to improved education, infrastructure and income growth. Prior to the pandemic, consultancy Rystad Energy projected that the government’s income from oil could reach $10 billion a year, a large chunk of cash for a country whose annual GDP in 2019 was a mere $4.7 billion. The public deserves to see its society develop, and the government would be remiss to squander that money.
Greater transparency and governance are also lacking among this new government. Despite the development of a Petroleum Commission Bill — meant to limit political influence in managing the oil industry — the current structure of the oil sovereign wealth fund allows the president to have final say on how the monies are spent. This creates the opportunity for resources to be misused for political or personal purposes—instead of the development of the society. Without independent and unbiased oversight of the funds, the PPP’s corruption track-record will be the country’s biggest concern moving forward.