The tiny South American nation of Guyana has emerged as the hottest offshore drilling location on the continent over the last six years. The swathe of oil discoveries made by ExxonMobil and its partners, Hess and CNOOC, in the offshore Stabroek Block, since 2015, recently saw the energy supermajor upgrade its resources estimate for the block from 9 billion to 10 billion barrels of oil equivalent. The energy supermajor’s success in offshore Guyana sees it forecasting that it will be pumping over 800,000 barrels of light (32° API gravity) sweet (0.58% sulfur content) crude oil per day by 2026. There are signs that Guyana’s oil boom is gaining greater momentum with other international energy companies expressing interest in developing operations in the country. This comes at a time when considerable headwinds regarding the outlook for crude oil exist, including the demand threats posed by the COVID-19 pandemic, the looming arrival of peak oil demand and growing climate change pressures.
Despite the risks, Guyana is an attractive jurisdiction for energy companies to operate in because of high-quality crude oil, low breakeven prices and a favorable regulatory environment. The Stabroek Block consortium, led by Exxon, was able to secure a production sharing agreement with Georgetown that has an incredibly low royalty rate of a mere 2%, far lower than any other jurisdiction in South America. Guyana’s government is also on the hook to reimburse the consortium for all development costs, operating expenses, estimated abandonment costs and interest expenses. That is a very lucrative deal for Exxon, Hess and CNOOC, with it expected to be a major contributor to earnings for those energy companies as production in the Stabroek Block ramps up, to 1 million barrels per day or more before the end of the decade.
In response to concerns over the favorable terms secured by Exxon and its partners in the Stabroek Block the government of President Irfaan Ali has promised to scrutinize how oil agreements are conferred. Georgetown also recently announced it would review the costs claimed by Exxon for its operations in the Stabroek Block, as part of its strategy to ensure that Guyana’s interests are safeguarded. Due to the furor over the rights and production sharing agreements given to Exxon and its partners, Georgetown is implementing a process for auctioning oil blocks which will commence during the third quarter 2022. That is in stark contrast to the previous system, undertaken with the Exxon-led consortium, where Georgetown negotiated directly with energy companies to award oil block contracts. Guyana’s government has indicated that it intends to offer new hydrocarbon acreage and existing blocks that were relinquished by earlier operators for failing to meet contractual obligations including exploration obligations. The new licenses to be granted by Georgetown will have a 10-year life span with terms expected to be significantly less favorable than the 2016 deal signed with the Exxon-led consortium for the Stabroek Block. Given the considerable furor surrounding the Stabroek deal, Guyana’s government has flagged that it may choose to exclude Exxon as well as its partners in the Stabroek Block, Hess and CNOOC, from the process. If that occurred, it would not have any material impact on Exxon which has already secured rights to the Canje and Kaieteur offshore blocks where it is the operator and holds a 35% and 30% interest, respectively. Nonetheless, the energy supermajor, despite drilling a number of dry wells across both blocks, has failed to achieve the success it has enjoyed with the Stabroek Block.
The planned auction, along with revised agreements that are more favorable toward the former British colony, will add further momentum to an oil boom that has generated tremendous benefits for Guyana. In 2020 the IMF found that the impoverished South American country’s gross domestic product soared by a notable 43.5% when it sharply contracted for every other country on the continent because of the pandemic. The IMF has forecast that Guyana’s GDP will expand yet again during 2021 by an impressive 20.4%. Georgetown, regardless of the considerable concerns expressed regarding the detrimental nature of the contract with Exxon and its partners, including the loss of a considerable portion of revenue, has earned considerable fiscal income from crude oil sales. The government received $388 million from the sale of just over 7 million barrels of crude oil which began in February 2020 after the 120,000 barrel per day capacity Liza Phase One oilfield in the Stabroek Block started production in December 2019. The newly announced oil auction will go a long way to advancing Guyana’s plans to become a major global oil producer and exporter. Energy consultancy Wood Mackenzie in a 2020 report predicts that Guyana will be pumping on average over 1.1 million barrels of crude oil per day by 2028, making it only the 11th country in the history of oil to reach the one million barrels per day milestone. There is every likelihood that Guyana will exceed that projected target.
The development activities and production are only in their infancy in the prodigious Stabroek Block, where Exxon has made 23 high-quality oil discoveries and is now eyeing the development of the Yellowtail project. This, which comprises the Yellowtail-1, Yellowtail-2, and Redtail-1 discoveries, will involve the drilling of 41 to 67 wells and will add 250,000 barrels per day of capacity when it comes online by late 2025 or early 2026. While the project is at the approval stage, with the final investment decision expected in early 2022, Exon has already awarded the construction of the FPSO to SBM Offshore. When the facility commences operations in late-2025 or early-2026 it will add 250,00 barrels of capacity to Exxon’s production from the Stabroek Block, potentially taking its oil output to over 1 million barrels per day further bolstering the likelihood that Guyana will become a major global oil producer. That will boost the impoverished South American country’s economy and sustain elevated levels of GDP growth for a prolonged period.