There are growing fears that the COVID-19 pandemic will sharply impact deeply impoverished Guyana’s economy and fiscally vital oil boom. Newly appointed President of Guyana Dr. Irfaan Ali recently called on the international community to assist small states like Guyana, which have limited resources and undiversified economies, to overcome the considerable fallout caused by the pandemic. There are considerable fears that the health emergency will significantly impact Guyana and its emerging oil boom. The small South American country, like many of its neighbors, has been disastrously affected by the global pandemic, resultant global economic slowdown and oil price crash. Economists and academics have very real concerns that Guyana will be negatively affected by the oil curse which has derailed good governance and development in many petroleum rich countries. Despite the current headwinds, there are signs that Guyana’s offshore oil boom will gain further momentum.
Oil giant ExxonMobil almost a month ago announced another notable oil discovery in Guyana’s territorial waters, the Redtail-1 well, adding to the global energy major’s impressive history of oil discoveries in the country. This comes on the back of the Yellowtail-2 discovery and is Exxon’s 18th find in offshore Guyana. That will add to the oil major’s estimated 8 billion recoverable barrels of oil in the Stabroek Block.
During December last year, Exxon started production in the block with the Liza Destiny floating production and offloading vessel which can pump up to 120,000 barrels of crude daily. The company expects its Liza phase-2 project to come online during 2022 and produce up to 220,000 barrels of oil daily. Only days ago, Exxon announced that it will proceed with the Payara project in the Stabroek Block after receiving the required government approvals. That asset is expected to come on-line in 2024 and produce up to 220,000 barrels of petroleum daily using the Prosperity floating production, storage and offloading vessel. That means Exxon could be pumping up to an impressive 560,000 barrels daily from its offshore Guyana assets by the end of 2024. This will give Exxon’s oil production and ultimately cashflow a healthy boost, particularly once oil prices rebound. More importantly for Guyana, the latest discovery will boost oil reserves and eventually production bolstering fiscal income for its cash strapped government. The IMF, even after allowing for the fallout from the COVID-19 pandemic, estimated in April that Guyana’s GDP would expand by almost 53% in 2020 because of its offshore oil boom.
Exxon’s latest discovery points to the tremendous oil potential held by the former British colony. Guyana’s offshore oil is especially attractive for global energy majors in the current difficult operating environment weighed down by a prolonged price slump. Exxon has described its offshore discoveries as high-quality, oil-bearing sandstone reservoirs. That indicates it is light sweet low sulfur crude oil, meaning it has a high API gravity greater than 30 and sulfur content less than 0.5%. Demand for light sweet crude is growing because of low refining costs and stricter pollution regulations aimed at reducing emissions from vehicles and ships. The increasing strictness of emission regulations means that higher quality fuels are required, which are more easily produced from light sweet crude. This is particularly important for maritime fuels because of the introduction of the International Maritime Organization (IMO) regulation 2020, which sets the maximum sulfur content of marine fuels at 0.5%. The introduction of that regulation on 1 January 2020 was partly responsible for the surge in demand from China for Brazil’s light sweet crude.
Another factor underscoring the attractiveness of investing in new offshore projects in Guyana are the low breakeven costs, which are falling at a steady clip as technology, knowledge and drilling practices improve. Initially, offshore projects in Guyana were estimated to have breakeven costs of around $40 per barrel Brent but this has fallen significantly over the last year. Chief Executive John Hess of leading independent oil company Hess, which has a 30% interest in Exxon’s Stabroek Block, stated in February that the breakeven price for the giant oil field is $35 per barrel. He went on to state that the breakeven price will fall further as the block is developed, estimating that the Liza Phase Two project, which is expected to come online in mid-2022, will have $25 per barrel breakeven price. Breakeven prices could fall even further as drilling techniques improve and further infrastructure is established in the Stabroek Block and Guyana’s offshore oil fields. This makes those assets extremely attractive in an operating environment where Brent is trading at around $39 a barrel. Operational profitability will grow at a solid clip when oil prices recover. It has been estimated by several institutions that Brent will recover to at least $60 a barrel during 2021.
For these reasons, interest in offshore Guyana from global energy majors will remain strong despite the current oil price slump and COVID-19 pandemic. As oil discoveries in the Stabroek Block increase and breakeven costs fall, there will be considerable incentive for Exxon to continue making significant investments in offshore Guyana to boost its low-cost oil reserves and production. The push by President Ali’s government to improve the regulation of Guyana’s oil industry and how licenses are awarded, including greater transparency as well as environmental protections, will promote Guyana’s attractiveness as a destination for investment. For these reasons, the COVID-19 pandemic while sharply impacting Guyana will not derail the former British colony’s oil boom. That means Guyana will, as governance is improved under President Ali’s leadership, benefit greatly from its considerable offshore petroleum potential, which should see its economy grow at a rapid clip and the country avoid oil curse.