Guyana has only been an oil producer for a little over two months, and already, it is getting a brutal taste of just how volatile the industry is. As a result of a crisis in the oil market, Guyana will see a significant cut to the US$300M it was projected to collect this year from the Stabroek Block’s Liza Phase One Project.
During an exclusive interview with Kaieteur News yesterday, Attorney-at-Law Charles Ramson Jr. said that the crisis in the oil market could see Guyana’s first year of revenues being reduced by more than US$200M.
The crisis in the oil market is due to two interrelated factors—fears over the coronavirus and a brewing oil price war between Russia and Saudi Arabia. (See related story on page 15)
Yesterday, oil prices saw the most dramatic decline since the financial crisis in 2008. As a result, it was deemed by some international analysts as “Black Monday.” Because of the coronavirus, oil prices which were as high as US$69 a barrel in early January declined to about US$50-US$45 a barrel. That state of affairs would only get worse following a row that could become an ugly oil price war between Russia and Saudi Arabia.
According to CNN Business, Russia refused a proposal that was made last Friday at a meeting in Vienna by the Organization of the Petroleum Exporting Countries (OPEC) to cut back on the production of oil supply in an attempt to support prices which have been declining due to fears over the coronavirus.
In response to Russia’s refusal, Saudi Arabia over the weekend slashed its selling price for crude by US$6 to US$8 in an effort to retake market share and heap pressure on Russia. Upon review of the foregoing, international analysts commented that Saudi Arabia is “rolling up its sleeves for a price war.”
The net effect of Saudi’s actions led to prices dropping to US$34 a barrel up to yesterday. (See link for more details: https://edition.cnn.com/2020/03/08/investing/oil-prices-crash-opec-russia-saudi-arabia/index.html).
With a possible oil war unraveling before the world, US Investment Bank and Financial Services Company, Goldman Sachs yesterday said that oil prices dropping by 43 percent to US$20 a barrel is a real possibility that the market should brace itself for.
So what does all of this mean for Guyana? Ramson in his interview pointed out that when Guyana calculated its take from the Liza project, calculations were done using the US$55 a barrel oil price. He noted, however, that the fiscal take which includes a two percent royalty and a 50 percent take of the profit oil changes drastically, given the global circumstances.
Ramson said, “…If you were to do any kind of calculations now about what Guyana should expect for its oil for year one and year two etc., it shifts dramatically downwards, so instead of receiving US$300M, we will only receive US$9M to US$11M, which means that the first shipment of oil we were able to sell, whatever we were able to get as a result of that we were quite lucky, as it was a high price at the time but Guyana will not get that US$300M it expected…”
Further to this, Ramson said that even if one were to ramp up production to 120,000 barrel of oil per day, based on his calculations, it would take Guyana five years to rake in the estimated US$300M. And even then, he said it would not be guaranteed if the price continues to shift downwards.
Additionally, Ramson noted that the oil market crisis will also affect the pace of cost recovery. In this regard, he said that the estimated revenue from the Stabroek Block project would be significantly less, thereby increasing the timeframe for which ExxonMobil has to recover its investments, which is estimated to be over US$3.5B for the Liza Phase One Project.