Guyana deserves detailed explanation for US$9 billion Payara capital cost – OGGN

There needs to be a detailed explanation of how the Stabroek Block co-venturers arrived at an estimated US$9B in capital costs for the Payara development, which will come on stream in 2024. So says Canada-based engineer, Darshanand Khusial on behalf of the Oil & Gas Governance Network.
This, Khusial said in a letter, following the 2020 Q3 earnings call of Hess Corporation, during which its principals sought to explain US$7.5B of the cost. The rest, Khusial has called “padded”.

The question about the cost had come from JP Morgan analyst, Arun Jayaram who said “the F&D [finding and development] cost came in a bit higher than buy side expectations.”
He also wondered about the implications for future Stabroek Block projects.
Hess’ Chief Financial Officer and Executive Vice President, John P. Rielly said, “the net development cost for Hess is $1.8 billion.”

Hess Guyana Exploration Limited, the company’s local subsidiary, has a 30 percent stake in the venture.
“So when you gross that up, it’s approximately $6 billion,” Rielly said. “We do have contingencies in our numbers for that, it’s set especially fairly high contingencies early in the process and it comes to that $6 billion on a gross-up basis.”

Next up, Rielly added the cost of the Prosperity Floating Production, Storage and Offloading (FPSO):
“And the one thing you also have to add when you’re doing the F&D is the ultimate purchase cost from the FPSO. We did not include that in our numbers, because that’s still — the timing of that is being evaluated and the cost gets lower as you move out in time. So we don’t know what that is. Exxon in its Phase 2 release had the FPSO at approximately $1.6 billion, that’s what they disclosed for Phase 2. We expect it to be lower with synergies. So if I round that, it’s $1.5 billion, so you get about $7.5 billion there.”

How do the co-venturers then arrive at US$9B? Rielly continued: “And then, we do have some pre-sanctioned cost to add. And I know Exxon has got some additional contingencies beyond that.”
He later added, “the thing that I want to add with Payara is all the costs and the contingencies that we have in our numbers and the pre-sanctioned cost and the expected FPSO cost is in that calculation for the $32 Brent breakeven. So this truly is a world-class asset and adds to obviously then will be the third project in Guyana and we’re looking forward to doing the next project.”
Khusial said that there is a lot at risk for Guyana when it comes to this cost. Guyana has to repay every cent.
He notes that for Guyana’s US$1.5B 2020 budget, there are hours of videos from Parliament, detailing how it will be spent.

“Did the Government of Guyana do a similar deep dive of US$9 billion cost of Payara?” Khusial asked.
Payara is the third of a series of approved projects by ExxonMobil, Hess and CNOOC Nexen. Liza Phases One and Two, and Payara have estimated development costs totaling US$18.5B. Vice President, Dr. Bharrat Jagdeo had said that all costs will be audited, and that it’s only a matter of time.

He said that the development cost audits would have to wait for the completion of the audit of the US$460M pre-contract costs claimed by ExxonMobil for works in the Stabroek Block, conducted prior to the signing of the 2016 Production Sharing Agreement (PSA). But the audit of the pre-contract bill, significantly lower than the development costs, is moving at a snail’s pace. The government had granted an extension to the auditing firm, IHS Markit, but the deadline has not been publicly stated.