Sep 26, 2019 News
By Kiana Wilburg
According to the International Monetary Fund (IMG), Guyana can expect to lift its first entitlement of one million barrels of crude oil as early as February 2020. Kaieteur News understands that this will occur at approximately 60-day intervals.This would also indicate that oil production is highly likely to start before the end of 2019. The financial institution noted that while Guyana has opted to take its share of production from the Stabroek Block’s Liza One field, and market same on its own behalf, there are some crucial factors which have to be considered in the process.
The IMF advised the government that if it is to successfully monetize oil production, it needs to be able to qualify pricing of crude oil by quality, quantity and pricing. Maximizing the sales it said, will depend on the type of sale, the sale price, the buyers and where the proceeds go.
The organization which is headquartered in Washington D.C noted however that currently, Guyana lacks both the capacity and technical systems to price crude oil sales. It stressed that correctly pricing oil requires an understanding of petroleum market drivers as well as basic use of hedging within a trading environment to properly evaluate and challenge prices achieved by the lifters.
This observation by the IMF is also in keeping with that of University of Houston Instructor, Tom Mitro, who had told Kaieteur News that Guyana opting to sell its share of the oil might not necessarily be the best decision at this time. He said that it would be wise to consider other options.
The official had stressed that selling crude requires a good deal of marketing expertise and Guyana would need to get people trained in order to do this effectively. Mitro cautioned that this could take several years.
Mitro also acknowledged that the advantage of Guyana selling its own oil is that the Government’s appointed managers of the oil would see and understand the market firsthand and not have to rely on Exxon to sell the crude at a price that may not be ideal. As one example, The Oil and Gas Consultant noted that Angola’s stated own oil company, Sonangol, had set up its own crude oil marketing company years ago with offices in Houston, London and Singapore.
Mitro stressed that it took quite a few years before they were able to stop relying on expatriate secondees to these operations and becoming more independent, fully staffed, managed by Angolans. “So what I am trying to tell you in simple terms is that this is a long term process,” Mitro noted.
The Oil and Gas Consultant also stressed that an alternative for Guyana is for the Department of Energy to rely on the operator being Exxon, to sell the crude. He reminded that this option is already envisioned in the Stabroek Block Production Sharing Agreement (PSA). He said that this can be done right from the beginning while noting that Exxon certainly has the expertise to do it.
The official said, “Also, this could mean the government gets to sell its share of oil on a more regular basis since its entitlement would probably be combined with Exxon’s when planning tanker loading logistics. Otherwise, they would have had to wait until their entitlement accumulates enough to comprise a full tanker size lifting.”
Mitro noted however that the problem with this approach is that the Ministry would need to be able to verify that the prices obtained are in line with the market. He said that if Exxon sells to its own downstream affiliates, that gets much more difficult to do. He stated too that Exxon will charge a fee for this, noting that this fee will most likely range from anywhere from US$.02-US$.07 per barrel.
In addition to the foregoing, Mitro asserted that Guyana’s other alternative is that the Energy Department can hire a third party crude oil marketing firm to do this for them. Mitro said, “This could mean they obtain a slightly higher price from time to time, but with the risk that the marketing firm may not be able to easily dispose of the oil at times when the market is declining as they don’t have access to refineries.” He said that this is the same risk if the Energy Department would opt to sell on its own without a marketing firm. He also stressed that the charge from a third-party firm may be even higher than what Exxon would charge.
Overall, the Oil and Gas Consultant said it makes sense for the Energy Department to develop a strategy that evolves overtime. One such strategy he suggested might involve requesting Exxon sell the government’s share over the first few years, and at the same time, request to have one of its own be seconded to the Exxon trading offices in order to learn the business. At the same time, Mitro said they can perform independent reviews or audits of the prices using publicly available pricing data from S&P Global Platts.
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