Most of the calculations of Guyana’s oil earnings are based on crude prices remaining at or above US$55 per barrel. If the price dips below this sum, then Guyana is left with very little; in fact, it may be left with nothing at all, since production may cease all together.
Based on the cost recovery threshold of 75% which was agreed upon, it could be presumed that once the price dips below US$45, it will not make economic sense for the oil companies to continue production. Right now, the price is only slightly above US$50 and if it falls, this will affect the estimated US$300M which Guyana is expected to earn this year
Crude oil prices by the Organization of Petroleum Producing Countries (OPEC) dipped to below US$20 per barrel in 1998 and 1999. OPEC no longer has the leverage it once had to dictate global crude prices. Domestic production in the United States and the release of oil from that country’s reserves are now able to effectively counter any attempt by OPEC to keep prices high.
Other factors threatening oil prices are the production of shale and the Paris Agreement, which set limits on global emissions. Shale is a fine-grained sedimentary rock. It is being processed into oil, and is likely to emerge as a major competitor to traditional crude. Production, however, has not been increasing at a rate to affect oil prices, but if it does, then oil prices can fall further.
The Paris Agreement, a global climate accord, is in serious problems. It can collapse at any time. Once that happens, oil prices will free fall, because it means countries no longer have to worry about their emission levels.
Many expect that the 2019 crude prices would have held for some time because of the Paris Agreement. There is more than good reason to reexamine this assumption.
Of the 107 countries which have promised to reduce emissions. Only three have so far submitted their revised plans to do so, and this is only nine months short of the Conference of Parties of the United Nations Convention on Climate Change, which is to be held in November in the United Kingdom.
Oil prices hinge on those commitments. Oil prices are not likely to stay high unless those commitments are made or unless some of the large oil producers agree to significant cuts in production. One of the biggest producers, Saudi Arabia, is not likely to do so, and its decisions weigh heavily in OPEC.
The Saudis, however, are facing problems from Russia, which is asking for more time to cut production so as to keep prices at or around their present level. It is being proposed that production be cut by a further 600,000 barrels per day in order to ensure the present level of prices.
The outbreak of the coronavirus is threatening oil prices. China purchases as much as 70% of OPEC production. The outbreak of the coronavirus has caused prices to drop. And with Russia being unwilling to cut production, prices have fallen.
All of these developments have implications for Guyana. The country must never assume that the mere existence of oil means wealth. Oil earnings are a function of the price which the crude will fetch on the market, and there are so many factors which dictate how much a country will earn from its oil production. As we have seen, even the coronavirus can determine the price of crude.
Oil prices are never stable. They can spike or crash at the slightest cough.
These are all the more reasons why countries have to ensure that they get the best deal when developing their hydrocarbon resources. They should press for the best terms. Countries should not sell themselves short, because the market is unstable, and downturns in prices can lead to economic problems.
There will be many rainy days ahead for Guyana. Old people say, you must always set aside something for those times. The best deal would have ensured that there will be enough to set aside for when those rainy days appear.
Guyana’s pitiful two percent royalty and 50% profit oil (which is after cost recovery) works out to a minimum of 12.5%. It was a poor deal. It leaves Guyana unprotected and exposed in the event of prices dipping below US$45. Right now prices are just around US$51.
Let us hope the United Nations can revive the Paris Agreement and that the coronavirus can be curtailed quickly. Otherwise that pittance which Guyana was expecting from oil production this year may not materialize.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper)
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