Sep 15, 2020 Letters
A friend of mine who is living in Guyana wrote me earlier this afternoon asking for my thoughts on Secretary Pompeo’s upcoming visit to Guyana. Below are two thoughts I offered plus three more:
1: They should expect pressure to approve the Payara proposal immediately, because:
– the price of Brent quality oil closed at just under $40.00 Sunday. Guyana’s oil was rated at a few notches lower than top quality Brent. But for this analysis, I will use $40.00 as the selling price.
– Guyana’s royalty of 2% comes off the top. That’s 80 cents per barrel.
– Exxon’s production cost at Liza One is $35.00 per barrel, as publicly stated by Hess Corporation, a 30% partner in the Stabroek Consortium, of which ExxonMobil is the managing entity. (Remember Hess was showing the stock market how much money they were about to make from such a low cost-of-production field, so I believe them).
– Guyana gets 50% of the “profit” in the form of oil, referred to as “profit oil”.
– there is, what I have referred to previously as, a “genius clause” in an otherwise lopsided contract. That is, the expenses Exxon can claim are capped at 75% of the
selling price, for purposes of calculating profit. (Wish I had that in my gas contracts!)
– that means that expenses are capped at $30.00 per barrel for calculation of Guyana’s profit, on oil sold at $40.00 per barrel.
– Gross “profit” is therefore $40.00 – “$30.00” = $10.00 per barrel.
– Guyana’s profit share is $5.00 per barrel.
– Guyana’s total take is $5.80 at the price of $40.00 per barrel.
– what is Exxon’s take? $40.00 – $5.80 = $34.20
– Exxon’s actual production cost was $35.00. That is a loss. Welcome to the oil business!
Note that this is before amortizing capital expenses, estimated at between $6.00 to $7.00 per barrel by Hess. Their published information does not specifically say that capital expenditure is included in production costs, so I want to leave it out there. If someone knows, please let me know.
Hess hedged 90% of their future sales at $60.00 per barrel. That is standard good practice for smaller producers. I am told that Exxon doesn’t hedge. Makes sense. They sell their oil mostly to their own refinery divisions! (Hess sold off their refineries several years ago).
Hedges are usually for one year out. Hess’ March 2020 contracts will probably expire in February 2021. Even though they are getting $60.00 per barrel today (despite the going price being $40.00 for November production), March 2021 doesn’t look too bright for the price of oil. Presumably, Hess have some hedges in place going forward, but my friends here who hedged their production for early next year told me that the future price was at around low to mid-forties, and very difficult to get.
Last week, our bank’s Oil and Gas committee set our Futures Price Deck at $45.00 through 2021. (Basically, a considered guess. We have to do it quarterly to give our petroleum lenders a benchmark for calculating our clients’ borrowing base, when future oil production is our collateral).
– Liza Two and Payara’s projected production cost is $25.00 per barrel, according to Hess. Note that is ten dollars lower than Liza One.
– Doing the same analysis as before, with same selling price of $40.00 per barrel:
Royalty to Guyana at 2% = 80 cents.
Gross Profit on sale per barrel: $40.00 – $25.00 = $15.00
Guyana’s 50% share = $7.50.
Guyana’s total take = $8.30
Exxon’s take is $40.00 – $8.30 = $31.70
Exxon’s net profit on projected Liza Two and Payara oil = $31.70 – $25.00 = $6.70 per barrel! That’s how we like it.
That is the reason why any delay in Payara’s approval is so critical to ExxonMobil and to Hess. That is worth bringing out their biggest gun.
A $6.70 profit per barrel versus an eighty cent loss per barrel is well worth consideration of making a PAC contribution to a political party, channeled of course through the company’s lobbying firm! As you well understand, that is most certainly not a quid pro quo. It’s always because the company likes what a politician is doing for the national good. As long as we are clear about that.
– The Stabroek Consortium has an active lobbying firm in Washington. My guess is that Secretary Pompeo’s visit is primarily to “encourage” VP Jagdeo to “expedite” the Payara approval.
2: Since this is an official visit, Guyana should expect a push for Shared Governance of some sort, but with lesser insistence than 1 above. This will be to “stabilize” democracy, and even maybe, their investments.
3: I would not be surprised if he “suggests” that talk about renegotiating, reviewing, revisiting, revising the present contract be put on hold until the price of oil ‘stabilizes’.
4: Might he be offered the Order of Roraima, or the honorary version thereof, since US citizens cannot accept foreign honors, for his services to Guyana’s democracy? I read somewhere that during the election results standoff, he personally called ex-President David Granger and “advised” him on the way forward. I don’t know if that is true.
5: Since I started writing this, my friend in Guyana wrote back to suggest that he thinks that constitutional reform might be on his agenda too. I agree, so want to include that idea.
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