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Guyana election could force oil majors to renegotiate production-sharing deals

Offshore Guyana has become the next drilling hotspot, attracting some of the world's largest international oil and gas companies. But future investment and development could be threatened by the outcome of the South American country's general election in March, just as first oil from the Liza field begins flowing into the global market.

The upcoming presidential election has stoked concerns around Guyana's oil production-sharing agreements with some of the world's biggest oil majors and whether new commercial terms could be implemented if the current administration is ousted, analysts said.

Exxon Mobil Corp.'s oil production-sharing contract with Guyana appears to be insulated regardless of the election outcome. Changes to the current oil contract with the U.S. major, along with its partners Hess Corp. and China National Offshore Oil Corp., would only impede the development of the Exxon-operated Liza field in the Stabroek block, according to Schreiner Parker, vice president for Latin America at Rystad Energy.

Exxon holds a 45% stake in the Stabroek Block while Hess has a 30% interest and CNOOC holds a 25% stake.

"Talk of retroactively changing the fiscal terms [of the Exxon contract] is probably only saber-rattling for either side of the political spectrum in Guyana," Parker said. "There is a base understanding that maintaining that fiscal regime is going to be very important, not only for the current estimates of government revenue but also for attracting new players and diversifying the E&P operator landscape in Guyana going forward," Parker said in a Jan. 30 phone interview.

Hess CEO John Hess dispelled speculation that Guyana could renegotiate its oil production-sharing contract. During the company's fourth-quarter 2019 earnings call Jan. 29, the CEO said both the current government and the opposition government "have been pretty clear that they're going to honor the Exxon/Hess [production-sharing contract]."

Parker pointed to the importance of contract sanctity in the emerging play, adding that 80% of Guyana's resources are still in the discovery phase and have yet to be sanctioned to go into production.

This would leave a lot of oil on the table. Exxon and its partners estimate the Stabroek Block holds more than 8 billion barrels of oil equivalent recoverable resources, although that figure could be on the conservative side as Exxon recently announced its 16th discovery in the area.

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Production from the Stabroek Block is just getting underway as a crude oil tanker arrived in Guyana on Feb. 13 to lift the country's first 1-million barrel crude entitlement from Liza, the director of Guyana's department of energy said. The latest lift of crude was the third from the Liza Phase one development since oil production commenced Dec. 20, 2019. Shell Western Supply & Trading Ltd., a subsidiary of Royal Dutch Shell PLC, won the bid to purchase Guyana's first three lifts of crude oil, according to the Guyanese government.

Production from the block could reach 750,000 barrels of oil equivalent per day by 2025, Exxon said.

Renegotiation 'not a viable alternative'

The Guyana/Exxon contract includes a 2% royalty on gross earnings and a 50% split of profits after Exxon recovers the initial costs of investment. Under the cost-recovery ceiling portion of the deal, 75% of oil production will initially be allocated to Exxon and its partners. The remaining 25% will be equally split between the companies and the government of Guyana.

Initially signed in 1999, the production-sharing contract with Exxon was renegotiated in 2016, company spokesman Todd Spitler confirmed Feb. 10. This was a year after current President David Granger, a member of the People's National Congress, took office.

The March 2 election is the result of a 2018 vote of no confidence in Granger and his administration, with the opposition party critical of the country's contract with Exxon.

Irfaan Ali, a member of the People's Progressive Party, who is challenging Granger for the presidency, has repeatedly criticized the terms of the existing oil production-sharing contracts and said that most of them must be reviewed.

"We have consistently said that production contracts post-Exxon Mobil must be and will be renegotiated as these contracts would have been signed when Guyana was already de-risked. The terms of some of these contracts are even more lopsided than that of the Exxon contract, e.g. the [Tullow Oil PLC] contract which has a 1% recoverable royalty rate," Ali said in a Jan. 20 Facebook post.

As part of the Tullow contract, Guyana receives more than a 50% share of profits after the company recovers investment costs. Tullow, which owns a majority interest in the Orinduik and Kanoku blocks offshore Guyana, is awaiting results from a third well, but its drilling success has not been as great as Exxon's.

Exxon is "on a different footing and as such we will review that contract to ensure that the administration of the contract brings greater benefit to Guyana and Guyanese," Ali added.

Guyana's total annual oil revenues could approach $30 billion by 2030, assuming an oil price of about $65 per barrel, Parker said. However, if the government were to retroactively change the fiscal regime in Guyana, Exxon could delay the sanctioning of these different projects within the Stabroek Block by several years, Parker added. This would, in turn, impact the flow of income to the government, which could be reduced by as much as 14% if sanctioning delays were three years or more.

"It is in everyone's best interest to have each of the discoveries moved into final investment decisions and be sanctioned for production as soon as possible. Renegotiating the Exxon contract is not a viable alternative," Parker said.

Stabroek output could top 750,000 boe/d by 2025

Production from Liza field's first phase, which started on Dec. 20, 2019, is anticipated to hit 120,000 boe/d in the coming months. Additionally, the Liza Unity floating production storage and offloading vessel, or FPSO, which will be used for the Liza field's second phase, is being constructed and is expected to begin production by mid-2022. It will have the capacity to produce up to 220,000 boe/d.

Front-end engineering design is underway for a potential third FPSO, the Prosperity, to develop the Payara field. Exxon is continuing to work with the government toward making a final investment decision, or FID, for Payara sometime this year, with a targeted startup in 2023. Exxon anticipates that by 2025 at least five FPSOs will be producing more than 750,000 boe/d from the Stabroek Block.

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Spitler would not disclose Exxon's anticipated production from Guyana this year, saying that Exxon "does not comment on commercial details beyond what has been provided." However, the company will outline more details regarding its Guyana operations during its investor day March 5.

In the meantime, Exxon will broaden its exploration efforts in Guyana as it works through "the considerable undrilled potential" there with five additional wells planned, Exxon CEO Darren Woods said during the company's Jan. 31 earnings call.

Assuming each lift contains 1 million barrels, pegging its net production this year from Guyana at 25,000 barrels a day, "If you multiply that by 365, you're getting just about 9 million, a little over 9 million barrels. So we expect just from a forecast standpoint, to have nine lifts this year," Hess CFO John Rielly said during the company's call.

Hess' global oil and gas production, excluding Libya, is forecast at 330,000 boe/d to 335,000 boe/d this year, up from 290,000 boe/d in 2019.