ExxonMobil and Guyana

Mar 28, 2018 Letters

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DEAR OPINION LEADERS IN GUYANA,
An article in Monday’s Midland Reporter-Telegram in Texas contains mention of Guyana. I found it interesting for the following reasons:
1. Guyana is mentioned immediately following the Permian Basin in ExxonMobil’s production plans. Moving up in Exxon’s production schedule is good for Guyana because of: (a) earlier monetization of Guyana’s oil and (b) utilizing the resource before oil becomes redundant as a source of fuel for electricity and transportation, if that ever happens.
2. It refers to Exxon’s purchase, early last year, of the Bass oil properties here in the Permian Basin. Note that the size of the Bass reserves was estimated at 3.4 billion barrels at the time. The new estimate is 5.4 billion recoverable barrels because they have identified other strata of oil bearing shale below the ones known last year when the deal was closed. The experts tell me that the number will keep increasing as they fine-tune the technology involved.
3. Exxon paid the Bass family 6.6 billion US dollars, one billion in cash and 5.6 billion in Exxon shares of stock. This was for 275,000 mineral acres. Mineral acres refer to the mineral rights below those acres. It does not include the surface of the land. In Texas, the “surface estate” is entirely separate from the “mineral estate”. The surface ownership is usually in different hands from the mineral estate. Sometimes, the same person or group of persons, own both the surface and the mineral estates, but these are usually smaller acreages.
4. The rate of royalty and the signing bonus that Guyana negotiated is well below the normal range. For example, the state of Texas gets 25 percent royalty on the top line – that is, on the sale of all oil and gas produced on state lands. My rate of royalty is 20 percent on three small tracts and 25 percent on another three small tracts that I own. I also got a signing bonus at $3,000 per acre on the first three mineral estates and $6,000 per acre on the last three mineral estates to lease those properties, each for three years, or for infinity as long as oil and gas are being produced. Only one of my properties is currently in production, so I get one royalty check every month. The well-site is a mile and a half from my property because the operator drilled two miles down and two miles laterally, known as horizontal drilling. If the operators do not start drilling my other acreages within three years from the signing of our lease agreement, the mineral rights revert to me and we can then renegotiate anew or I can lease or sell to any other operating company.
At least twice a year, maybe more often, I get offers to sell my mineral estates to either the company presently leasing the mineral rights or their competitors. The last offer was at $16,000 per acre. I know that the going rate for bigger tracts is $40,000 per acre for the mineral estate only. Often, the mineral estate is much more valuable than the surface estate. I have not sold any of mine but I have friends who owned large tracts who have sold theirs to become billionaires in cash.
5. I know that Guyana’s Exxon deal includes a 50/50 sharing of net profits. Bless those who have ever benefitted from such an arrangement.
6. I mention all of the above to stimulate some discussion among you about Guyana selling its mineral estate in the Stabroek block to Exxon and its partners. Only the Stabroek block. Exxon would be tough. They have the upper hand. They dealt Guyana a sucker’s deal with the current lease agreement. I don’t see renegotiating the current deal as any easier. But it might be easier for Exxon to buy the mineral rights now and get out of Guyana and do nearly all of their operations off-shore. Forcing renegotiation of a two-year old contract will draw international ire at Guyana, but for the one-sidedness of the contract. But even Guyana’s international friends will balk at doing anything else other than offering their sympathy.
However, offering to sell and negotiating a sale with the same firm presently leasing the asset is a widely accepted legal and moral modus-operandi in business. I know that this idea will trigger arguments about whether Guyana should sell its “birthright”. Good point, but should the Oil & Gas (O&G) find benefit Guyanese now living? Or primarily future generations? That’s for Guyanese to decide.
Another argument will be whether Guyana will be selling its “sovereignty”. The answer to this is a definite no. Guyana should contractually lease the surface acreage over the Stabroek block to Exxon to carry out its operations, at a nominal cost, for periods of no more than 25 years, renewable per mutual consent and consistent with all laws relating to the Law of the Sea and laws relating to International Marine Territorial boundaries.
What Guyana will be selling is limited to only the O&G below the seabed, just in the Stabroek block. Limit the exploitation to O&G only, not other minerals. One incidental advantage to Guyana is having Exxon and the USA as buffers between it and Venezuela’s claim.
What about the price for the O&G? The best yardstick is the Bass deal. Isn’t Guyana’s reserves estimated at around 3.5 billion barrels at present and going up? Seems close enough to the Bass deal. I would ask for $6.6 billion, with 2 billion in cash up-front and 4.6 billion in Exxon stock.
Exxon stock is paying dividends at around 3.5% at present. That would generate $146 million USD per year in dividends plus whatever gains Exxon shares make. At today’s price of $65 per barrel, Guyana’s royalty of 2 percent would bring in about $50 million per year on production of 100,000 barrels per day; $100 million dollars per year on production of 200,000 barrels per day; $150 million per year on production of 300,000 barrels per day; $200 million per year on production of 400,000 barrels per day; and $250 million per year on production of 500,000 barrels per day. But that is if the price stays at $65 per barrel. Of course, if the price goes higher, hooray for Guyana, the royalty will increase; if the price drops, it will be catastrophic because it is a rare country that can adapt to a sudden decline in its income stream without major domestic disruption.
I believe a two billion US dollar infusion into Guyana now can benefit all Guyanese now living in Guyana with better housing, healthcare, security and infrastructure, if carefully and properly used. The key point here is “now”. Note that it will take several years for Exxon to ramp up production to 500,000 barrels per day. The construction agenda that I have read calls for 120,000 barrels by 2020 and I have seen commentary of going up to 500,000 barrels per day, but I have not seen a timeline for that.
7: This idea is based on getting Guyana a big cash inflow now; providing the opportunity to benefit Guyanese now; becoming a sizable (4.6 billion US dollars worth of shares) shareholder in Exxon Mobil; getting a reliable stream of dividends annually from its Exxon shares; having good upside to additionally benefit from Exxon stock growth and the option to diversify the portfolio if Exxon does not grow as expected; establishing an inbuilt “Sovereign Wealth Fund” with the acquisition of Exxon stock; putting a stronger buffer between Venezuela and Guyana’s oil; getting rid of the current lop-sided deal with Exxon; avoiding international recrimination with any attempt to re-do the current deal; while showing greater sagacity in negotiating royalty agreements with other companies in the future: and still holding in reserve a sizable portfolio of potential oil bearing offshore seabed to benefit future generations..
I know that this is long but I wanted to throw this out to you. Have fun with it. Who knows, maybe you can find something useful in it for Guyana.
Please note that for simplicity I have referred to Exxon as if they are the sole owner of the Guyana contract. I know that they own only 45% of the deal but as the operating entity, it is just easier to conceptualize the above as if the three owners are one entity.
Tulsi Dyal Singh

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