Latest update November 23rd, 2024 1:00 AM
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More money for Guyana with reduction in Liza cost
DEAR EDITOR,
I was not surprised to hear about the reports of decreased costs for the Liza-1 project. After all, the initial estimate we were given was just that – an estimate. Final calculations could have swayed either way, but thankfully, they were lower than the initial quote. Obviously, the real question is what does a lower cost of production mean for Guyana? The obvious answer is that this is good for us, because the US$700 million reduction is US$700 million that does not have to be paid back for the company’s initial investment. That’s more money in our coffers!
The Production Sharing Agreement (PSA) that our government agreed to, states that 75% of the revenue earned from production in the initial years will be used to recover the companies’ investment until costs are fully recovered. The remaining 25% is to be split evenly between Guyana and the investing companies. Once costs are fully paid, Guyana and the consortium split the profit 50/50, after Guyana takes a 2% royalty.
Last we heard, the development cost was estimated to be US$4.4 billion with production set to begin at the Liza-1 well in 2020. But with the new lower cost calculations, we also have lower cost recovery, and Guyana will get to split the full profit more quickly.
Beyond this project, this news will have a positive impact on future projects. If you are weighing several business ventures, and one venture in particular required a lesser investment than the rest, while also yielding equal or greater profit – then you would choose that venture because costs are lower.
For foreign investors, Guyana can be that venture – as a lower-cost producer, we offer a prime opportunity for development while still benefiting all parties greatly. And given our extensive reserves, it looks like we will be able to offer that opportunity for a long, long time.
This information must also be used as leverage in future agreements. We can now point to the competitive development cost of our reserves, and of prior projects, to bargain for more favourable terms. Foreign investors love to save money, and now we know that our highly porous offshore reserves are an excellent option in that regard.
Simply put, the confirmation of lower costs will serve Guyana in the long-run as we establish ourselves as, not just an oil-producing state, but a low-cost, oil-producing state. To investors, the difference between the two is huge.
More importantly…the difference is huge for Guyanese! We will be better positioned to weather global oil market fluctuations than most other producers because of our low costs for production. Lower costs mean prospects can remain profitable in nearly any oil price environment, and not just in coming months or years, but in coming decades.
Sincerely,
Clement Smith
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