Even with 5.5B barrels... Oil refinery not feasible for Guyana-Consultant stands by earlier study report

Even with 5.5B barrels… Oil refinery not feasible for Guyana-Consultant stands by earlier study report

May 14, 2019 News

By Kiana Wilburg

About three years ago, the APNU+AFC administration hired Mr. Pedro Hass, Director of Advisory Services at UK-based firm, Hartree Partners, to conduct a study on the feasibility of an oil refinery here. His report categorically stated that this was not practical. At that time, Guyana was only pegged to produce some 120,000 barrels of oil per day.
But there have been 13 discoveries from then to now in the Stabroek Block which have pushed reserve estimates of the block to 5.5B barrels of oil. In light of these new numbers, many have wondered whether Guyana needs to rethink the potential of having an oil refinery.
But in spite of what the figures say today, the Refinery Consultant told Kaieteur News in a brief comment that he maintains the position of its initial report, which is, a refinery is just not economical in Guyana’s case.
Furthermore, industry analysts believe that Guyana would be wise to avoid this project, regardless of how attractive it seems. To prove this, an analogy was offered.
“Imagine you inherit some money from your uncle and someone offers you the opportunity to buy a house. But it is extremely expensive. It doesn’t make any sense for you to buy it. But you are still considering it…whether to buy it or not…In the middle of these considerations, you get a second inheritance that is much bigger than the first. Does it make the house a better buy?”
On this note, the specialists said that even if Guyana has more money and more production, it doesn’t change the refining economics for the nation.
Further to this, they explained that the US Gulf Coast refineries are today exporting about 3 million barrels of oil a day. These refineries they said are operating at full capacity.
“Now it is highly likely that local demand in the US is going to shrink given electrification and other efficiency issues having to do with the quality of engines, and if you count the fact that internal combustion engines are getting more efficient; that hybrids are having a greater degree of penetration and electric vehicles will have a higher degree of penetration over the next 10 to 15 years, that means the refining capacity available for export is going to increase,” the analysts stated.
They added, “So a new refinery is going to take four to five years to get built in Guyana and by the time you finish that refinery, it will have to recover the fixed cost of building the refinery and you will be competing with a depreciated, very efficient refinery in the US Gulf Coast.”
In light of this reality, the specialists said that one of the more favourable possibilities before Guyana is to do a joint venture with a US oil refinery. That way, the officials said, Guyana gains, as it does not have to wait five years for construction, and the project is already operated by people who are experienced.
But this is not the first time such a recommendation would be coming to the forefront as Guyana considers the possibility of an oil refinery. It was also noted in the report Hass submitted to the APNU+AFC administration.
In the report seen by Kaieteur News, Hass said that another way in which Guyana can acquire economic exposure to refining economics is via a joint venture (JV) with a refining company in one of their assets.
The Consultant said that existing refineries trade at a fraction of replacement cost economics (which makes this a better option, perhaps, than building one’s own refinery) and having a JV in which Guyana supplies crude oil and lifts petroleum products is a possibility.
He said that this is a very sophisticated transaction which requires a full understanding of operating, environmental, financial and commercial risks. Hass said that the challenge lies not only in identifying the correct JV candidate, but also in negotiating the transaction and then maintaining a high standard of governance.
Another option Hass’ report highlights is the acquisition of stocks in refining companies.
Expounding on this, Hass said that a similar exposure to refining economics can be achieved with lesser complexity through financial investments in independent refining companies. He said that this can translate into the desired economic exposure, without the governance complexity that a JV would entail. Selecting and managing the portfolio is the complex part of this strategy, the Consultant noted.

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