Oil Market Collapse has serious implications for Guyana

Apr 23, 2020 Letters

DEAR EDITOR,

Reference is made to your editorial on the effects of the pandemic on oil revenues (Apr. 22). Anyone who studies economics would know when there is a glut of a product in the market economy, prices would inevitably fall. There has been a growing surplus of oil and its derivatives in the market since January when the Chinese economy began shuttering. So prices of crude have been falling since January. No one had foreseen a glut in oil in recent months. And no one expected price to plummet to below zero dollars as it did on Monday. This has serious implications for Guyana – will be selling oil at a loss and will be indebted for decades to come.
The caretaker Finance Minister is reported to have stated that Guyana would be lucky to receive around US $60 for its next three oil lifts. He is right. But your editorial is more apt – lucky if Guyana would get anything. Guyana may get something around $30M because oil price is not expected to shoot up quickly during this year – less than $10 for next lift in June, around $10 for September and over $10 for December – for an average of $10 – if we are lucky.
Guyana’s oil lift is reportedly one million barrels every three months. Its first lift was sold in January for $55M. Its second lift (not confirmed) in March/April was sold for around $10M.
I read that oil was trading at negative dollars (as low as minus US$40) when only in early January it was trading at almost $60 per barrel. Will Guyana or Exxon receive negative dollars for its crude? What does negative dollars mean for sellers?
There was a massive fall in oil prices in the futures market – meaning oil to be delivered in the future. There is a slump in usage of the derivatives of oil – gasoline, kerosene or aviation fuel, diesel, grease, etc. Not much fuel is being used because of lockdown in almost every country. So there are surplus oil products everywhere. And oil storage facilities have been filled almost everywhere to near capacity; few storage facilities have been vacant to store oil. Since oil can’t be dumped (like milk as is happening in USA) because of environmental impact, sellers are practically paying buyers to take or hold the oil. This is unprecedented in the history of oil production.
Producers are not getting buyers and they need to get rid of their produce. So they offer the oil for free or even pay buyers (negative $) to get it off their tankers as they continue pumping oil from the wells. (It is not reported that Exxon is paying buyers to accept crude). If production is stopped, it is very costly to restart operations. So producers prefer to take a hit now to recover losses later (Exxon and other American companies are being compensated by government to retain workers on payroll – one would need to look at this in terms of billing costs to Guyana). In Guyana’s case, if production cost is $31 a barrel, it would take a long time for Guyana or Exxon to break even – another couple years. (There is need for an audit of the exact cost per barrel as some specialists I spoke with say, it is around $20). But Guyana simply can’t afford to sell oil at losses. Some economists feel it is better to close operations and restart when oil recovery costs is higher than the market price. Environmentalists are also calling to cap the wells.
It is noted that even though sellers may be offering buyers $ to accept their crude, the buyers may at some point refuse as they reach storage capacity and the producers themselves may be running out of storage facility. What next? Shut down operations! I don’t think producers will reach that stage. They may reduce output in order to reduce losses.
But if economies remain closed for another month, producers will have to cap wells or discontinue production. Or worse case, Guyana may have to pay buyers (not likely) to get rid of its oil lift (sweet crude which is in demand) expected in June. If Guyana has to pay buyers to accept the oil, the country will remain in almost permanent bankruptcy or insolvency. Demand may not increase substantially until September, the earliest when economies may begin to return to normal. By then, it is unlikely there will be demand for oil price to climb to $30, the break even price. Guyana will remain at the mercy of buyers or those who are bidding to sell its oil.

Yours truly,
Dr. Vishnu Bisram

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