The Payara and Yellowtail projects’ rapid approvals were huge mistakes

Apr 24, 2022 Letters

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Dear Editor,

Numerous pieces of anecdotal evidence indicate the Stabroek Block’s operation is a phenomenal cash generating machine. Public information allowed going beyond the anecdotal evidence and conservative computations were completed of the block’s cash generation.
The exceptional cash generation pays off the Liza1 and Liza 2 capital expenditures (CAPEX) by 2024. This rapid CAPEX payoff is advantageous to the Guyana Government (GG). However, the government leaders give away the advantage with the rapid approval of production projects every 2-3 years. Upcoming paragraphs discuss discount cash computations further; the computations are used typically to evaluate project viability in the oil industry.
Recall, the Stabroek Block’s production sharing contract (PSC) dedicated to cost recovery 75 percent of oil production (likely adjusted for royalties), referred to as Cost Oil. Part of Cost Oil paid the Stabroek Block’s operating expenses (OPEX) and the remaining Cost Oil repaid JV partners’exploration and development capital expenditures (CAPEX). When CAPEX is paid off, any remaining balance of Cost Oil left over after paying OPEX becomes part of Profit Oil to be shared equally between the GG and the JV partners. The GG oil take is 14.25 percent when Cost Oil is used completely to pay OPEX and CAPEX. Computations determined the GG oil take from the combined Liza 1 and Liza 2 production would be 42 percent in 2025 after CAPEX was paid off in 2024. A 42 percent take for the GG will never be realized in 2025 as US$19 billion of new CAPEX must be repaid starting in 2024 for the approved Payara and Yellowtail projects. Note, the computed 42 percent take is not a static number but will decrease with decreasing oil production from the existing production platforms.
Computations demonstrated the GG would have received in 2025, millions more barrels of oil from 42 percent of the combined Liza 1 and Liza 2 production compared with 14.25 percent of the combined Liza 1, Liza 2, Payara and Yellowtail production. Therefore, the Payara and Yellowtail projects’ rapid approvals were huge mistakes. Approval of production projects have to be strategic. A fifth platform should not be approved until Payara and Yellowtail CAPEX, along with any outstanding exploration expenditure has been repaid. After CAPEX repayment, the GG oil take would go up dramatically. The approval strategy for new production projects has to weigh the country’s oil take from the new production facility with the oil take from declining production from the existing production facilities. Getting the oil out the ground fast before it is stuck is nonsensical and not a data driven strategy. Note with cash coming from Liza 1, Liza 2, Payara and Yellowtail, payoff of the Payara and Yellowtail CAPEX will be very rapid.
US$60 per barrel price was used in the computations. Discounted cash was computed annually beginning in 2020 with key inputs of 1) annual production of the Liza platforms 2) OPEX for both Liza platforms and 3) discount rate.
Information gleamed from the 2022 GG budget presentations allowed determination of the 2020 and 2021 annual oil production, as well as the 2022 budgeted production. Annual oil production for 2023 forward was determined by employing production decline curves. Liza 1 and Liza 2 total production was bounded by 500 million and 600 million oil barrels respectively, also publicly reported.
Break Even Point (BEP) was reported in the media as US$35 and US$25 per barrel for Liza 1 and Liza 2, respectively. With BEP known, Liza 1 and Liza 2 OPEXs can be determined using production depletion curves and a discount rate.
Actual production decline curves are unknown for Liza 1 and Liza 2 production wells. Production decline curves were intentionally selected to underestimate annual oil production from 2023 forward and maximize the Liza 1 and Liza 2 OPEXs determinations.
Expectations would be the discount rate to be used in both the discount cash and OPEX computations would be the Gulf of Mexico (GOM) discount rate. OPEX and discount cash computations were completed for1) GOM discount rate 2) 125% GOM rate and 3) 150% GOM discount rate which would be a ridiculous number. The higher discount rates moved the payoff of Liza 1 and Liza2 CAPEX out by months rather than years.
Computations of discount cash from the Stabroek block were based on conservative inputs. The more likely reality is CAPEX will be paid off more rapidly than predicted by the current computations. Why the GG leaders do not use this advantage of rapid CAPEX payoff to the country’s benefit remains a head scratcher.

Regards,
D. C. Daly

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