Stabroek Block clean-up costs subject to continuous review

Stabroek Block clean-up costs subject to continuous review — Financials

Jul 06, 2022 News

The Liza I FPSO producing in the Stabroek Block

Kaieteur News – While already more than US$355M is being deducted from oil produced in the Stabroek Block for the decommissioning (clean-up) phase at the end of the life of each oil well, information coming to light indicate that this estimate is routinely changed, taken into account changing inflation rates and pre-tax discounts.

The information is contained in the Financial Statement for at least one of the production partners in the Stabroek Block working along with Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana.

This much has been outlined by CNOOC Petroleum Guyana Limited, ExxonMobil Guyana’s 24 percent partner in the Stabroek Block.

According to the financial notes attached to the company’s financial statements, when it comes to decommissioning and restoration provisions, this is estimated by its management based on the branch’s net ownership interest in all wells, “estimated costs to reclaim and abandon the wells and facilities and the estimated timing of the costs to be incurred in future periods.”

In terms of the calculations, it noted that “the discount rate is a pre-tax rate that reflects current market assessments of the time value of the money and the specific risks to liability. That rate at the end of the first year of production was 3.25 percent down from 3.50 percent the previous year.

Importantly it was noted that “the inflation rate is part of our long term price assumptions” and that “changes to these rates will affect the calculation.”
According to CNOOC, “consistent with the 2019 year-end, an inflation rate of two percent has been used.”

The cumulative effect is that the decommissioning costs being deducted by the oil companies for future clean-up and abandonment of the well will be continuously revised taking into account the changing factors of the equation.

For 2020 and 2021—the first two years of production—ExxonMobil and its partners, Hess Corporation and CNOOC, recovered some US$355.7M for decommissioning costs which would be incurred in another 18 years for the Liza Phase One Project.

Decommissioning entails the removal of all equipment used for the extraction and production of oil and gas resources as well as the safe abandonment of wells involved. The activity takes place when the life of the project comes to an end.

Based on its 2021 financial statements, Exxon’s subsidiary, EEPGL recovered $15.2B in 2020 and $17B in 2021 for decommissioning costs associated with the Liza One Project.

During a recent engagement with media operatives, ExxonMobil Guyana acknowledged that decommissioning funds are not needed until 20 to 30 years down the line. Be that as it may, the company noted that the provisions of the 2016 Stabroek Block deal allow for early recovery. The oil giant assured nonetheless that when Guyana needs that money for clean-up, it will be available.
It said too, that a Decommissioning Security Agreement is being sorted with government to ensure only the companies are held liable and that the country is indemnified. The company said, “This agreement will ensure all the funds are in place to pay for the costs when they are needed couple decades from now.” EEPGL concluded that neither the people of Guyana nor the Government have reason to be worried.

In a previous interview, Vice President, Dr. Bharrat Jagdeo had said that he has no qualms about early recovery of decommissioning costs as long as the companies are using it to reduce loans taken to support the Stabroek Block development. Once it is put to productive use, the VP said he has no issue. “It is all fungible,” he had said.

Given the magnitude of the money to be recovered annually for decommissioning, Guyana has been warned by international actors to put the necessary provisions in place to ensure what is being deducted is not inflated and that when the time comes, Guyana would not be left to foot any part of the bill.

Such a warning has been issued time and again by Director of Financial Analysis for the Institute for Energy Economics and Financial Analysis (IEEFA), Tom Sanzillo. If Guyana does not safeguard itself, Sanzillo warned that Exxon could easily walk away with more than it deserves on decommissioning.