From Guyana’s oil and gas discovery to production: Delays, stranded assets and all that

Introduction

There has been a veritable spate of commercial oil and gas discoveries since the 2000s. In its 2016 Global Economic Prospects report, the World Bank had indicated that over recent years there have been signs of this flagging among developing countries. This circumstance has raised concerns, as delays in oil projects are always problematic for these countries. Such delays increase their vulnerabilities at the policy level, chiefly because developing countries build optimistic investment expectations of boosting growth from oil and gas extraction and export whenever discoveries are made.

Typically, however, the pursuit of oil resource discovery requires large up-front investments over considerable periods. And during such time (as in Guyana’s case), uncertainties over the price of oil in global markets compound policy vulnerabilities. The combination invariably affects macroeconomic stability. And, as a result, it has been observed that much is dependent on the quality of governance, the reliability of the institutional framework, and the predictability of the policy environment.

One also observes that the investment risk for oil and natural gas projects declines as the country gets closer to production (phase 3 of the extraction process discussed last week) and feasibility studies are completed. Today’s column focuses on the movement from the commercial discovery of hydrocarbon resources to their extraction and sale, based on global experiences to date.

Delays

Fortunately, in early 2014 the MinEx Consulting Group of Toronto, Canada released details of a survey which they had conducted of 3,498 commodity discoveries across the world for the more than six decades long period, 1950-2013. The survey was designed to: 1) identify how many discoveries had led to actual production and 2) the time delay between the commodity discovery and the start of production. This survey remains at present the best dataset on this topic. And it covers a wide range of commodity discoveries.

Seven key findings of that survey warrant close attention by the authorities. First, there is a low conversion rate from commodity discovery to production (only 45 per cent). That is, less than one-half of all commodity discoveries in this long period have been put into production. Second, the average delay between discovery and development has been 12.4 years. The data also suggest that the period of this delay is lengthening. Meanwhile, the conversion delay varied by commodity, ranging from 10.0 years to 18.6 years. This range was similar for the conversion rate, which varied by commodity from 19 per cent to 58 per cent.

Third, the size of the deposit and its accessibility has a direct bearing on the outcome. However, as noted previously, Guyana’s discovery meets the status of ‘giant’. Fourth, and relatedly, it seems to matter whether the find is a greenfield or brownfield discovery. By the latter is meant an extension of operational deposits, which is more likely to be accessible, as infrastructure is indeed likely to be already in place.

Fifth, country risk is a most important determinant of outcomes. It can be confidently asserted that established mining jurisdictions, do better than low risk jurisdictions. Sixth, the phase of the business (commodity cycle) at which the discovery is made affects outcomes, as one would reasonably anticipate.

Finally, a miscellany of local factors have been identified and weighted for their contributions to the observed delays. These include cost over-runs, poor economics, infrastructure, regulatory/ governance, social, environmental, and unspecified factors, in descending order of significance.

For the convenience of readers this information is summarized in Schedule 1.

 

Schedule 1: Delays Between Commodity Discovery and Development: Reported

Causal factors

Item          Reported Causal factors

  1. Low Conversion Rates (average 45%)
  2. Slowing of Conversion Rates (average delay 12.4 years)
  3. Deposit Size and Accessibility
  4. Investment type Brownfield (15.6 years) Greenfield (18.4 years)
  5. Country Risk (less in “Established “  Mining Jurisdictions)
  6. Phase of Business and Commodity Cycles
  7. Many Factors Induce Delays (Cost over-runs, poor economics, infrastructure, environmental, social, regulatory and governance issues)

Source: Author’s construction from MinEx Consulting Report, 2014.

Stranded assets

An issue that has risen to the forefront of global discussion in the hydrocarbons sector, is the notion of stranded assets. In finance/economics, these refer to assets on a company’s balance sheet that rapidly diminish in value as a result of forced assets write-offs. In other words, assets that have become obsolete (non-performing) well ahead of their useful life, and therefore should be recorded in a company’s balance sheet as a loss of profit. I do not want to bore or lose readers with this definition. It is nevertheless crucial to a fuller understanding of a potential crisis of enormous magnitude facing the production of fossil fuels in today’s global environment.

The Carbon Tracker Initiative (CTI), a research think-tank in the United States, has brought to global attention that the global climate change modification agenda (to limit greenhouse gases in order to prevent global warming to 2°C by 2050) is incompatible with 1) prevailing levels of holdings of global coal, gas and oil reserves; 2) their projected utilization; and 3) sustainable development, based on a low carbon agenda. In these circumstances, carbon reserves (about two-thirds of them) are in effect ‘unburnable’, if the global climate change agenda is to be met.

In practice it has been estimated this means around 38 per cent of known oil and gas reserves could be imperilled. And if this is realized it would severely impact on the majors in the industry. Three modifying considerations exist: 1) nearly three-quarters of oil and gas corporations are nationally owned corporations;  2) coal is most at risk, for its relatively greater carbon pollution; and 3) new high cost properties are more likely to be put on hold, than older and more established ones.

Conclusion

This ends discussion of the topic ‘From Guyana’s oil and gas discovery to production.’ Next week I begin discussion of policy issues related to Guyana’s development of an oil and gas extraction industry.

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