As indicated last week, today’s column aims to update my earlier (October 2016) assessment of Guyana’s petroleum discovery. But before addressing that topic I offer two very brief observations on last week’s forecast of the nominal price range for crude oil in 2025, the time I anticipate when I expect Guyana’s first oil will be fully on-stream. Last week’s forecast of the most likely prevailing price range (US$60 to US$74 per barrel) in 2025 is conservative. It is about one-fifth lower, at the mid-range, than the World Bank’s October 2016 forecast of US$82.60 for 2025. Second, at my maximum likely price range, I had further forecast the industry will be facing medium level risks to its commercial viability and sustainability.
Turning to the petroleum find, as earlier indicated, published reports suggest petroleum exploration had gained much significance in Guyana during the 1940s, and perhaps earlier. It was much later though, in the 2000s that this exploration became firmly noticed by the oil majors, along with the minors, independents, and local/overseas joint ventures. In 2000, the US Geological Survey’s World Petroleum Assessment, Central and South America, had identified the Guyana-Suriname Basin as a significant petroleum reservoir, holding perhaps 15.2 billion barrels of crude oil; 42.1 billion cubic meters of natural gas and 2.3 billion barrels of natural gas liquids. This certainly makes this reservoir one of the world’s largest potential petroleum deposits.
In explanation of this discovery, geoscientists refer to the Atlantic mirror image theory, which posits that the petroleum geology of the Guianas Equatorial Margin mirrors that of West Africa, on the other side of the Atlantic, where billions of barrels of oil have also been discovered, including Ghana’s offshore Jubilee deposits. As Dennison, 2017, has recently reminded us Guyana has two main petroleum provinces, namely, the Guyana basin (offshore and the coastland onshore basin fringe); and the Takutu basin of south-central Guyana.
Guyana’s post 2015 discoveries are located in the Stabroek Block within the Guyana basin, an offshore area of 26,800 square kilometres. As is well known, development of the discovery occurs under an agreement between the Government of Guyana and ExxonMobil local subsidiary, Esso Exploration and Production, 45 per cent, and its partners, Hess Guyana Exploration, 30 per cent; China National Offshore Oil Corporation, CNOOC Nexxen Petroleum, Guyana, 25 per cent. Further, since the late 2000s, several companies have been engaged in petroleum exploration in Guyana, including ExxonMobil and partners, Repsol, Esso, Andarko, Nabi Oil, Mid Atlantic Oil, JHL Associates-Ratio Oil, Eco-Atlantic, Tullow, and CGX Energy.
According to information provided in media reports and from personal interviews, after several successful wells (Liza 1-4, Payara, and Snoek) current estimates of likely commercially recoverable oil by 2025 falls between two broad ranges: 2.25 to 2.75 and 4.0 to 4.75 billion barrels. Some of this is expected onshore. However, both ranges are today substantially above the earlier estimate (October 2, 2016) of 800 million to 1.4 billion barrels. By industry standards, this is considered potentially massive, and a “giant find”, which therefore justifies both Exxon and its partners’ press description of it as: “a world class discovery”, and their publicly declared intention to continue exploratory drilling in Guyana; as many as 16 wells in the Stabroek Block have been declared.
Crude oil characteristics
Crude oil is not a homogeneous commodity. Petroleum engineers are quick to observe that it varies in terms of 1) its viscosity or resistance to flow; 2) its volatility or quickness to evaporate; and 3) its toxicity or danger to health. Worldwide, there are around 200 different types of crude oil which are traded, with three perhaps principal; namely, West Texas Intermediate, WTI, the Brent Blend and the OPEC Basket. The price of crude oil is dependent on its quality, which is itself mainly dependent on two characteristics, namely, its American Petroleum Institute density (API gravity) and its sulfur content. Its API gravity determines whether it is considered heavy or light oil and its sulfur content whether it is considered sweet or sour. If the API is greater than 10, it is lighter and floats on water and if it is less than 10 it is heavier and sinks. There is therefore an inverse relation to water.
Light sweet crude typically trades at a differential ranging between 15 to 25 per cent on its average price. As previously noted this is because, among other properties, it yields better refined products; produces higher valued refined products; uses less energy for processing; and, requires less capital investment in being able to meet industry standards for refined products, when it is compared to heavy sour crude oil.
One of the commonest standards applied is: light oil has an API > 1; medium oil has an API between 22.3 and 31.1; heavy oil has an API < 22.3 and extra heavy oil has an API < 10. Sweet crude has sulfur content less than 0.5 per cent. Sour crude has sulfur content greater than 0.5 per cent. Sour crude is malodorous, corrosive and poses serious environmental and health dangers. As the US Energy Information Administration, EIA, 2012, observes: light crude oil sells at “better prices compared to residual oil and other bottom-of-the-barrel products; and is cheaper to produce and transport as it is less volatile.” The WTI is a very high quality crude with an API of 39.6 and sulfur content of 0.24 per cent. The Brent Blend has an API of 38.3 and sulfur content of 0.37 and the OPEC basket an API of 32.7 and sulfur content of 1.77 per cent.
Media reports and public commentary have not indicated official word on the API gravity, sulfur content or other definitive characteristics of the Guyana finds. There seems however a consensus view that Guyana’s crude oil finds can be categorized as falling in the broad category of light sweet crude. I have no reason to challenge this consensus even though recent predictions (2010) made by Hart Consulting Analysis are that the world average API gravity will decline slightly from 33.0 in 2008 to 32.9 in 2030 and the sulfur content rise slightly from 1.1 in 2008 to 1.3 in 2030. These trends reflect the fact that total world crude oil reserves are of lower API gravity and higher sulfur content than current global production, (see Math Pro, Energy Economics, Applied Optimization, 2011).
As promised weeks ago, with completion of this topic, I am now in a position to present my view, starting next week, on the contentious issue of a local oil refinery!