Introduction
It has been a week of headlines in the petroleum sector. First out was Dr. Mark Bynoe who told the Stabroek News about Government’s plans to market its share of crude oil. This was followed by an interview with the same newspaper in which the Minister of Finance disclosed that Guyana is likely to get US$200M in the first oil year. Then came a report in Oil Now, a local internet news medium, in which the Norway-based business intelligence company Rystad Energy estimated Guyana’s total income from the Stabroek Block at US$117.5 billion. While Jordan and Rystad dealt with both quantity and value, the thrust of Bynoe’s statement was about marketing.
Each of the articles appears to have simply accepted whatever numbers without question and could build exaggerated expectations if they are not put into some context. This Column is most concerned about Bynoe’s statement because it appears to be a policy statement of some consequence and which therefore cannot be ignored.
Bynoe’s plan
According to Bynoe, the Government of Guyana will go to tender either during the current quarter or the next for “a fee-based marketing service” to market its share of expected crude oil production. In what is in fact a major policy pronouncement, Bynoe announced that the government will be selling its own share of exported crude and that it will issue a tender during the current (July 1 – September 30) or the fourth quarter of 2019 (October 1, December 31) for a fee based marketing service.
Trading in crude oil is probably as complex as producing the stuff with its infinite number of variables. In deciding to do its own marketing, the Government is assuming both risk and responsibility and it is therefore important that the possibility for errors is minimised and assumptions are rational and as far as possible grounded in facts. Of course, it is possible that Bynoe deliberately oversimplified the matter and that he fully understands that selling crude oil can involve spot price (immediate sale, purchase, price and payment) and future price market (future sale, purchase, future price and payment). His description of the transaction as a “fee-based marketing service” (what else can it be?) suggests that he thinks that this is some straightforward physical product, which it clearly is not.
Trotman’s catastrophe
The APNU+AFC Government left the negotiation of the Petroleum Agreement to Raphael Trotman with catastrophic long-term consequences for the country. Now it seems to be leaving the disposal of Guyana’s share of petroleum under the Agreement to Mark Bynoe who according to his appointer, knew nothing of the sector. While Granger and his cohorts seek every subterfuge to perpetuate themselves in Government, they are leaving this singularly most important economic development for the future of the country in unqualified, inexperienced and inept hands. First Oil will soon be upon us and time is running out. Failure to act could be as consequential as Trotman’s nightmare without, thankfully, its permanence, since no marketing contract can have some of the asphyxiating clauses which exist in Trotman’s 2016 Agreement.
One assumes that Bynoe is familiar with the provisions of Article 14 of the Petroleum Agreement under which not later than three months before the first scheduling of crude oil, the Contractor is required to propose to the [Government] offtaking procedures whereby the Parties will nominate and lift their respective shares of Crude Oil. The question is whether the Contractor and the Government have had any discussions on this matter since it seems to form the core of Bynoe’s plan. He would be aware too that Article 14. 2 (a) requires that lifting be carried out without interference to Petroleum Operations.
Short on details, wrong on facts
Bynoe did not go into details but it does appear that what he is proposing is to have an agent negotiate Crude Oil sale on the Government’s behalf, a formidable tripartite arrangement. But as pointed out in the next paragraph, Bynoe has substantially overestimated Guyana’s share and whoever the buyer is will find the unit cost of transportation quite high. Worse, in the context of the more reasonable figures, it is unclear how and whether Bynoe’s plan is not dead on arrival.
Let us look at his estimate. According to the Doctor, Guyana’s crude oil will be sold in “million barrel cargos” and a crude cargo lift will be used every eight to 10 days. Something is clearly wrong either with the reportage or the maths. Let us test Bynoe’s figures against the certainty that Guyana will receive only 14.25% of production for up to the fourth year. We know too that in the first and second years, production will be 120,000 barrels of oil equivalent per day. From this we can easily calculate that over an eight-day period, production will be 960,000 barrels and over a ten-day period, production will be 1,200,000 barrels. In other words, Guyana would have to take all the production to permit a one million barrels every eight days: and that is gross production, without deductions for petroleum used for fuel or transportation in the terminal system.
Taking 14.25% of the eight days production, Guyana’s share is 136,800 barrels while its share over a ten-day period will be 171,000 barrels. Put another way, for Guyana to earn 1 million barrels as its share of production, it would need to accumulate its share over approximately two months!
What is even more worrying is that Bynoe has an advisor who shadows him wherever he goes. Not only do Bynoe’s numbers and his plan not make any sense: it is also embarrassing to leave then out there as part of Government’s policy.
Next week: A look at Jordan’s and Rystad’s projections.
