Introduction
Empirical observations, research and analysis, along with widely recorded historical experiences reveal that, beyond doubt, Guyana’s coming time of oil and gas production and their export will be fraught with severe risks. As has been repeatedly indicated over the three years of my columns on this topic, risks and challenges are endemic to the petroleum sector.
In the case of Guyana, I had earlier advanced the proposition that two of these risks are existential. These are: 1) the geo-strategic/political risk posed by Venezuela’s aggression; and 2) the ever present threat of an environmental catastrophe.
Existential risk has been identified for the purposes of the Road Map in the dimension of “getting petroleum revenues.” This is listed as the fourth Guidepost for this dimension, which today’s column addresses. I note here, however, that I have added a third existential risk, arising from recent national political developments. This is the risk of intensified internal political conflict and strife, directly and indirectly spilling over to Guyana’s petroleum “finds.” This threat will be introduced later to the discussion, where appropriate.
Existential Threat!
What do I refer to in the term existential threat/risk? By this I basically refer to: 1) a permanent threat to the materialisation of Guyana’s petroleum sector, as currently envisaged; and/or 2) a substantially delayed transition to ramped-up production, thereby stranding Guyana’s petroleum assets already sunk in exploration and pre-production activities and planning. The severity of such threats is, I believe, self-evident.
More on Stranded Assets
The notion of stranded assets introduced in the paragraph above has risen to the forefront of global analysis of the hydrocarbons sector. As earlier columns indicated, in finance/economics, these indicate assets on a company’s balance sheet, which rapidly diminish in value — as a result of forced assets write-offs. In other words, such assets have become obsolete (non-performing) well ahead of their useful life and are, therefore, recorded on a company’s balance sheet as a “loss of profit.”
A research think-tank in the United States, the Carbon Tracker Initiative (CTI), has sought to bring to global attention that, the global climate change agenda is incompatible with 1) prevailing global levels holdings of coal, gas and oil reserves 2) their projected utilisation, and 3) sustainable development, based on a low carbon agenda. In these circumstances, carbon reserves (about two-thirds of them) may turn out to be “unburnable,” if the global climate change agenda is met.
Because of such developments, it is estimated around 38% of known oil and gas reserves might be imperiled! And, if this is realised, it would severely impact on Guyana. However, 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) high cost low productivity oil properties are those most likely to be put on hold.
Survey Data
In an earlier column (December 25, 2016), I had referenced the Canadian MinEx Consulting Group, which had surveyed about 3,500 commodity discoveries worldwide over the period 1950 to 2013. The survey data revealed that stranded assets are indeed a significant probability! Empirical evidence revealed a low conversion from commodity discovery to production (45%) and, long average delays in production coming on stream (on average 12.4 years). For the convenience of readers the information from the MinEx Consultancy Report is reproduced from my earlier column in 2016.
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 Miscellaneous Factors Induce Delays (Cost over-runs, poor
economics, infrastructure, environmental, social, regulatory and
governance issues)
Source: Author’s construction from MinEx Consulting Report, 2014.
Process Risks
All threats to Guyana’s coming petroleum sector, including the existential ones that I identify here, originate in the four necessary processes or phases fundamental to oil and gas extraction. It is, therefore, useful to recount these processes for readers, as a lead-in to my discussion of the existential threats/risks identified for Guidepost 4.
Industry manuals on the sector, classify the required activities sequentially into four major processes or phases. These are: firstly the exploration phase or stage; secondly, the phase of drilling and development of wells; thirdly, the production phase; and, finally, the phase where production ceases, the operations site is abandoned, and the oil well(s) decommissioned. This last termination phase remains an essential part of the process, in order to secure the environment against damage caused by the commercial extraction and sale of hydrocarbons. The following brief paragraphs elaborate to on these four processes.
Production (Stages 1&2)
The first phase, exploration, involves risks, namely, geo-physical prospecting and a “high cost” systematic search for rock formations associated with significant petroleum deposits. Such exploration requires the drilling of expensive wells, particularly when offshore. Development of well(s) therefore, will only be pursued/completed if the likely value of recoverable hydrocarbons is greater than the projected cost of getting the hydrocarbons to the market. If this does not hold true, the wells are plugged. Stage 2 or full field (well) development commences only after exploration yields commercially recoverable hydrocarbon deposits.
Stages 3&4
The third stage is where: 1) the process of extracting hydrocarbons takes place; 2) separating the mixture of liquid hydrocarbons (gas, water and solids) occurs; 3) removing the non-saleable constituents are effected; and, 4) selling the gas and remaining liquid hydrocarbons take place. Today, costly production sites can handle crude oil output from multiple wells. Typically, the oil is processed at a refinery and the natural gas may be processed to remove impurities either in the field or at a natural gas processing plant. Stage 4, site abandonment, involves plugging the well(s) and restoring the site to its “original condition.” The activities are aimed to contain environmental degradation.
Conclusion
The three existential threats I shall evaluate include a repeat of the two threats indicated earlier. The third, which has recently emerged, refer to national political strife and conflict, which have reached a point, not envisaged until very recently. This is exemplified in the call of a former Head of State for sanctions against Guyana, on the cusp of petroleum production and export in 2020!
