The oil companies appear to be pressuring the government to approve the Payara project. Before we proceed with any more approvals, we should clarify mathematical anomalies between Liza Phase 1 and Liza Phase 2 that may save us billions of US dollars; verify the pre-contract costs; hire qualified people and create the institutions/regulations so we can secure our oil wealth; and rebalance the Stabroek Block contract so Guyana gets its fair share. The Liza Phase 2 project should not have been approved without corrections, but sadly it was. Now we need to make sure we use the approval of the Payara project as leverage to get a fair deal for Guyana.
In December, 2018, the oil companies reduced the gross capital cost of Liza Phase 1 by US$700 million to US$3.7 billion. Recall, Liza Phase 1 holds 450 million barrels of oil. The gross capital cost of Liza Phase 2, (it holds 600 million barrels of oil), has been stated as US$6 billion. But doing some simple divisions to arrive at gross capital cost per barrel reveals a quirk between Liza Phase 1 and Liza Phase 2. In the table below, it is shown that the gross capital cost per barrel of Liza Phase 2 is almost US$2 higher than that of Liza Phase 1. Due to lessons learned from Phase 1 and economies of scale, one would expect that Liza Phase 2 gross capital cost per barrel should be less than that of Liza Phase 1. That difference of just a few dollars spread over 600 million barrels results in an extra cost of over one billion US dollars for Liza Phase 2. That is close to the amount of money the Government of Guyana needs to run the country per year.
Additionally, there appears to be an even bigger anomaly that the oil companies should explain. Hess, in recent presentations, has listed the break-even cost for Liza Phase 1 at US$35/barrel. But Liza Phase 2 is a better deal with a break-even cost of US$25/barrel. Intuitively, one would think: If the break-even cost is about 30% less for Liza Phase 2 compared to Liza Phase 1 then the gross capital cost per barrel should be significantly less than $8.22 per barrel for Liza Phase 2.
Table: The economies of scale and efficiency should result in lower cost per barrel for Liza Phase 2.
If there is one lesson we should learn from the debacle with the oil contracts, it is that we should take our time to carefully vet future approvals. It is coming up to a year since exposures in the independent press caused the Liza Phase 1 gross capital cost to be reduced by US$700 million. Before we rush to approve Payara and other projects, we should have the oil companies explain the anomalies between Liza Phase 1 and Liza Phase 2. If the Liza 1 and Liza 2 sites are close to each other and Liza 2 is bigger than Liza 1, wouldn’t you expect the gross capital cost of Liza Phase 2 to be less on a relative basis?
Rushing approvals and lack of high-quality analyses have resulted in US billion-dollar benefits to the oil companies and to equivalent losses for the Guyanese people.
Darshanand Khusial
