‘Jewel in the crown’: Chevron follows Exxon to Guyana’s oil riches

Chevron’s deal to buy Hess last week for $53bn gives the US supermajor access to one of the hottest prospects in the global resources industry: Guyana’s 11bn barrels of offshore oil.

There was little interest in the Latin American country’s potential as a fossil fuel producer when ExxonMobil began exploring Guyana’s waters for oil in 2008. That changed in 2015 when an Exxon-led consortium, including Hess and Chinese giant Cnooc, made a significant discovery at the Liza field, in the 6.6mn acre Stabroek Block.

The consortium has made more than 30 significant discoveries since then, with the latest announced on Thursday. The steady stream of oil output should help sustain Exxon’s — and now Chevron’s — crude business for decades.

It should also transform one of Latin America’s poorest nations, home to just 800,000 people. Oil output has gone from zero to 390,000 barrels a day last year. The unusually fast ramp-up could push production to 1.2mn b/d by 2027 — equivalent to about a third of Exxon’s current daily production.

Last year Guyana’s economy grew by a record 62.3 per cent, the highest rate in the world, as the petrodollars poured in. The IMF expects it to expand by another 38 per cent in 2023.

Its rise comes as the world plots a move away from fossil fuels, climate campaigners object to the very principle of further oil and gas development, and opponents worry about oil companies’ chequered history of operating in poor countries.

Even so, the US oil majors’ investments look set to make Guyana one of the last petrostates to emerge in the oil era.

“It is a jewel in ExxonMobil’s crown. It’s a significant resource. It fits very well with the execution capability of ExxonMobil,” Alistair Routledge, Exxon’s Guyana president, told the Financial Times.  

“Clearly what’s attractive to Chevron is that ExxonMobil is operating at a very high level . . . From first discovery in 2015 to first oil in 2019. I mean, [it’s] just unheard of really to develop a new resource and in a brand new basin where there’s no existing infrastructure in that short a timeframe.”

Wall Street analysts have labelled the Exxon-led investment in Guyana “the best oil deal in modern history”. It has a low break-even price of $25-$35 per barrel at a time when global oil prices are above $90 a barrel. But the US supermajor and its Guyana project have also drawn criticism.

The Stabroek Block produces high quality light sweet crude, which has a 30 per cent lower greenhouse gas intensity than the average of Exxon’s portfolio. But climate campaigners warn the sheer size of the reserves make them a “carbon bomb” that will accelerate climate change if they are produced. They also worry about the potential damage caused by offshore drilling to Guyana pristine environment.

Others caution that Guyana risks falling victim to the “resource curse”, in which sudden natural resource riches hollow out other domestic industries and breed political division and corruption. A bitter dispute over the transfer of power following the 2020 general election underlines the political fragility of a country divided on ethnic lines.

“There are hundreds of millions going into a country with a small population so they’re not complaining,” said Tom Mitro, a senior fellow at Columbia University’s sustainable investment centre and a former Chevron manager who helped negotiate its contracts in countries including Angola, Nigeria and Papua New Guinea.

But he and other experts argue that the production-sharing contract signed with Guyana in 2016 is unduly generous to Exxon, and some say it should be renegotiated.

“It was an unusually sweet deal,” Mitro said.

Guyana’s government now has money for hospitals, housing, transport, flood management infrastructure and a sovereign wealth fund, which should bolster public finances. But the record profits generated by Exxon last year and Chevron’s purchase of Hess’s 30 per cent stake in the Stabroek Block have brought renewed scrutiny of the contract terms.

In that deal, Guyana agreed to split profits 50:50 with the developers it wanted to attract. But up to three-quarters of revenue go first to cover the consortium’s costs. Among other perks, Guyana also agreed to pay the companies’ income and corporation tax from its share of the profits.

Mitro points to the absence of a “ringfencing” clause. Revenues from already producing oil sites — such as the Liza field — are not ringfenced but can be used to recover costs for exploration across other sites in the block. The IMF expressed “concern” in 2019 that this could “affect the projected flow of government oil revenues”.

Ringfencing has drawbacks, said Graham Kellas, an analyst at consultancy Wood Mackenzie. “[Guyana] could get more money out of Liza quicker but they’ll get money out of the next development slower,” he said. 

The fiscal terms are “appropriate”, he said. “The risks were extremely high . . . In high-risk, high-cost, deepwater exploration anything could happen.”  

Mitro argues that the risks were lower because Exxon had already discovered Liza when it signed the deal with Guyana. “From all the evidence, Exxon knew it was going to be a large discovery,” he said.  

Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis, points to potential trouble for Guyana years from now, when output is exhausted and someone must pay to decommission the oil infrastructure.

“It’s kind of like musical chairs,” said Sanzillo. “When the music stops, who gets the benefit and who is left without a chair?” 

Industry practice normally involves establishing a fund for decommissioning costs, which are taken from oil revenues over the length of a contract, according to Kellas. This does not form part of Guyana’s 2016 contract.

That is “unusual, but not totally unheard of”, said Kellas, adding that large companies could afford to shoulder any costs without setting up a fund.

“But it does raise the risk of [ExxonMobil] selling the assets late in life to a smaller company that then defaults on the decommissioning.” 

Exxon’s Routledge defended the contract, saying the terms were competitive for a deepwater, frontier development that had attracted limited interest until the big recent discoveries. Just two companies — Hess and Cnooc — replied to 35 letters sent out by Exxon seeking partners when Shell pulled out of the consortium in 2014, he said.

Routledge said returns to Guyana could exceed $100bn over its operations’ decades-long lifetime. There would be no renegotiation of the agreement as “contract sanctity is super important for investors”, he added.   

“Everybody can cherry pick certain things but at the end of the day, it’s a collective economic return . . . for an economy [whose current] national budget is only around $3.5bn-$4bn. It is quite transformational,” he said. 

Joel Bhagwandin, a Guyanese financial analyst who has worked with both Exxon and Guyana’s public procurement commission, said the deal was “heavily criticised” in the country when it was first signed. 

But recent government laws that oblige oil companies to procure from Guyanese businesses and nationals for some services would help spread benefits to the country’s economy, he said. Exxon said it had spent $1.2bn with 1,500 local suppliers since 2015. 

Guyana is pushing for more favourable terms from future deals and is negotiating royalties of 10 per cent on upcoming contracts, far above the 2 per cent it agreed with the Exxon consortium.

But companies and analysts do not believe the government will rewrite existing terms, as other Latin American countries such as Chile and Mexico have done when they sought greater state control of their lithium reserves. 

A Guyana government representative did not reply to a request for comment.

Meanwhile, some Guyanese people who oppose the oil development on environmental grounds have recently enjoyed some success with court challenges. In May the country’s high court ordered Exxon to provide an “unlimited guarantee” in case of any oil spill damage in the country’s waters.

Exxon is appealing against the ruling, and has limited costs to a $2bn guarantee until a full hearing. Experts have speculated that the original ruling could dent companies’ appetite to invest further in the region.

Melinda Janki, a former BP lawyer who is fighting against Exxon’s appeal, said the suit was designed to ensure Exxon would minimise its operations’ risk to the environment and would pay for any damages caused, calling the original contract with the supermajor “abusive and exploitative”.

The court’s original ruling was a “surprise”, Routledge said. “What’s important to us is that we follow all the rules, the regulations, the laws, and I believe that if we do so then we should not have any significant issues,” he said.