Factors to consider for licencing Guyana offshore oil blocks

• Bocks are those where the initial term (normally x years) has expired and there has been no drilling for a period of y years and no dedicated seismic or other significant activity for a period of z years; and,
• Discoveries are those where the initial term (normally x years) has expired and there has been no appraisal drilling, dedicated seismic, extended well testing or similar dedicated activity for a period of y years.

The assets are divided into Class A and Class B. Class A assets are those whose ‘‘current licensees are doing all that a technically competent group with full access to funding could reasonably be expected to do’’ while Class B assets are those whose ‘‘current licensees are unable to progress activity due to misalignment within the partnership, a failure to meet economic criteria, other commercial barriers, or a combination of these’’. The owners of the assets are encouraged to work them within a time frame or trade or relinquish them thereafter (Kemp and Kasim 2006).

Hence, there is a minimum of two periods of drilling inactivity which are possible during the life cycle of a hydrocarbon asset – i.e. pre-initial or post-last drilling. In the present context, the pre-initial drilling duration data are considered as being uncensored while those on the post-last drilling duration are considered as being censored.

• Licensing data: These include data on the commencement date of licences, the relative equity holdings of partners, the number of partners awarded a licence and licence fees.
• Asset-to-infrastructure distance: Using the data on the locational coordinates (longitudes and latitudes) of each asset and the nearest surface infrastructure, the shortest distance between the two must be calculated using an appropriate formula.
• Timing: Distance alone does not fully explain the effects of the availability or otherwise of infrastructure on the development of assets. The timing of access to infrastructure is equally important. In order to quantify the timing effect, Guyana must determine the time lag between the commissioning date of the nearest surface infrastructure and licence acquisition.
• Annual rental payments: A key component of the variations in licensing terms are the differences in the rental payments. The authorities must seek to use rental payments to influence the pace at which licensees work their assets or trade/relinquish them.
• Uncensored duration: Trend-wise, there are highly irregular movements in the time paths of the uncensored duration of all the cross-sections. However, the movements will appear to be more volatile in the case of the assets. In order to determine the underlying long-term trends of the variables, logarithmic trend lines must be fitted to the current data.
• Water depth
• The operators’ relative equity share

 Common-effects variables

1. Licensing measures (X₁, X₂). Licensing terms apply equally to the four cross-sections od the current basin. Operators in the Guyana Basin must pay licence fees for their entitlement to acquire and retain assets. Higher licensing fees will be designed to discourage the prolongation of duration. However, a delicate balance has to be struck between encouraging participation and discouraging undue holding on to assets. While high rental payments may achieve the latter goal, they may limit the number of applications at the licence bidding rounds. In the present situation the assumption is that to achieve an appropriate balance, the authorities, having decided on a suitable initial rental payment, can use either of two related instruments to influence the speed at which blocks are worked. Firstly, the rate of increase of the annual incremental rental payments (X₁) can be increased to shorten the licence duration. Secondly, the authorities may reduce (X₂)—i.e. the time period to reach the year of maximum payment.
2. Net cash flow (X₃). It is postulated that a healthy net cash flow (X₃) in the industry in the current period would encourage drilling and thereby reduce the uncensored duration. Poor net cash-flow situations, on the other hand, could prolong the duration of the unused licence.

Cross-section specific effects variables

3. Water depth (X₄). Cost conditions can play a prominent role in determining the uncensored spell of an asset, with favourable conditions shortening the spell and unfavourable conditions prolonging it. The average water depth (X₄) of the drilled area can be used as a proxy for costs. A directionally positive relationship was assumed to exist between X₄ and the uncensored licencing spell.
4. Assets ownership and the role of partners (X₅, X₆). Oil and gas assets are traditionally developed through partnerships. However, partnerships can either hinder or fast track the development of assets

• The operator’s equity share (X₅): Decision-making and action-taking are speedier when the operator of an asset is also the core investor in the asset. Thus, higher operators’ equity shares would normally be expected to reduce the duration while lower operators’ equity shares would have the opposite effect. On the other hand, spreading the risks and costs more evenly among the investors may serve to reduce the duration of unused blocks. Thus, in the real world of strategic partnering and alliancing, the direction of the relationship between the operators’ relative equity share and the duration of the unused area is an empirical matter.
• The number of partners (X₆): Relatedly, the number of partners in a licence can influence the speed at which drilling decisions are taken and implemented. The incidence of ‘‘partner drag’’ is likelier the greater the number of partners owning an asset. However, it is difficult to be dogmatic about the direction of the relationship since, on occasion, more partners may actually help to reduce the duration of unused areas through cost- and risk-sharing.

Interactions of a number of partners and equity holding (X₅ x X₆): Individually, neither the number of partners owning a licence nor the relative equity holdings of operators can adequately explain the variations in the duration of unexplored areas as can be done by their combined or interactive effects. Thus, for example, a concession with several partners may not suffer any partner-drag inertia, if the relative equity holding of the core investor is sufficiently high to provide effective leadership. Therefore, allowing for the interactive effects of relative equity holding and the number of partners in a concession would ensure that, in weighing the impact of one affect the influence of the other is taken into consideration.

5. Access to surface infrastructure (X₇, X₈). The issue of the influence of the accessibility to surface infrastructure can be investigated in the four possible ways in which the impact can be felt.
6. The expected physical distance (X₇): Other things being equal, exploration will more readily be undertaken near an existing infrastructure than in a remote location. Therefore, a positive statistical relationship may exist between distance to infrastructure (X₇) and unexplored areas.
7. The timing of accessibility (X₈): In addition to the physical distance, the when of accessibility to the nearest surface infrastructure is equally important. The start-up date of exploration would, Ceteris paribus, be shorter if the infrastructure were already in place at the time of first acquisition than otherwise.
8. Interactive effects of distance and timing (X₇ * X₈): The data on the individual effects of distance or timing can mislead. Thus, at a given point in time, a long-fallow block or discovery may be found to co-exist with nearby infrastructure. Further insights may be found when the timing and distance effects are jointly considered.
9. Percentage of infrastructure owner-operators (X₉): The terms of accessibility to infrastructure have a direct impact on the licence-to-first spud duration. The terms of accessibility can be proxied in the present situation by the proportion of infrastructure owner-operators among the licensees, at any point in time. Thus, the duration of unexplored blocks would depend on the proportion of infrastructure owner-operators (X₉), with a higher relative proportion shortening the licencing duration. Nonetheless, there is also merit in the counter-argument that a concentration of the assets especially unused assets in the hands of infrastructure owner-operators may not materially reduce the duration of rights of unused blocks. This is likely to be the case where the owner-operators have a portfolio of marginal/fallow assets that may be peripheral to their total asset holding. Ultimately, therefore, the direction of the relationship between the concentration of assets in the hands of infrastructure owner-operators and unused blocks duration is an empirical matter.
10. Reserves (X₁₀, X₁₁):
11. Cumulative reserves: The sizes of the cumulative oil (X₁₀) and gas reserves (X₁₁) already discovered are important factors influencing the length of the unused licencing duration. The bigger the sizes of producible reserves the shorter the uncensored unused spells.
12. Interactive effects of reserves and distance (X₇*X₁₀, X₇*X₁₁): The presence of reserves is only a necessary condition for reducing the unused licencing duration. A further necessary condition is likely to be the nearness to infrastructure. ‘‘Stranded’’ reserves may fail to exhibit the expected negative relationship between reserves and unused licencing duration if the distance factor outweighs the reserves advantage. By explicitly considering the interactive effects of distance and reserves such otherwise ‘‘perverse’’ relationships are easily contextualised.

Overall Guyana Offshore Block

Considering the Guyana offshore blocks as a whole, one important piece of evidence that will emerge from the estimation is that, in general, the interactive effects are more important than the individual component effects. Focusing on single-issue influencing factors may not be as useful as considering joint effects. While by themselves the short-term individual influences of influencing factors such as reserves, distance to infrastructure, and the number of partners can be seen to be statistically insignificant or have perverse relational signs, the interactive effects of the variables produced more statistically significant results, with well-behaved (correctly signed) relationships.

Thus, the most important statistically significant factor that will influence the unused licencing spell will be the interactive effect of distance to infrastructure and the presence (or lack) of gas reserves in the discoveries. The positive sign of the relationship between the two variables will provide evidence of the ‘‘stranded’’ asset phenomenon, where the presence of gas reserves, even though statistically significant will not be strong enough to overcome the distance disadvantage (also statistically significant).

Similarly, the interactive effects of distance and reserves on the uncensored licencing spell of oil assets are very important or statistically significant. However, unlike the case of gas, the sign of the relationship may be negative, implying that the influence of oil reserves overrides that of distance. This is possible because as long as adequate oil reserves exist at a location, distance problems can be overcome through tankering, an option not available to gas.

The relative concentration of licence shares in the hands of operators are often found to be statistically significant with the sign of the relationship being positive. In other words, the evidence appeared to be that equity concentration in the hands of operators prolonged unused licencing duration rather than reduced it. Relatedly, the number of partners in a concession can be found to be statistically significant, with more partners prolonging the uncensored fallow duration. Interestingly, however, the combined interactive effects of relative equity holdings and the number of partners in a concession are often found to be not only statistically significant but also negatively related to the licence-to-first spud duration. Implicit in this situation is the general existence of one core investor, with a reasonable, but not very high concentration of equity, partnering with several other firms whose individual equity holdings are not too small to negatively influence the decision-making process.