Under the Production Sharing Agreement (PSA) between ExxonMobil affiliate Esso Exploration and Production Guyana Ltd., its partners Hess and CNOOC Nexen and the Government of Guyana, movements in the price of oil will directly impact the revenue the country receives when production begins in the first quarter of 2020.
Under Article 15 of the agreement ExxonMobil will be paying a royalty of 2% of all petroleum produced and sold (before cost is deducted), less the quantities used for fuel or transportation in the operations. The agreement allows for ExxonMobil to utilize a maximum of 75% of production (after royalty is subtracted) as cost oil. After cost is deducted, the remaining profit will then be shared 50/50 between the company and Guyana.
The company is expected to begin production at around 120,000 barrels of oil per day. Guyana will therefore, from day one of production, receive 2% of the oil produced before cost is deducted and 50% of the profits (after cost is deducted).
The royalty plus Guyana’s share of profit oil will see the country receiving approximately 17,100 barrels of oil per day. At a price of US$50 per barrel, that means that from day 1 of production Guyana will receive US$855,000 (17,100 x US$50). The price of oil as of February 28, 2018 stood at US$66 per barrel. If this price should be used, Guyana would instead receive US$1,128,600 from day 1 of production.
Important to note also is that after the first 5 years of production, ExxonMobil and its partners are expected to recover their initial cost which means that profits will increase, and as such, so will Guyana’s revenue from its 50% share of profit oil and 2% royalty.
All projections are based on what the price of oil is expected to be, over a period of time. If oil price falls dramatically, so will both ExxonMobil and Guyana’s share of the profits.
Analysts in the industry have been continuously adjusting their forecasts in an effort to project what the price per barrel is expected to be in coming years, with many holding to a US$50 average, while others have higher projections.
For its part, ExxonMobil Guyana has said that the South American country’s profit oil and royalty – at US$50 per barrel – from the Liza Phase 1 development could be over US$1.5B after 5 years production and over US$7B over the lifetime of the project.
What is certain is that Guyana’s earnings from oil production will significantly increase since plans are already underway for a Liza Phase 2 development in 2022 and a third development at the Payara-Pacora reservoirs by 2023.