Wednesday, February 1, 2023

In a low oil price world fiscal terms will have to be competitive, but contracts must also be progressive – expert says

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The world is moving now faster than ever towards renewable energy sources and this along with other factors that impact the demand for oil means that going forward, prices are not likely to increase beyond $50 per barrel. This, one excerpt says, will require fiscal terms to result in low breakeven prices so that development of oil fields will be economically feasible.

“What is now very amazing is that in just the last year the UK, the EU, Japan, Korea, and—interestingly—the Democrat President-elect of the US–all have committed to be carbon-neutral by 2050; China has committed to be carbon-neutral by 2060,” said Dr. Pedro H. van Meurs in a presentation at the Guyana Oil and Gas Virtual Summit held this week.

Explaining the impact of these policy decisions, Dr. van Meurs said, “Firstly, demand will go down rapidly and that means the price for oil will also probably stay low. It’s now around $40, it may increase to $50, but it’s difficult to see significant price increases beyond that level based on the current demand and supply projections.”

Global oil consumption is already on track to slump by an unprecedented 8.8 million barrels a day this year, averaging 91.3 million a day, according to the International Energy Agency (IEA). It also trimmed estimates for 2021, lowering its first-quarter projection by 700,000 barrels a day, though demand is still set to stage a rebound of 5.8 million barrels on average next year. Nevertheless, the long-term outlook continues to point to a low oil price scenario.

“Now it means that your fiscal systems have to result in economic projects at $50 on a ‘real’ long-term basis,” Dr. van Meurs said. “Otherwise, you will not receive much interest [from] investors. And, consequently, my suggestion is that the governments analyze their fiscal terms at a $50 price and probably around $20 cost and if it doesn’t result in economic projects then you have to adjust your fiscal terms downward to make sure that projects are economic, in case you want to make sure that your acreage attracts interest from investors.”

However, the highly volatile nature of oil prices, even before the global pandemic and accelerated move towards renewables, means that systems must be established that cater to any eventuality.

“It is interesting to say that we need to improve terms. But then what happens if all these predictions are wrong and oil prices increase strongly again? Actually, we have always been wrong about the future of the petroleum industry; rather dramatically wrong,” he pointed out. “So, what if we are wrong again and prices go up? This means that fiscal systems have to have features in it that take care of high oil prices, just like Colombia, for instance. And this means you have to have sliding-scale royalties or other profit shares that increase the take for the government under higher prices. That is the modern system that we now face for the next 30 years.”

Turning his attention to Guyana, Dr. van Meurs said under the current economic conditions, the fiscal terms of Guyana “are just about perfect” since they encourage strong developments under the current low oil prices.

“So even if oil prices would stay at fifty dollars, this relatively high-cost resources that Guyana have it is still economic to produce these resources and that is proven by the great interest of the oil companies to develop those resources,” he said. “So, for the moment, if we believe the low oil prices are here to stay, the system of Guyana is actually perfect for the conditions.”

However, he pointed out that in a higher oil price scenario, the dynamics change, so going forward other fiscal mechanisms should be considered as Guyana develops a new model Production Sharing Agreement.

“So my recommendations if Guyana is looking at redesigning their fiscal terms and contract terms for new acreage to be offered; then I think what you are looking at is a fiscal system that works for $50 a barrel, and has strong price progressive features in it,” he stated. “That means the government’s take—the share that the government gets—goes up at higher prices. While at the same time, the government creates for itself more flexibility to be able to use fiscal terms to manage the complex energy transition that we are going to face.”

Pedro van Meurs received his PhD in Economic Geology from the State University of Utrecht, the Netherlands, in 1970. Until 1973, he was Chief of the International Petroleum Developments Division of the Department of Energy, Mines and Resources of the Federal Government of Canada. Since 1974 Dr. Van Meurs has been President of his consulting firm Van Meurs Corporation. In this capacity he has carried out consulting assignments for a number of companies and more than 90 governments in the world, providing advice on upstream petroleum fiscal policy. He is frequently an expert witness in arbitration cases for companies and governments.

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