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Liza opens the door

ExxonMobil's find has opened a new frontier along South America's northeast coast

Guyana's emergence into the spotlight has been swift. In spite of its proximity to oil-and-gas rich Venezuela and Trinidad & Tobago, the tiny South American country's waters had remained almost completely unexplored until 2015. That was when ExxonMobil hit it big at the Liza field, which opened up a multi-billion-barrel frontier.

Now the country is racing to first oil. ExxonMobil and its partners Hess and Cnooc-owned Nexen sanctioned the first phase of development at the Liza field in July. Guyanese oil, which is relatively light at around 32°API, is expected to start flowing by 2020, less than five years after the discovery. ExxonMobil and its partners plan to spend some $4.4bn on the initial phase of development (Guyana's GDP was just $3.4bn in 2016), which will include building a subsea production system to feed a 120,000-barrel-a-day floating production, storage and offloading (FPSO) vessel.

The economics of the development look promising, even at today's oil prices. Service costs have been low thanks to a wrenching recession in the global deep-water business. And the project is enjoying favourable fiscal terms, which were offered by the government to encourage frontier exploration—the royalty rate is just 2% and the government take is 50% of profit oil. Analysts at Wood Mackenzie reckon the breakeven, with a 15% return, is around $46 a barrel, making it competitive with other high-profile oil plays like Brazil's pre-salt or America's tight oil.

Subsequent exploration success indicates there is more oil to come. ExxonMobil and its partners have made two other discoveries on the Stabroek Block, home to the Liza find, called Payara and Snoek. So far, the companies have found between 2bn and 2.5bn barrels of oil equivalent of recoverable resources at the block, enough to support further development. Wood Mackenzie analysts say the additional discoveries could support production of as much as 450,000 b/d at a fleet of FPSOs in the years to come.

There is more exploration in the pipeline. On top of ExxonMobil's campaign at the Stabroek Block, Repsol is carrying out 3-D surveying at the nearby Kanuku license with an eye towards drilling in 2018 or 2019 and Tullow Oil is shooting 3-D surveys at its Orinduik licence.

Much of Guyana's offshore remains open, and the government is keen to attract the industry's majors. The government continues to award exploration contracts through one-on-one negotiations but there is a push from inside the country and outside transparency groups to set off competitive bid rounds. The next licenses aren't likely to enjoy the same plum fiscal terms that Exxon secured.

While early exploration has been relatively smooth sailing, significant hurdles lie ahead as Guyana goes through the growing pains of becoming a petro-state. There are likely to be fights over what to do with the 3 trillion cubic feet of gas found alongside the oil. The operators will probably want to flare or re-inject the gas, the two cheapest options. The government is likely to push for the development of those resources, potentially via a pipeline from the deep-water fields to onshore processing and power-producing facilities.

Corruption is another concern. The country ranks a lowly 108 out of 176 in Transparency International's corruption perceptions index, and effectively managing an influx of petrodollars that could double the country's current income will be difficult. The government has outlined plans to create a sovereign wealth fund, a positive step to ensuring the oil dreams don't turn to disappointment.

Source: Petroleum Economist
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