Low oil prices are forcing the oil majors to back away from large-scale offshore projects and instead shift their focus on smaller, short-cycle shale investments. ExxonMobil, Chevron, Royal Dutch Shell and, ConocoPhillips are just a few of the companies that are ratcheting up their spending levels on shale drilling, particularly in the Permian Basin in West Texas.
Even as ExxonMobil sharply increases spending on shale this year, it has also prioritized one major project in particular—a drilling prospect off the coast of Guyana.
Even though they are cutting back on bigger projects, they are not forgoing offshore drilling altogether. For example, even as ExxonMobil sharply increases spending on shale this year, which will account for one quarter of the company’s overall spending, it has also prioritized one major project in particular—a drilling prospect off the coast of Guyana. Earlier this month, the company said it will be investing $5 billion to explore oil production in Guyana by 2020.
Exxon to open up new frontier
Exxon announced enormous discoveries in its Stabroek block in 2015 and 2016. Based on the results from the Liza-1 and Liza-2 wells, the oil major says its prospect could hold between 800 million and 1.4 billion barrels of oil, enough to make it a “world-class discovery.” In January 2017, the company announced a second large discovery in the same block, not far from its first exploration well. The 2017 discovery adds weight to Exxon’s belief that offshore Guyana should be one of its top priorities.
If all goes according to plan, Exxon, along with its junior partner Hess Corp., will bring first oil online by 2020, an accelerated timeline for a project as complex as this one.
Exxon is moving quickly on developing the prospect, awarding some initial contracts for the use a floating production, storage and offloading (FPSO) vessel. The oil major will make a final investment decision this year, a decision that, for now, appears to be an easy one. If all goes according to plan, Exxon, along with its junior partner Hess Corp., will bring first oil online by 2020, an accelerated timeline for a project as complex as this one. For Hess, the Guyana play is even more important—the company is allocating more than 20 percent of its 2017 budget for operations in the South American nation.
Geopolitical conflicts won’t slow Exxon down
Venezuela disputes the sovereignty of Guyana over some Exxon’s exploration block. The Venezuelan government, reeling from a deep economic crisis, has demanded that all exploration and development work be stopped until territorial boundaries are resolved. The dispute is over a century old, but has taken on new importance with Exxon’s discovery.
Venezuela disputes the sovereignty of Guyana over some Exxon’s exploration block.
“Investors have been intimidated, development has been derailed, projects have been obstructed,” Guyana’s President, David Granger, said in a speech in Washington in 2015 following Exxon’s initial discovery. “It is too much to bear for a country that has less than a million people.” But while the government of Guyana feared that Venezuela’s complaints would scare away investment, the potential volume of recoverable oil appears too enticing to slow down Exxon. In addition to investments in Kazakhstan and Papua New Guinea, Guyana is a critical element of Exxon’s long-term production plans.
Exxon has ongoing legal issues with Venezuela. The oil major has been trying to collect $1.6 billion in compensation from the South American country over the nationalization of its assets back in 2007. Exxon originally wanted $16.6 billion for its heavy crude assets that were seized by the late Venezuelan President Hugo Chavez. A World Bank arbitration court awarded Exxon only a fraction of that amount in 2014, ordering Venezuela to pay the oil major $1.6 billion. Exxon has been unable to even collect that sum, and a separate court decision just a few weeks ago annulled part of the payments. The drawn-out saga has left a lot of animosity between Exxon and Venezuela, which will likely strengthen the resolve of Exxon in its Guyana venture.
Industry excitement, but resource curse ahead?
The discovery of such a large volume of oil—several billion barrels—off the coast of Guyana suggests that more discoveries could be forthcoming. In fact, the northern coast of South America is quickly emerging as a top exploration region.
In addition to West Africa and the Eastern Mediterranean, offshore Guyana is one of the three most important areas in the world for new oil discoveries over the past few years, according to Wood Mackenzie. “To compete with [US] shale, deepwater oil has to be an exceptional resource. And it looks like that’s what this is,” said Andrew Latham, senior vice-president for exploration at Wood Mackenzie, according to the FT. Offshore Guyana and West Africa share a geological ancestry, so it is no coincidence that both regions are seeing high levels of exploration interest even in a world of $50 oil.
The FT points out that other oil companies also have a presence in the region. Spanish firm Repsol and Tullow Oil of the UK also have exploration blocks in Guyana. Tullow, Statoil and Noble Energy have assets in Suriname to Guyana’s east. Furthermore, the small E&P Kosmos Energy, partnering with Chevron and Hess, is examining seismic data for prospects in Suriname as well.
As the oil fields in Guyana’s waters come online, they should transform the country into a sizable producer.
As the oil fields in Guyana’s waters come online, they should transform the country into a sizable producer. It is hard to overstate the effect that this investment could have on the country—the oil reserves could be worth up to $200 billion. “It’s not often that a country goes from 0 to 60 so fast like this,” Matt Blomerth, head of Latin American Upstream Research for Wood Mackenzie, told the New York Times in January after Exxon announced its latest discovery.
But for a country with fewer than 1 million people, there are downsides to such an economic transformation. Environmental regulations, corruption oversight, and above all, a plan for the influx of billions of dollars into an economy with a GDP of just $3 billion are critical if Guyana wants to avoid the worst of the “resource curse.” Although some analysts, and even Exxon executives, have excitedly talked about Guyana as “a second Angola” in terms of its oil potential, there are also highly negative details in that comparison. Angola is a textbook example of a nation ruined by resource extraction, a country blessed with oil wealth that nonetheless suffers from terrible inequality, low life expectancy, corruption, and a one-dimensional economy.
Environmental regulations, corruption oversight, and a plan for the influx of billions of dollars into an economy with a GDP of just $3 billion are critical if Guyana wants to avoid the worst of the “resource curse.”
For its part, the government of Guyana has vowed to use oil revenues to diversify the economy. “It is our intention to make sure that resources are used in a manner that will enable us to diversify across a significant spectrum of activities from industrial activities, oil-related activities as well as services, and this I think is the defense we have against the so called resource curse,” Guyana’s Vice President and Minister of Foreign Affairs, Carl Greenidge, said at an industry event in October 2016.