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Will Exxon’s Big Bet On Guyana Pay Off?

ExxonMobil is one of the few global energy supermajors which for some time resisted the energy transition which is underway and will eventually lead to peak oil demand and ultimately sharply lower fossil fuel prices. After a bruising 2020 which saw Exxon, once the world’s third-largest listed company at the end of the 1990s, described as a zombie corporation the energy super major embarked on a new path. This includes rolling out a plan to manage the energy transition and push for a carbon-neutral global economy to check global warming as well as a focus on more profitable assets. By November 2020 Exxon had announced it planned to focus capital spending on those assets which will deliver the highest possible returns. That saw the global supermajor list Brazil, Guyana, and the Permian Basin as priorities in its 2021 capital budget of $16 billion to $19 billion. 

Exxon prioritized exploiting those assets because of the combination of low breakeven prices and the high-quality light and medium sweet crude oil that they produce. Exxon’s operational Liza-1 field in the Stabroek Block offshore Guyana is pumping oil at a breakeven price of $35 per barrel. That is expected to fall to $25 a barrel when the Liza Phase 2 project commences operations during 2025 pumping up to 220,000 barrels per day. That makes it more profitable than offshore Brazil where industry analysts estimate an average breakeven price of $35 to $45 per barrel. The Liza-1 field is even significantly less expensive than the Permian Basin, another core focus for Exxon, where the Federal Reserve Bank of Dallas found that new wells had a breakeven price of $46 to $53 per barrel. In an operating environment where West Texas Intermediate is selling for $64 per barrel and Brent is trading at around $67 a barrel, Exxon’s operations in those regions will be highly profitable.

Higher oil prices were responsible for Exxon delivering a solid first quarter 2021 result with net income of $2.7 billion. Despite the vastly improved performance, the oil supermajor is maintaining a conservative approach to spending. Importantly, the significantly improved result and outlook allowed Exxon to start dialing down its substantial debt pile. By the end of the third quarter, the supermajor’s debt had reached almost $69 billion, whereas by the end of the first quarter of 2021 it was $63 billion. Exxon’s performance not only defied the latest fallout from the pandemic but was the best quarter since the fourth quarter of 2019.

Offshore Guyana is shaping up to be a lucrative location for the integrated supermajor. After drilling a dry hole in the Canje Block offshore Guyana, Exxon made its 19th discovery at the Uaru-2 well in the Stabroek Block. That comes after a spate of earlier discoveries which saw the energy company estimate that it has recoverable oil resources of over 9 billion barrels of crude oil in the Stabroek Block. Exxon has secured a production-sharing agreement with Guyana’s national government on very favorable terms. The contract distributes profits from the oil produced on a 50/50 basis between the Exxon-led consortium, which includes Hess and Chinese national oil company CNOOC, and Georgetown. The profits received by the syndicate are then split 45% to Exxon, 30% for Hess, and the remaining 25% to CNOOC. There is also a 2% royalty payable by the consortium on gross revenues which is the lowest in South America and significantly less than the royalties on U.S.-produced crude oil. What makes the deal especially profitable for Exxon and its partners is that 100% of all development, operating, reclamation and interest expenses are recoverable.

The oil discovered by Exxon in the Stabroek Block is characterized as a sweet medium grade crude oil with a sulfur content of 0.58 and API gravity of 32 degrees. Those are desirable attributes in a world where there is a growing focus on decarbonizing the economy and reducing carbon as well as sulfur emissions. Sweeter light grades of crude oil are easier and cheaper to refine into high-quality low-emission fuels. By the end of 2026, Exxon expects to be pumping 750,000 barrels of crude oil per day from its operations in offshore Guyana. Exxon’s share of that production will be highly profitable for the company and contribute to bolstering cash flow as well as the bottom line.

By Matthew Smith for Oilprice.com

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