Investment Decisions and Project Risks for a New Petroleum Discovery in Guyana.

Inkpen and Moffett (2011, p. 6) opine that the International Energy Agency forecasts that energy demand will increase at a rate of roughly 1.5% per year until 2030. One can discern from this statement that the industry banks on discoveries to meet this growing world demand. Thus, future developments, see governments and oil companies alike, venture into deeper waters, and undertaking riskier operations to comply with the world’s supply. In the Oil and Gas supply chain, imbibing Chima (2011), five main links make up the oil and gas industry to its entirety. Such relationships can be a consideration to have its independent operations and thus, accounts for a rather complex supply chain. Continuing with Chima (2011), these links are inclusive of, exploration, production, refining and end consumers. The exploration stage, part of the upstream stage is inclusive of activities in the way of seismic, geophysical and environmental events. After the oil and gas companies and the government agree on the seismic data, organically, the next stage of the process is production. Chima (2011) confirms that this stage of the process encompassing activities of drilling, production, reservoir, and services engineering. The Midstream, however, speaks to the storage, trading and movement of crude oil to refiners, imbibing Inkpen and Moffett (2011, p. 6). Refining, however, belonging to the downstream node, speaks to the transformation of crude oil into products that the end user can find useful.

Delving further into the exploration node, one can discern that during exploration as part of the upstream node, a considerable number of funds is necessary to support the activity of searching for oil. One can agree with Wenrui et al. (2013) and from the above influence that Oil and gas have, that it is a somewhat valuable resource and thus, countries and oil companies alike shall push the boundaries of the technology and equipment to retrieve such resources on land and as well, offshore. Therefore, oil companies venture into ultradeep conditions to extract oil. There are three types of exploration strategies, imbibing Jahn et al. (1998, p.24) and Inkpen and Moffett (2011, p. 87) and Claude (2015), namely, seismic and surface topography and area survey methods. It can be discernable that, as the ways graduate from surface topography through area surveys to seismographic methods, there is some correlation between the level of technology and the affixation of price to these methods. Surface method, banks on environmental mapping and seepages through the ground. Therefore, oil deposits such a pitch and gases, are a usual indication of oil pockets below surface. Area surveys however, imbibing Claude (2015) concentrates on using gravity and magnetic fields to discern anomalies below the earth’s surface. Lastly, Seismographic methods, continuing with Claude (2015), uses the sound waves through blasts unto the earth’s surface to microphones to discern the earth’s rock formation, to ultimately detect pockets.

It is the intention of governments, who find or have an inclination of a reservoir of oil, to act in the best interest of its country, to exploit as much as possible underground. Since most governments, lack the funds and the expertise to perform such activities, these governments and their state-run organisations seeking to engage external companies to achieve such. It is a common occurrence that the government shall find to tender the exploration and production process to a foreign outfit, usually an International Oil Company, and try to maximise their efforts. This agreement amid the International Oil Company and the government, agreeing with Boykett et al. (2012), one can consider being of paramount significance. The Oil and Gas company shall as part of their engagement to drill and produce oil, shall first understand what the taxation and benefit rules that prevail in that country are. Such taxation and benefit structure shall speak to the fiscal regime of that country. According to EY (2016), companies who sought to engage in scopes of work in Guyana, shall understand as part of their contract negotiations, understand the fiscal regime of Guyana. Through EY (2016), it is discernable that Guyana operates under the Petroleum, Petroleum (Production), (Exploration and Production), Maritime zones, Income Tax and Corporation Tax act.

For an Oil company venturing into Guyana, from a glimpse, the fiscal regime appears to be quite simple and can favour oil and gas companies and the government, who sought for business in Guyana. Continuing with EY (2016), the fiscal regime sees oil and gas companies, liable to contribute quarterly on profits made in Guyana and abroad. The income in direct relation to the production is legible to be deductible, with certain restrictions. Moreover, Royalties are due, to the government, per the license. There are other tax considerations that the organisation may want to consider which is the withholding tax, which is at 20% on payments disbursed to non- residents of Guyana. Moreover, there is a Value added tax at 14%. International Oil companies, however, as part of the Production Sharing Regime, can enjoy benefits in the way of a 20% petroleum capital expenditure allowance, offsetting of corporation taxes towards the following year and double tax relief granted that there is a treaty with the country, in which their parent operations exist. In comparison with its neighbouring country, Trinidad and Tobago, who operates under the concession and production sharing regime, there are far fewer levies and taxes that are payable, one can discern from EY (2016). Allowances, however, the government of Guyana offers less. Thus, imbibing Inkpen and Moffett (2011), it is prudent that Oil companies weigh their expenses of taxes and operating expenses against the expectation on the Oil price through different formulas. The identification of the reserves through seismic activities and understanding the government’s take, through their fiscal regime is prudent to feed into the investment decision, but one can know that this is not enough to make a sound judgement.

According to Inkpen and Moffett (2011, p. 96), other factors would affect the investment decision. Such elements are inclusive of the recovery factor, which speaks to the percentage of oil in recovery. Traditionally, imbibing Macmillan (2000), organisations use the decision tree as a basis for the decision making, but now there is a suite of decision-making tools, that the Guyana project can use, namely Decision Tree TM or DNVGL Easy Task TM. According to Hunn (2017), the discoveries, see Guyana with up to 3.2 billion barrels of oil and gas, of which 2.25 billion barrels are recoverable. Thus the percentage of oil recovery is at 70%, using various techniques for recovery. The IOC and the government may find it prudent to proceed with production. But one can agree with Suslick et al. (2009) there are other pertinent issues, such as interdependencies of decisions and efforts that drive the production strategy. But Guyana, like many other countries, are susceptible to different types of risk. For one, the Oil and Gas industry sits are around USD 70/ barrel and could plummet at any point, and this is due to its interdependency on other markets, like China, to drive the demand. Should there be another price crunch, the cost of production would be higher than the sale of oil. The current status of Guyana as an emerging market, this might be a critical factor and can cripple the country and the IOC that operates within. Clew (2016) speaks to other risks that projects are subject, namely, political insurance and environmental risks. Guyana sits strategically on the Venezuelan oil belt, which means that they enjoy one of the world’s largest reservoirs. Unfortunately, Guyana also shares a boundary with Venezuela and Suriname. Venezuela, according to EY (2016) fiscal regime, sees Venezuela opting for joint ventures with IOCs and seeking 50% of the IOC shares. Such a move opens companies to a significant risk of nationalisation. Since the proximity and the possible influence of their Venezuelan counterparts, such an approach over a period can occur and can be a point of concern for oil companies. Also, the maritime borders between Venezuela and Guyana can find both countries in a feud over resources, which can pose a security threat to IOCs and their assets. As well, environmental organisations are lodging complaints and court orders against Guyana to stop the drilling of Oil and Gas of the country’s coast, according to The Guardian (2018). Continuing with The Guardian (2018), no environmental permit was sought before drilling, which is against Guyanese law. Such a position can harm funding for the various oil companies, who are engaging in Oil and gas. According to Razavi (1996) institutions like World Bank, in the past involved in Oil and Gas activities and building of infrastructure, but since that time, imbibing Elliot (2017) they have resorted to funding climate change initiatives with a case by case approach on dealing with Oil and Gas, as per Elliot (2017). One can envisage that this would be a trend with other lending institutions and can see the IOCs in a bind to get the necessary funding. The project can, however, source their income by offering bonds as an alternative to sourcing funding from lending institutions. Brogan (2017) details the various types of bonds available, namely convertible, public, private and hybrid bonds. Offering this suite of bonds to the public allows for an alternative source of funding.

Decision Tree for Guyana Project (Sudenius, 2017 and Pemberton, 2018)

I've recently had the honour of enrolling in the University of Liverpool's Online MSc of Operations and Supply Chain Management Programme. The below is my final Individual assignment of my Oil and Gas Management Module.

References

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