The war in Ukraine, the subsequent U.S., and UK ban on Russian oil imports, Europe’s energy crisis, and supply constraints all highlight the need to expand global crude oil production. Nearly a decade of under-investment due to the late-August 2014 oil price collapse saw significant supply constraints emerge which are being exacerbated by surging energy demand as the COVID-19 pandemic winds down. This sparked a massive oil price rally which was further buoyed by Moscow’s invasion of Ukraine, Europe’s second-largest country, and sent the Brent benchmark spiral to over $130 a barrel before pulling back sharply to under $100 per barrel. Heightened supply constraints, draining oil inventories, and U.S. and UK bans on Russian oil imports all point to an urgent need to boost global crude oil supplies.
This is particularly so with OPEC either being unable or unwilling to materially expand production which has led energy industry analysts to speculate that most participants in the OPEC Plus deal possess little to no spare capacity. It is the tiny impoverished South American nation of Guyana that is ideally positioned to benefit from spiraling crude oil prices and the significant risk premium created by recent geopolitical events. The former British colony of Guyana is in the midst of a massive offshore oil boom which began with ExxonMobil’s first petroleum discovery, in 2015 at the Liza field in the offshore Stabroek Block. Since then, the energy supermajor along with its partners Hess and CNOOC have made well over 20 quality oil discoveries in the offshore block. Exxon estimates that there are at least 10 billion barrels of recoverable oil in the Stabroek Block, endowing Guyana with higher oil reserves than many of its South American neighbors including Colombia and Ecuador.
Exxon’s Liza phase one project reached planned capacity during December 2020 with the Liza Destiny floating production, storage, and offloading (FPSO) pumping 120,000 barrels per day. Liza Phase One has impressive economics, breaking even at a low $35 per barrel, which is significantly lower than most other jurisdictions in South America such as Brazil where pre-salt projects have an estimated average breakeven of around $40 per barrel. Start-up production at the Liza Phase Two development was announced, by Exxon, in February 2022. This is a particularly important development for Guyana, Exxon as well as its partners in the Stabroek Block and for global oil supply. The Liza Unity FPSO, which arrived in Guyana in October 2021, is expected to be pumping 220,000 barrels per day by mid-2022, giving the Liza oilfield total output of around 340,000 barrels daily. Liza Phase Two, according to Hess, has a projected breakeven price of $25 per barrel, making it one of the lowest-cost oil projects under development in Latin America. Exxon is also in the process of developing the Payara project in the Stabroek Block. The development was approved during 2020 and will add a further 220,000 barrels per day with the Prosperity FPSO expected to start operations during 2024 with a forecast $32 per barrel breakeven price.
Offshore Guyana’s attractive economics, where the average breakeven price is pegged at less than $40 and is expected to fall significantly as drilling techniques improve and critical infrastructure is built out, will attract significant investment. The low carbon intensity of the crude oil discovered in offshore Guyana, evident from Exxon’s Liza grade with API gravity of 32 degrees and 0.58% sulfur content, magnifies the attractiveness of investing in the impoverished South American nation. This is because of growing momentum to decarbonize the world economy as a key element of the fight against global warming where signatories to the Paris Accord committed to keeping temperature increases well below 2 degrees Celsius.
Guyana’s oil industry is on track to experience considerable production growth with the former British colony expected to be pumping 1 million to 1.2 million barrels per day by 2030. While that final number indicates that Guyana will eventually make a substantial contribution to the global crude oil supply, the production to be added during 2022 of around 220,000 barrels per day will do little to fill the shortfall left by the ban on Russian oil imports. Russia pumped an average of 10.5 million barrels of crude oil and condensate per day during 2021. The Kremlin expects that to increase by up to 5% which, if achieved, will see the world’s third-largest petroleum producer pump 11.05 million barrels per day during 2022. Moscow plays an outsized role when it comes to global crude oil supplies which is further enhanced by being a key participant in the OPEC Plus agreement.
Russia is the world’s second-largest crude oil exporter after Saudi Arabia, supplying around 5 million barrels daily of crude oil and condensate, with Western Europe the primary destination for those energy exports. While OECD Europe receives 4.7 million barrels per day of crude oil from Russia only 670,000 barrels are sent to the U.S., which for 2021 accounted for a mere 8% of total U.S. petroleum imports. That ranks Russia as the third-largest supplier of crude oil to the U.S. after Mexico which is in second place having provided 710,000 barrels per day during 2021 and Canada placed first supplying 4.34 million barrels per day. Those numbers underscore why Washington, notably in comparison to Western Europe, was able to ban Russian energy imports.
It is difficult to see how Guyana’s rapidly growing crude oil output will replace Russian crude oil exports or address the current tight supply situation over the short to medium term. The former British colony is expected to only add around 220,000 barrels per day during 2022, which represents only 4% of Russia’s oil and condensate exports. Even after accounting for Exxon’s Payara project, which has a planned capacity of 220,000 barrels per day, Guyana will only increase its petroleum output by 440,000 barrels by the end of 2024. Clearly, Washington will need to look elsewhere, primarily OPEC, if global crude oil supplies are to increase.
By Matthew Smith for Oilprice.com