WRINKLES IN THE PETROVERSE

by

Dr. Tulsi Dyal Singh

 

The Petroverse is showing wrinkles

crow’s feet around its eyes

furrows on its forehead

and fine lines on its face

that no amount of cosmetology

can hide from revelation.

 

And what happens in the Petroverse

echoes exponentially in Guyana

as it learns to tame the ropes

that pull from varying directions

at the idiosyncrasies of a market

that is always unpredictable.

 

A Major Shakeup in the Ownership

The landscape of Guyana’s nascent petroleum industry was significantly altered in October 2023 when Chevron Corp announced its intended purchase of Hess Corporation. Earlier in the month, it was altered too, though less directly, when ExxonMobil announced its acquisition of Pioneer Natural Resources. ExxonMobil and Hess together own 75 percent of the triumvirate which owns the mineral rights to Guyana’s Stabroek block. The Chinese company CNOOC owns the other 25 percent. ExxonMobil owns 45 percent and is the operator of the Stabroek Block.

 

These ownership changes point to changes in the priorities that buyers and sellers constantly monitor and respond to in the ongoing business of enhancing shareholder value and returns, in a fast moving and often unpredictable Petroverse. While Guyana is the sovereign owner of the Stabroek block,

the real decision makers are the major international oil corporations that have acquired the mineral rights, have the financial resources and the technical and technological expertise to bring the oil and gas to the surface, ready for monetization. Guyana is mostly a bystander while it receives its two percent royalty and guaranteed 12.5 percent profit share until the corporate investors have recovered their capital outlays.

 

John Hess, the Chief Executive Officer of Hess Corporation was the most vocal cheerleader of Guyana’s oil, as he promoted: the promises of Guyana’s bountiful oil reserves; the advantaged exploitation agreement they had obtained; the pliability of their counterparts in Guyana; the ease of securing environmental passes; contracting with deep water drillers at the bottom of a low-cost cycle; crunchy, porous rocks laden with high quality Brent oil; and one of the lowest breakeven costs in the oil industry. Hess’ stock price reached its highest point ever as the corporation’s profit soared. So, why did he sell, at this time, to Chevron?

 

Significance of the Sale

The sale of Hess to Chevron involves much more than its Guyana’s assets but several industry observers have cited its stake in Guyana’s Stabroek Block as the crown jewel of its treasury. While the high price and the healthy premium over that price are obvious factors to motivate a sale, are there other factors that could have loaded the dice?

 

Financial Demands of Carbon Capture, Removal and Storage

 

Fossil fuels have brought incalculable benefits to mankind in the last two centuries as they powered the machinery and technologies that shape our lives today. But their production and consumption also generated petro-toxins, the most damaging of which has been carbon dioxide in the atmosphere. It is now generally accepted, even by the major oil corporations which initially denied its deleterious effect on the environment, that carbon dioxide is in fact, a major cause of climate change; and that drastically reducing carbon dioxide in the atmosphere is an environmental, moral and existential priority.

That daunting task will require: reductions in the production and consumption of fossil fuels; accelerated development and utilization of alternative renewable sources of energy; capture of carbon dioxide at the sources of generation; active removal from the atmosphere; and long term storage of the captured and removed carbon dioxide underground, undersea, in seaweed farms or conversion into nontoxic or even better, into beneficial agents. This is a very expensive task and technically demanding.

In the Petroverse of the 2030’s and beyond, can stand-alone oil producers compete with the deep pocketed major oil companies who already have a head start and who have tight connections in Washington, DC and have access to taxpayers dollars under the guise of research, experimentation and development through tax abatements, incentives and grants? Chevron and ExxonMobil are much closer to the biggest trough than Hess! I believe that a strategic exit now, especially at the high end of the valuation graph was a formidable reason the sale.

Recoverable Reserves – ?

The exuberant announcements of increases in the recoverable reserves in the Stabroek Block, in the billions of barrels of oil equivalent, have gone silent. The last estimate was 11 billion barrels of oil equivalent, and it was made more than a year and a half ago, even though eight new finds have been revealed without any change in the estimated recoverable reserves. Why? Have the new discoveries not added significantly to the cumulative total? Or, have the new discoveries only replenished the oil that is currently being extracted as rapidly as possible? Or were the initial estimates too high? Or, is there a new corporate policy to limit or delay publication of this information? Surely, both buyer and seller know the answer, but whatever is the answer, was that a factor in this sale?

The Unfriendly Neighbor, Venezuela

Guyana’s neighbor to the west is Venezuela, the country with the largest petroleum reserves in the world. At over 300 billion barrels of recoverable reserves, it dwarfs Guyana’s current 11 billion barrels. Venezuela has a very active, ongoing and ominous boundary dispute with Guyana, claiming about two thirds of the land area of Guyana as its territory. This boundary was settled more than a century ago but has flared up intermittently by Venezuela, sometimes with belligerence. Venezuela has called a national referendum for December 2023, in Venezuela, to justify continuing its spurious claim. The result of the referendum is a foregone conclusion and will likely have the only effect of galvanizing Venezuelan jingoism.

There is an open case related to the boundary, currently before the International Court of Justice. It has been dragging on for several years, largely because of non-cooperation from Venezuela, an indication of the weakness of its case. More concerning, is the present build up of troops along the border. Venezuela with a population of over 28 million people has a vastly superior military establishment compared to Guyana which has a population of less than one million and a basic defense force. A sustained military operation would be grossly asymmetrical.

Venezuela and the major American international oil companies have had a contentious history over the last two decades. From producing a high of 3.7 million barrels of oil per day, its production is now less than one million barrels per day, largely because of its nationalization of American oil assets and the resulting sanctions imposed on Venezuela by the United States government. The sanctions and the resulting diminution in oil revenues have devastated the Venezuelan economy to the extent that more than seven millilon Venezuelans have departed the country. But on October 18, 2023, the US government temporarily suspended the sanctions that applied to oil and gas operations in Venezuela. Both Chevron and ExxonMobil had huge footprints in Venezuela. Chevron still has, through a special deal with Petroleos de Venezuela S.A. (PDVSA), the national oil company of Venezuela. Is this temporary lifting of the sanctions a precursor of a rapprochement between the United States and Venezuela and a harbinger of Chevron increasing its activities there and ExxonMobil’s return to Venezuela? Is that reason enough to have worried Hess? And possibly provide another reason to sell when the sailing’s good.

Will Chevron honor the existing Carbon Credit Contract between Hess and Guyana?

In late 2022, Guyana got verification of 33 million tons of sellable Carbon Credits for its rainforest carbon sink. Hess Corporation contracted to purchase US$750 million worth of it over ten years. In fact, John Hess, CEO of Hess Corp flew to Georgetown for the signing of the agreement amidst unrestrained local delight, and the first purchase, worth US$187 million, was consummated. A partial payment of US$75 million was to be paid to a special account in Guyana with the remainder to be paid over the following 18 months. This initial lot of 12.5 million tons was dubbed “legacy credits” since the were earned retrospectively, for the years 2016 to 2020, and the price was US$15 per ton. It was announced that Hess would continue to purchase 2.5 million tons per year for 2021 to 2025 at US$20 per ton; 2.5 million tons per year for the years 2026 to 2030 at US$25 per ton, making for a total transaction of US$750 million. There has not been much publicity about any further sales of Carbon Credits. But the bigger question is if Chevron will honor the remainder of the Hess Corp’s commitment to buy the remainder of credits described in the purchase agreement. At his weekly press conference on October 26, 2023, Vice President Bharrat Jagdeo announced that he was aware of the question and that he asked his staff to check with Hess and was told that Chevron will honor the contract.

The Future of Fossilenes

Despite the almost universal acceptance that fossil fuels, which I have grouped as “fossilenes”, are a potent cause of deleterious climate changes, they are still the most reliable, portable, accessible, energy dense and cheapest available form of energy available to most of the world. The development of renewable forms of energy such as wind, solar, tidal and others have not matched the urgency that is required for them to replace fossilenes on the scale and speed required to significantly lower carbon dioxide in the atmosphere. Just two years ago, it appeared that there was a massive effort to accelerate a rapid transition to renewable sources of energy but the war in Ukraine quickly stymied that and since then the world has fallen back to its most reliable and easily available sources, namely oil and gas. From a prediction of declining use of oil and gas over the next thirty years, some experts are projecting a gradual increase in the demand and use of fossilenes.

A World of Fossilenes paired with Carbon Capture, Removal and Sequestration

It appears to me that the model that the major oil companies have been targeting involves continuing to produce oil and gas while capturing as much of the carbon dioxide at emitting sources; and launch into a massive campaign to remove huge amounts of carbon dioxide already in the atmosphere. This is where huge amounts of money will be required. I see both the acquisition of Hess by Chevron and the acquisition of Pioneer by ExxonMobil as the preamble of the development of the Petroverse of the future.

Guyana’s place in the Petroverse

Guyana’s contribution to the world’s petroleum output is expected to be around 1.2 million barrels per day by 2027, or just over 1 percent, a significant number especially for a new producer with such a small population. Many financial analysts, in talking about the Hess/Chevron deal have described Guyana’s Stabroek Block as the crown jewel of Hess’ treasures. Even though Hess’ share of Guyana production accounted for less than 10 percent of Hess’ revenue in 2022, the prospects from rapidly increasing production there have encouraged some analysts to give much greater weight to Guyana’s contribution to the sale price of US$53 billion. Ranges vary from a quarter to three quarters!

A Hypothetical Value of the Stabroek Block

At a quarter, the value of Hess’ share of the Stabroek Block is US$13 billion. At three quarters, the value US$40 billion. At a half, the value is around US$27 billion. It is tempting then to impute a current value of the entire Stabroek block. Since Hess owns 30 percent of the Stabroek block, a range of US$50 billion at the low end to US$150 billion at the high end can be imputed. As always, this is about oil and gas. Who can predict the Petroverse?

 

About the Contributor

 

Dr. Tulsi Dyal Singh is a Guyanese-born American. He is a Past President of the board of trustees of the Permian Basin Petroleum Museum, Library, and Hall of Fame. He has degrees in Medicine from the University of the West Indies, a Masters degree in Health Care Administration from Trinity University, Texas; and is certified as a bank director from the Southwestern Graduate School of Banking in Texas. He has lived in Midland, Texas, for more than forty years.