Guyana has several options to achieve downstream investments without committing vast sums of money into an oil refinery.
This is according to Pedro Haas, the oil expert consultant hired by the government to determine the economic feasibility of setting up an oil refinery locally.
Director of Advisory Services at Hartree Partners, Pedro Haas making a presentation of the findings of a feasibility study done on building an oil refinery in Guyana
Haas, the Director of Advisory Services at Hartree Partners, a United States company, Wednesday evening presented the findings of his feasibility study to the Minister of Natural Resources Raphael Trotman and the general public in the auditorium of the Marian Academy School, Carifesta Avenue.
Minister Trotman said the presentation was to facilitate transparency in the emerging oil and gas sector.
Refinery not feasible
Constructing an oil refinery could cost the government US$5B Haas explained. The consultant, who was secured through the New Petroleum Producers Group by Chatham House, said that the final results of the study show that Guyana would be “destroying over half the value of your investment the day you commission your refinery”.
Haas explained that the refinery would generate a net present value of negative $3B. “It’s a very significant value destruction impact,” he said. The economic simulation was done based on a refinery producing 100,000 barrels per day (bpd).
Construction cost was estimated at around US$25,000 bpd with a construction period of upwards of 60 months. “We also had to assess the extra cost of building such a massive project in a place where these projects have not been built,” Haas said.
Worst and best case scenarios were also analysed. In a more optimistic simulation, the refinery would still incur a US$2.5B loss. “It improves the economics but not enough to reverse the negative economics of the investment,” Haas pointed out.
Guyana’s investment in a refinery would be competing against much older and more efficient refineries.
“Here you are investing in a new refinery and the investment has to be made at full replacement cost whereas the refineries that are being built or that are being operated in the Atlantic basin are refineries that have been fully depreciated, they’ve been around for a long time, and their operated at very low cost,” Haas noted.
Haas cautioned that building and operating a refinery is a “risky proposition”. He pointed out that even if the government were to invest in a small modular refinery, it would still be an expensive undertaking.
There are options available for the government to create downstream investments for Guyana’s oil if it decides not to invest in a refinery.
Haas said the government can develop “defensive trading”, that is, becoming very skilled at international trade of crude and profits. “Selling the crude oil at the appropriate price and buying at an economic price and ensuring that you get market prices for both your sales and your purchase,” Haas explained.
The government can also convert crude oil into products or even establish a “tolling arrangement” which is an agreement to have a
Minister of Natural Resources, Raphael Trotman addressing a section of the gathering at the presentation of the findings of a feasibility study done on building an oil refinery in Guyana
“rationally and commercially run” refinery pay a fee per barrel processed in return for products, Haas explained.
Other options include hedging financial exposure on the international market. “What I have is a financial exposure to the price of oil. I am long on the price of oil and I am short the price of products so that means that I am going to be short on the refining margin,” explained Haas.
However, Haas signalled that hedging financial exposure cannot be done for 20 years but in the initial three to four years.
A different approach presented by Haas is to have the Sovereign Wealth Fund invest in the stock of reputable oil refining companies. Haas explained that a country like Guyana could compensate for exposure to the refining margin in the event of price fluctuations in crude oil and products. “If you invested in those companies’ stocks you would be essentially protected,” Haas said.
These alternatives to a refinery could also serve to protect the country against the vagaries of the oil market.