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The Big Picture:

In 2015 ExxonMobil struck oil in 2 out of 3 exploratory wells in Liza


prospect, offshore Guyana, Stabroek block. Appraisal work so far has placed
Liza asset under an estimated of 450 MMBOE to 1.200 MMBOE range
recoverable reserves. Although much smaller, later on during 2017 additional
volume was found in the Payara prospect, propelling total reserves expectation
towards 1.400 MMBOE. Not final decision for full blast independent development
has been reached for this second prospect.
So far, Guyana government claim a total of 13 new additions in total,
including the latest Tilapia, Haimara, and Yellowtail prospects further south-
southeast within the same Stabroek block.
Promises forecasting production increase from Guyana offshore assets
have been made since 2015, with the discovery of “Lisa and Payara” fields. The
plan according to Guyanese authorities (not Exxon’s) comprises for Phase 1 Liza
prospects, a 2020 yearend production of 120.000 B/D, with breakeven margin of
$35 per barrel. For phase II, a peak production of 180.000 to 200.000 B/D has
been sanctioned for 2022, with a $25 per barrel breakeven margin. Guyana still
needs to draft a regulatory framework for hydrocarbon extraction, fiscal regimes,
state participation, and environmental protection statutes, although initial
information points towards a 50/50 operator to government scheme.

As per available information pipelines will be laid during Q2’2019. For


phase I, a vessel will be converted into a FPSO (FPSO: floating, production,
storage and offloading facility) during Q3’2019, to support incoming production
from a 17 production well drill center. For phase II, a 220 MBD FPSO it’s being
considered, while a third one is still under consideration for the Payara field
(unconfirmed).
Facts:
Realistically speaking the whole plan makes monetization of Guyana’s
proven oil and gas reserves most likely beyond the 5 to 10 year window;
definitively not for the short term. The offshore Staboreak project has lots of
intangibles which could easily turn the NPV profile into read, plus the economics
have lots of assumptions with not firm technical basis to support it.
Without accounting for the operational and inherent asset deliverability
challenges, “Stabroek” is an important green field area costly to develop. Liza
and Payara reservoirs are located to a depth of over 17.500ft (>5,300+mts) deep,
in a 6,570+ft (2.000+mts) water column. Discovery wells for both prospects
targeted similar reservoirs, the most prolific belonging to the middle to upper
Cretaceous. Some of these formations comprise poorly consolidated sandstones,
dolomitic sandstones, and naturally fractured limestone/dolomitic formations. Is
has also been confirmed that discovery wells have significant free-gas volumes,
possibly over 2 trillion cubic feet, as well as intrinsic early sand production
problems; very similar to those experienced in offshore CIGMA project,
Venezuela. These observations pose beyond doubt, a significant threat to
offshore Guyana future development.
There are sensitive environmental challenges, operational complexities,
and concerning potential reservoir complexities. Betting on a successful outlook
in the current stage, could on the contrary lead to a financial bloodshed.
Surprisingly, in the official statement of the first successful well, “ExxonMobil
gave no official estimate of well’s initial production potential”. Only Raphael
Trotman, Guyana’s minister of governance did.
To drill and complete an offshore >17.500ft deep well requires at least 120
days and around $65 to @85 million (although it may very well surpass the $100
million mark), without accounting for the implicit impact of the required initial
learning curve. For phase I, a 17 well drill center with concurrent operations, and
considering only a 3% decline rate per year, will be in theory able to boost
production to the 120.000 B/D target, assuming 100% efficiency, zero operational
problems/delay, and a 7.000 B/D per well rate, which in essence seems
unsustainable and unrealistic in practice. For phase II, some 30 wells will be
needed, including 15 injectors.
Looking at the numbers, in situ reserves will be depleted at 4%
acceleration during phase I, and 6% during phase II, considering the upper
bound for the recoverable reserves of 1.200 MMBOE (Full scope: Liza asset),
compared against 10% to 16% for the lower end reserves scenario (450
MMBOE). Both Liza and Payara are light to retrograde gas condensate bearing
assets. Assuming as accurate that initial pressure conditions places the main
pool at/or below saturation, further complications should be expected, all leading
to added costs (gas flaring, fluid disposal, etc) and accelerated productivity
decay.
As per confirmed information, both Liza and Payara reservoirs are
preferentially volumetric, meaning they have little or not additional-significant
pressure support besides fluid & rock expansion. Accelerating these assets at
such rate of over 4%; and even more 16%, will ensure a very short live
expectancy under primary production, reducing reserves expectation (in situ
trapping), and demanding additional pressure support from project inception
(assisted/EOR/IOR, recycling, etc), further increasing unit costs.
At required flowrates of 7.000 B/D/Well during initial production, superficial
and interstitial supersonic “erosional” velocities, particularly for the upper gas
phase, will force operations towards high OPEX intensive, to be able to reduce
(not avoid) critical exposure. Additionally, in spite of well architecture and type of
completion; i.e.: vertical, highly inclined or multilateral, supersonic velocities and
“erosional” forces will reduce well life expectancy even with costly and specific
metal alloy grades. Irrespective of borehole completion scheme, it will also
consistently and gradually destabilize near wellbore region, leading to borehole
collapsing adversely impacting flow properties, well deliverability, and ultimately
reducing both, overall production and margins.
The Ugly Truth:
ExxonMobil own economic analysis considers a capital investment of
$US4.5 (could expand to $6 blns), oil price of $US50 per barrel, gas price of
$US2.50 per MMBTU for a twenty five year window, for a total revenue to
Guyana expected at $US8.9 billion, with paid back time for Guyana’s share of the
development cost within six years of commencement of production of the Liza
field. Several weaknesses can be unveiled.
Basis for this estimate is an unrealistic-eight-years-sustained a 100.000-
120.000 B/D primary production plateau in a volumetric and saturated reservoir.
ExxonMobil will have to be able to sustain the initial plateau for 8 years, which
once again is improbable under the given development scenario for this type
asset. Most likely, target production acceleration will demand additional
producers than initially thought, peak production will be shorter than expected,
OPEX will be much higher than initially considered, and operational drawbacks
will increase sharply with time.

Surprisingly operators envisage pressure support initiation once phase II


is up and running, after 2 years of project inception by 2022. Dynamic model
suggests, pressure will decline sharply from day one, loosing about (-25%) of its
initial level of 8.500 psi within the first 8 years of production, to fall even further to
3500 psi (-60%) within the next 4 years, raising questions about the real integrity
of both; phase I and II.
The truth is that ExxonMobil has been facing serious operational and
financial problems. During 2018 did not even qualify within the top 10 global
corporations in terms of gross/net profit, even less in terms of reserves. Their
shale oil assets are consistently plummeting, demanding heavy OPEX. Marginal
costs are considerable and flow rate per well continue to show a drastic initial
decayof over 45% to 65%.
Stock value (XOX) has been falling heavily since early 2015, from more
than $110 per share to less than $60 per share, translating into a sizable lost of
over 45% in real value. Despite the massive “PR” about the offshore Guyana
discoveries, no market value has been capitalized since the first report in 2015.
On the contrary, ExxonMobil has continued loosing capital and value in the
markets consistently.
Regardless of the claim of 13 new prospects in total, including the latest
Tilapia, Haimara, and Yellowtail, in reality these are small offshore pockets of
hydrocarbon, which require large capital investments and high risks to develop.
Because these pockets are small and mostly isolated among them, capitalizing
on neighboring infrastructure is often prohibitive for large distances as it seems to
be the case, considering that Payara field is located some 10 miles from Liza
field, while the remaining prospects remain much further apart (>25 @ >100
miles S-SE).
For the specific case of PDVSA offshore CIGMA and Deltana projects, this
represents a clear opportunity to capitalize on its own strengths. These assets
have multiple advantages including larger in situ reserves, shallower subsurface
targets, among many others which definitively could translate into opportunities
to capture multiple investments, under a more convenient business approach
and a more reliable political environment than the preexisting ones.
Millan Arcia Einstein: Senior Upstream Adviser and SME. Has published over 11 highly
specialized technical papers internationally, and more than 200 energy related articles in a
number of journals, blogs and newspapers. Has been quoted in Aporrea.org,
NoticiasVenezuela.org, Plattsblog, Platts, Las Armas de Coronel, The Slush Pit (Oklahoma Oil &
Gas News), Energy Economist, and Los Angeles Times, among others.
E-mail: emillan7@hotmail.com
Twitter: @EinsteinMillan

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