Exxon Mobil’s Massive Bet on Guyana

Exxon Mobil’s Global Dominance

Exxon Mobil is among the largest publicly traded energy producers and chemical manufacturers in the world. Through the extraction and production of oil and gas reserves, Exxon Mobil has been committed to meeting the world’s growing needs for energy, while also maintaining economic prosperity for its employees and company shareholders. After evolving from a relatively small regional kerosene maker over a century ago, Exxon Mobil now has an established presence in the majority of the world’s countries. In addition to maintaining operational facilities and employing thousands of workers from all around the world, Exxon Mobil also explores for oil and natural gas reserves on six continents. Amid increasing uncertainty related to the global fossil fuel industry, Exxon Mobil has been moving forward with a massive bet on the South American country of Guyana.

Red Flags for Oil Producers

As global oil prices have plunged in recent years, multinational oil companies like Exxon Mobil have started to become plagued by financial challenges. The rebalancing of the fossil fuel industry and the global economy in general have increased economic uncertainty for many of the world’s most well-known energy giants. Before this period of uncertainty, the growth of developing countries like China, Brazil, and India created a subsequent wave of growth for fossil fuel company profits. The increasing demand for oil and the creation of new technologies to obtain hard-to-reach fossil fuel reserves stimulated a tremendous period of growth for the global energy industry. The American shale oil revolution, coupled with China’s increasing demand for fossil fuels created an era of euphoria for fossil fuel industry executives. However, this period of optimism was proven to be short-lived following a series of reports questioning the role that oil and gas would play in future economic growth scenarios.

Energy analysts and economists stress that the new economics of the oil industry may hinder the future expansion of fossil fuel businesses. Oil market uncertainty caused oil prices to fall by over 65 percent between 2014 and 2016 (Arezki, 2016). Following this price collapse, fossil fuel investor confidence reached a new low. The downfall of Exxon Mobil is indicative of the struggles that have plagued the fossil fuel industry as a whole. Between 2014 and 2020, Exxon Mobil’s price per share of stock collapsed by about 42 percent, while the Dow Jones Industrial Average rose by over 90 percent. While other fossil fuel giants like Royal Dutch Shell and Chevron have also been impacted by falling oil and gas prices, Exxon Mobil’s collapse has been more shocking because of the risky investments that the company has been making.

Exxon’s Counter-Cyclical Strategy

The oil and gas price slump has prompted many multinational fossil fuel companies to tighten their budgets and make spending cuts. The possibility of electric vehicle sales reducing global oil demand, as well as bipartisan support to ban fossil fuel-powered vehicles in many of the world’s biggest cities, have made some fossil fuel producers start to rethink their plans for future growth. However, in spite of these headwinds for the oil and gas industry, Exxon Mobil has been going on a spending spree as others have been making cuts. This tactic has been spearheaded by new Chief Executive Officer Darren Woods, who was named the leader of Exxon Mobil in January 2017. Through Woods’ counter-cyclical strategy, Exxon Mobil has continued to push forward with a vast plan for the South American nation of Guyana.

As part of Exxon Mobil’s $35 billion-a-year endeavor to make investments while other oil and gas companies are making cuts, the Irving, Texas-based oil giant has been pumping money and resources into oil and gas exploration in Guyana. Beginning in 2008, the company initiated a plan to explore for oil and gas through the evaluation of substantial 3-D seismic data. Since May 2015, Exxon Mobil has made 16 significant offshore oil and gas discoveries in Guyana (Exxon Mobil, 2020). Moreover, in December 2019, the company began production 190 kilometers offshore on what has become known as the Liza Project. In water depths of 1,500-1,900 meters, the Liza Project includes a sophisticated series of floating production methods using a storage and offloading vessel that has been engineered to extract 120,000 barrels of oil per day.

Guyana’s Oil

For decades, Guyana had been surrounded by the oil-producing nations of Brazil and Venezuela. Following Exxon Mobil’s announcement that commercial quantities of oil were discovered off the Guyanese coastline, the country’s leaders became hopeful that Guyana would become Latin America’s next major oil exporter. For this impoverished and jungle-covered former British colony, the oil discovery represents a path forward towards prosperity. According to projections from Exxon Mobil, Guyana may soon be able to pump roughly a barrel of oil per person each day, which represents more per capita oil production than Saudi Arabia (Vyas, 2018). The newly revised eight billion barrels of oil over the 6.6 million-acre offshore reserve is among the largest crude oil discovery in recent years (Baddour, 2020). While Exxon Mobil has continued to struggle to regain profitability in recent years, CEO Darren Woods remains hopeful that Guyana becoming a top global energy frontier will help to revitalize the company’s finances.

Economic Stability

Exxon Mobil projections suggest that by 2025, Guyana may be able to produce 750,000 barrels of oil per day, which is more than the daily production for all of India (Baddour, 2020). Furthermore, Credit Suisse says that these projections are likely to be conservative estimates for Guyana’s oil production capabilities. As a result of the recent oil discoveries, the International Monetary Fund has estimated 85.6 percent GDP growth in 2020 for the country of just 785,000 people (Baddour, 2020). This explosive GDP growth has raised concerns about economic stability.

While the development of deep-water oil resources may promise to help raise the standard of living, history suggests that natural resource wealth in underdeveloped nations may lead to increasing geopolitical tensions. In 2018, Guyana’s political leaders established a sovereign wealth fund that would receive as much as $5 billion annually in oil revenue. However, the government has not unveiled plans related to how the funds would be allocated. As the country is still viewed as an evolving democracy on somewhat shaky political ground, oil wealth may prove to be a complicating factor for Guyana. For every Qatar or Norway that has successfully used fossil fuel wealth to build stable economies, there is a Venezuela or an Angola that has fallen victim to the natural resource curse.

A Troubled History

The largely undeveloped Guyana is comprised of a vast wilderness filled with remote villages and only three paved highways. The country is plagued by an unreliable power grid, with much of the countryside having no access to any electricity. With the potential to generate upwards of $20 billion annually in oil revenue by the end of the decade, Guyana has the potential to be transformed from one of the poorest South American countries to one of the richest. While the potential for economic prosperity seems promising, there are numerous obstacles, especially in a country with weak political institutions. With a history plagued by ethnic tribal politics, money-laundering, drug trafficking, and diamond and gold smuggling, Guyana has many hurdles to surpass. Can oil revenue help Guyana move past its troubled history?

Guyana’s Transformation

In coordination with its New York-based partner Hess Corporation, Exxon Mobil hopes to transform Guyana into one of the world’s biggest oil producers. Exxon Mobil owns a 45 percent stake in the Guyana operations, with Hess controlling 30 percent and China National Offshore Oil Corporation controlling the remaining 25 percent (Blum, 2020). Besides its flagship Permian Basin region of West Texas, Exxon Mobil sees Guyana as one of its biggest growth regions in the coming decades. As the company continues to pump billions of dollars into Guyana, other companies have also started to invest in neighboring Suriname. The French energy conglomerate Total and Houston-based Apache Corporation have formed a partnership to explore for oil and gas next to Exxon Mobil’s massive discoveries. Meanwhile, Exxon Mobil still has four dedicated drillships exploring for additional oil reserves in other regions off the coast of Guyana. A fifth exploration vessel is expected to come online by the end of 2020.

A Questionable Deal

If Exxon Mobil is able to produce 750,000 barrels of oil each day in Guyana by 2025, that would represent about 20 percent of the company’s current oil and gas production (Blum, 2020). While Exxon Mobil is poised to vastly expand its oil production with the help of Guyana reserves, some energy analysts have questioned the deal that the oil giant has made with the tiny South American country. Some economists have said that Exxon Mobil crafted a deal that will deprive Guyana of nearly $55 billion over the complete timeline of the oil and gas lease (Crowley, 2020). Fiscal analysis suggests that Guyana’s Natural Resources Minister, Raphael Trotman, made an exceptionally poor deal with the oil giant when compared to past deals made with other countries. However, when Exxon Mobil executives were questioned about the deal made with Guyana, the executives labeled the media and analyst conclusions as “misleading,” given the risk involved in conducting business in one of the least developed countries in the world.

The International Monetary Fund has started to advise Guyana on the development of new oil and gas contracts with Exxon Mobil. Under the current contract, Exxon Mobil is allowed to use as much as 75 percent of all annual oil revenue to cover the cost of exploration and production (Vyas, 2018). Guyana is set to receive a two percent royalty based on the oil proceeds, followed by 50 percent of the continuing proceeds (Vyas, 2018). However, all oil company taxes are set to be paid from Guyana’s share of the oil profits. As a result of this deal, vocal critics from the international community have called for the oil deal to be halted and rewritten. If the deal falls through, it would be another crushing blow to an already embattled Exxon Mobil.

Mounting Pressure

While Guyana is not a member of the Organization of the Petroleum Exporting Countries (OPEC), the country’s newly discovered oil reserves would make it OPEC’s 12th-biggest member (Crowley, 2019). Exxon Mobil hopes to capitalize on this massive oil discovery to turn around the company’s financials. As the oil giant continues to increase its investment in Guyana, the risk appears to be growing for the company’s shareholders.

After Guyana’s contract with Exxon Mobil was posted publicly on a government website in December 2018, vigorous public debate ensued. Since then, the red flags have been mounting for Exxon Mobil. As the International Monetary Fund has stepped in to advise Guyana, the pressure to revise the oil lease has been mounting. Guyana’s president, David A. Granger, has vowed to end closed-door bidding for oil and gas drilling rights. Moreover, Granger has said that he will open new auctions for future fossil fuel development. If Exxon Mobil loses control of its originally established oil lease with Guyana, the already vulnerable oil giant could continue to falter.

Sources

Ali, A., & Schena, P. (2020). “Look Before You Leap: Weighing the Consequences of a sovereign Wealth Fund Aimed at Harnessing Oil Resources in Guyana.” Harvard International Review.

Arezki, R. (2016). “Rethinking the oil market in the aftermath of the 2014-16 price slump.” International Growth Centre.

Baddour, D. (2020). “Massive Guyana Oil Find Continues to Grow with Fresh Exxon Discovery.” Forbes.

Blum, J. (2020). “Exxon makes new Guyana discovery, ups recoverable estimates to 8 billion barrels.” Houston Chronicle.

Crowley, K. (2019). “The World’s Newest Petrostate Isn’t Ready for a Tsunami of Cash: Guyana is investigating oil leases at a rocky political moment.” Bloomberg.

Crowley, K. (2020). “Exxon Deal Denies Guyana $55 Billion, Global Witness Says.” Bloomberg.

Cummings, A. (2018). “How Guyana’s Oil Discovery Rekindled a Border Controversy.” Journal of Latin American Geography: Volume 17, Number 3, pp. 183-211.

Exxon Mobil. (2020). “Guyana Newsroom.” Exxon Mobil Corporation.

Krauss, C. (2018). “The $20 Billion Question for Guyana.” The New York Times.

Vyas, K. (2018). “Eureka! Giant Oil Find Set to Bring Guyana Startling Riches – Maybe.” Wall Street Journal.