1

Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

Investment Decisions and Project Risks for a New Petroleum Discovery in

Guyana.

Inkpen and Moffett (2011, p. 6) opine that the International Energy Agency forecasts that energy
demand will increase at a rate of roughly 1.5% per year until 2030. One can discern from this statement
that the industry banks on discoveries to meet this growing world demand. Thus, future developments,
see governments and oil companies alike, venture into deeper waters, and undertaking riskier
operations to comply with the world’s supply. In the Oil and Gas supply chain, imbibing Chima (2011),
five main links make up the oil and gas industry to its entirety. Such relationships can be a consideration
to have its independent operations and thus, accounts for a rather complex supply chain. Continuing
with Chima (2011), these links are inclusive of, exploration, production, refining and end consumers. The
exploration stage, part of the upstream stage is inclusive of activities in the way of seismic, geophysical
and environmental events. After the oil and gas companies and the government agree on the seismic
data, organically, the next stage of the process is production. Chima (2011) confirms that this stage of
the process encompassing activities of drilling, production, reservoir, and services engineering. The
Midstream, however, speaks to the storage, trading and movement of crude oil to refiners, imbibing
Inkpen and Moffett (2011, p. 6). Refining, however, belonging to the downstream node, speaks to the
transformation of crude oil into products that the end user can find useful.

Delving further into the exploration node, one can discern that during exploration as part of the
upstream node, a considerable number of funds is necessary to support the activity of searching for oil.
One can agree with Wenrui et al. (2013) and from the above influence that Oil and gas have, that it is a
somewhat valuable resource and thus, countries and oil companies alike shall push the boundaries of
the technology and equipment to retrieve such resources on land and as well, offshore. Therefore, oil
companies venture into ultradeep conditions to extract oil. There are three types of exploration
strategies, imbibing Jahn et al. (1998, p.24) and Inkpen and Moffett (2011, p. 87) and Claude (2015),
namely, seismic and surface topography and area survey methods. It can be discernable that, as the
ways graduate from surface topography through area surveys to seismographic methods, there is some
correlation between the level of technology and the affixation of price to these methods. Surface
method, banks on environmental mapping and seepages through the ground. Therefore, oil deposits
such a pitch and gases, are a usual indication of oil pockets below surface. Area surveys however,
imbibing Claude (2015) concentrates on using gravity and magnetic fields to discern anomalies below
the earth’s surface. Lastly, Seismographic methods, continuing with Claude (2015), uses the sound
waves through blasts unto the earth’s surface to microphones to discern the earth’s rock formation, to
ultimately detect pockets.
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Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

It is the intention of governments, who find or have an inclination of a reservoir of oil, to act in the best
interest of its country, to exploit as much as possible underground. Since most governments, lack the
funds and the expertise to perform such activities, these governments and their state-run organisations
seeking to engage external companies to achieve such. It is a common occurrence that the government
shall find to tender the exploration and production process to a foreign outfit, usually an International
Oil Company, and try to maximise their efforts. This agreement amid the International Oil Company and
the government, agreeing with Boykett et al. (2012), one can consider being of paramount significance.
The Oil and Gas company shall as part of their engagement to drill and produce oil, shall first understand
what the taxation and benefit rules that prevail in that country are. Such taxation and benefit structure
shall speak to the fiscal regime of that country. According to EY (2016), companies who sought to
engage in scopes of work in Guyana, shall understand as part of their contract negotiations, understand
the fiscal regime of Guyana. Through EY (2016), it is discernable that Guyana operates under the
Petroleum, Petroleum (Production), (Exploration and Production), Maritime zones, Income Tax and
Corporation Tax act.

For an Oil company venturing into Guyana, from a glimpse, the fiscal regime appears to be quite simple
and can favour oil and gas companies and the government, who sought for business in Guyana.
Continuing with EY (2016), the fiscal regime sees oil and gas companies, liable to contribute quarterly on
profits made in Guyana and abroad. The income in direct relation to the production is legible to be
deductible, with certain restrictions. Moreover, Royalties are due, to the government, per the license.
There are other tax considerations that the organisation may want to consider which is the withholding
tax, which is at 20% on payments disbursed to non- residents of Guyana. Moreover, there is a Value
added tax at 14%. International Oil companies, however, as part of the Production Sharing Regime, can
enjoy benefits in the way of a 20% petroleum capital expenditure allowance, offsetting of corporation
taxes towards the following year and double tax relief granted that there is a treaty with the country, in
which their parent operations exist. In comparison with its neighbouring country, Trinidad and Tobago,
who operates under the concession and production sharing regime, there are far fewer levies and taxes
that are payable, one can discern from EY (2016). Allowances, however, the government of Guyana
offers less. Thus, imbibing Inkpen and Moffett (2011), it is prudent that Oil companies weigh their
expenses of taxes and operating expenses against the expectation on the Oil price through different
formulas. The identification of the reserves through seismic activities and understanding the
government’s take, through their fiscal regime is prudent to feed into the investment decision, but one
can know that this is not enough to make a sound judgement.

According to Inkpen and Moffett (2011, p. 96), other factors would affect the investment decision. Such
elements are inclusive of the recovery factor, which speaks to the percentage of oil in recovery.
Traditionally, imbibing Macmillan (2000), organisations use the decision tree as a basis for the decision
making, but now there is a suite of decision-making tools, that the Guyana project can use, namely
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Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

Decision Tree TM or DNVGL Easy Task TM. According to Hunn (2017), the discoveries, see Guyana with
up to 3.2 billion barrels of oil and gas, of which 2.25 billion barrels are recoverable. Thus the percentage
of oil recovery is at 70%, using various techniques for recovery. The IOC and the government may find it
prudent to proceed with production. But one can agree with Suslick et al. (2009) there are other
pertinent issues, such as interdependencies of decisions and efforts that drive the production strategy.
But Guyana, like many other countries, are susceptible to different types of risk. For one, the Oil and Gas
industry sits are around USD 70/ barrel and could plummet at any point, and this is due to its
interdependency on other markets, like China, to drive the demand. Should there be another price
crunch, the cost of production would be higher than the sale of oil. The current status of Guyana as an
emerging market, this might be a critical factor and can cripple the country and the IOC that operates
within. Clew (2016) speaks to other risks that projects are subject, namely, political insurance and
environmental risks. Guyana sits strategically on the Venezuelan oil belt, which means that they enjoy
one of the world’s largest reservoirs. Unfortunately, Guyana also shares a boundary with Venezuela and
Suriname. Venezuela, according to EY (2016) fiscal regime, sees Venezuela opting for joint ventures with
IOCs and seeking 50% of the IOC shares. Such a move opens companies to a significant risk of
nationalisation. Since the proximity and the possible influence of their Venezuelan counterparts, such an
approach over a period can occur and can be a point of concern for oil companies. Also, the maritime
borders between Venezuela and Guyana can find both countries in a feud over resources, which can
pose a security threat to IOCs and their assets. As well, environmental organisations are lodging
complaints and court orders against Guyana to stop the drilling of Oil and Gas of the country’s coast,
according to The Guardian (2018). Continuing with The Guardian (2018), no environmental permit was
sought before drilling, which is against Guyanese law. Such a position can harm funding for the various
oil companies, who are engaging in Oil and gas. According to Razavi (1996) institutions like World Bank,
in the past involved in Oil and Gas activities and building of infrastructure, but since that time, imbibing
Elliot (2017) they have resorted to funding climate change initiatives with a case by case approach on
dealing with Oil and Gas, as per Elliot (2017). One can envisage that this would be a trend with other
lending institutions and can see the IOCs in a bind to get the necessary funding. The project can,
however, source their income by offering bonds as an alternative to sourcing funding from lending
institutions. Brogan (2017) details the various types of bonds available, namely convertible, public,
private and hybrid bonds. Offering this suite of bonds to the public allows for an alternative source of
funding.
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Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

Decision Tree for Guyana Project (Sudenius, 2017 and Pemberton, 2018)
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Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

References
Brogan, A. (2014) Funding challenges in the Oil and Gas Sector- Innovative financing solutions for oil and
gas companies [Online]. United Kingdom: EY. Available
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sector/$FILE/EY-Funding-challenges-in-the-oil-and-gas-sector.pdf. (Accessed 7 July 2018).

Boykett, T. et al. (2012) Oil Contracts- How to read and understand them [Online]. 1.1 edn. Austria:
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%20Understand%20them%202011.pdf. (Accessed 17 July 2018).

Chima, C. (2007) ‘Supply-Chain Management Issues- In the Oil and Gas Industry.’ Journal of Business and
Economics Research [Online]. 5(6) pp. 27-36. Available
https://elearning.uol.ohecampus.com/bbcswebdav/institution/UKL1/201860M31/MS_KMGT/KMGT_71
3/readings/UKL1_KMGT_713_Week01_Chima.pdf. (Accessed 16 July 2018).

Claude, B.H. (2015) Petroleum production [Online]. Available from:

https://www.britannica.com/topic/petroleumproduction [Accessed 17 July 2018].

Clews, R.J. (2016) Project Finance for the International. 1st edn. New York: Elselvier.

Elliot, L. (2017) World Bank to End Financial Support for Oil and Gas Extraction [Online]. United Kingdom:
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multinationals-pledge-come-clean-climate-change-risks-mark-carney. (Accessed 7 July 2018).

EY (2017) Global oil and gas tax guide [Online]. UK: EY.
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xmlqs?preview&XmlUrl=/ec1mages/taxguides/GOG-2017/GOG-GY.xml. (Accessed 7 Jul 2018).

Hunn, D. (2017) Exxon finds more oil off the Coast of Guyana, Boosts recoverable to 2.25 Billion Barrels
[Online]. Houston: Chron. Available https://www.chron.com/business/energy/article/Exxon-finds-more-
oil-off-the-coast-of-Guyana-11369778.php. (Accessed 18 July 2018).

Inkpen, A.C. and Moffett, M.H. (2011) The Global Oil and Gas Industry: Management, Strategy and
Finance [Online]. Tulsa, OK: Pennwell [Online], pp. 82-126. Available
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(Accessed 2 June 2018).

Jahn, F. et al. (1998) Hydrocarbon Exploration and Production, Volume 55. 2nd edn. Amsterdam:
Elselvier [Online], pp. 19-26. Available
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Kyle Pemberton
H00059294
KMGT-713 Oil and Gas Management

https://books.google.co.uk/books?hl=en&lr=&id=ocUT8hEDu1AC&oi=fnd&pg=PP1&dq=hydrocarbon+ex
ploration+techniques+and+methods&ots=XQbYzYM3kM&sig=syUDZV8OWebZeV754cX3C2jna7Y#v=one
page&q=hydrocarbon%20exploration%20techniques%20and%20methods&f=false. (Accessed 9 June
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Macmillan, F. (2000) Risk, Uncertainty and Investment Decision- Making in the Upstream Oil and Gas
Industry [Online]. Unpublished. Available http://www.oilit.com/papers/macmillan.pdf. (Accessed 30
June 2018).

Pemberton (2018) Key Concept: Development of a Decision Tree for Point Thomson. Unpublished.

Razavi, H. (1996) Financing Energy Projects in Emerging Economics. Tulsa, OK: Penn Well [Online]. pp. 2-
5. Available https://www.imf.org/external/pubs/ft/fandd/1996/06/pdf/razavi.pdf. (Accessed 7 July
2018).

Sudenius, K. (2017) Simple Decision Tree Analysis [Online]. Unpublished.

Suslick, S. et al. (2009) ‘Uncertainty and risk analysis in petroleum exploration and
production.’, Terrace [Online], 6 (1), pp. 30-41. Available http://geo25.ige.unicamp.br/terrae/V6/PDF-
N6/T-a3i.pdf. (Accessed 30 June 2018).

The Guardian (2018) Guyanese campaigners mount legal challenge against three oil giants [Online]. New
York: The Guardian. Available https://www.theguardian.com/environment/2018/mar/22/guyanese-
campaigners-mount-legal-challenge-against-three-oil-giants. (Accessed 18 July 2018).

Wenrui, HU et al. (2013) ‘Trend and Progress in Global Oil and Gas Exporation.’ Petroleum Exploration
and Development. 40(4), pp. 439-443