Listen: Guyana oil: The new crude on the block

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Jeff Mower:
Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where today we'll be discussing Guyana's crude production growth outlook and what that means for energy security and for refiners, particularly in the Atlantic Basin.

I'm Jeff Mower, director of Americas oil news, and I'm joined by Ha Nguyen, Commodity Insights director of crude oil and markets, Felipe Perez, head of Latin America fuels and refining, and Pat Harrington, Latin America crude markets editor. Guyana has been in the limelight lately as a major contributor of non-OPEC production growth, along with the United States, Canada, Brazil, and Argentina. Guyana is providing a cushion against supply cuts from OPEC and its allies and against supply disruptions that are currently taking roughly 2 million barrels a day off the market. Guyana has also been in the limelight because of a dispute with Venezuela where the Nicolás Maduro administration is looking to annex Guyana's oil-rich Essequibo region. However, S&P Global estimates that 90% of Guyana's offshore reserves lie outside those contested waters and expect Guyana production growth to continue. With the startup of the Payara field in mid-November, the ExxonMobil-led consortium offshore Guyana now has three producing oil developments which are expected to reach a combined 620,000 barrels a day when Payara reaches maximum capacity. Ha, where do you see Guyana production, say, in the next year or two?

Ha Nguyen:
Yeah. Payara came on earlier than expected, as you said, mid-November, and so right now we see Guyana about 400,000 barrels per day. Coming into 2024, 25, we do see a new upstream project, Yellowtail, that's supposed to come on August 2025, towards the end of 2025. In total aggregate, if you look at four of the key upstream projects mostly ramping up or full capacity, we see Guyana reaching 800,000 barrels per day by the end of 2025. Now, one other thing to keep in mind is who, right? Who's behind drilling all of these wells? And as we look at the key operators, it's Exxon and Chevron. If you look at what they've drilled in the past offshore, they've had a lot of experience apart from the US Gulf of Mexico, but also some of the international fields within other deepwater areas. They have a lot of experience not so much in the deepwater, but also in other areas as unconventional. These are big players that can actually move the needle on growing production higher within the next year.

Jeff Mower:
Are there other players out there that you're keeping an eye on?

Ha Nguyen:
There is, CNOOC has a small portion of the production there, and so the Chinese investors, I think they own about 25% of stake within the region. If you've looked at some of their portfolio, they also have the capital and then plus the expertise to actually drill deepwater wells.

Jeff Mower:
Now what do you see, if any, do you see any political obstacles to the Guyana production growth?

Ha Nguyen:
Yeah, so what you said earlier, the dispute with Venezuela, we do see production continue to increase. They've essentially, before Christmas, they pretty much kind of fizzled out on any armed forces between two parts. The landlocked area obviously is not part of any of the upstream drilling areas in the offshore waters, but if you look past that there is a offshore disputed area. The only impact that we could see is possibly tankers not being able to leave, the exports. If that were to happen, if the disputes were to escalate, that could backtrack to the production, but as of now we don't see any obstacles. But if there were any tensions on the offshore areas past the drilling areas, that could impact the exports that we're seeing right now.

Jeff Mower:
Yeah. I imagine also Maduro would just be taking such a huge risk in getting more aggressive there. I mean, he's gotten some sanctions relief from the Biden administration with some assurances of election reforms. It's an election year in Venezuela this year. Yeah. I just imagine if he got too aggressive there that those sanctions would just be slapped right back on.

Ha Nguyen:
Yes, it would be a huge risk. If you look at the waivers that came into effect in October, either those waivers in April could be renewed, which would ease it even more, but if you were to put more pressure on invading this area, they could reimpose the sanctions. That would mostly impact some of the exports for Venezuela more so than Guyana.

Jeff Mower:
Before we go further, I want to invite our listeners to join us at CERAWeek by S&P Global. The conference will take place over March 18th through March 22nd in Houston and will be jam-packed with all kinds of sessions and panels. CERAWeek speakers will provide insight into oil and gas supply and demand trends, insight into strategies for lowering emissions, and much much more. We'll include the link to register for CERAWeek in our show notes, so click on that to get started.

I'm going to turn now to Felipe. I'm curious, where primarily has this Guyana crude been heading? I know not much of any has been going to the US Gulf so I'm curious about that, but which refiners are preferring the Guyana grades and why?

Felipe Perez:
Thanks, Jeff. The primary destination for Guyana crude right now has been Europe. Why is that? We know Europe with the sanctions on Russia crude and refined products had to scramble to replace those barrels at any cost and looking for alternatives that sometimes maybe not necessarily fit very well their refineries but just like as a situation almost of an emergency, but things are stabilized now. But definitely in Europe is the primary destination for Guyana crude exports. Maybe it's not the best crude at the moment. If we're talking about Liza, we think about how that crude would fit with their refinery, but there's a little bit more behind that that I can expand as we talk.

Jeff Mower:
When you say Liza crude is not the best, you just mean it's heavier?

Felipe Perez:
Liza crude is a light sweet. What European markets or refiners prefer is more crudes that will have more of the distillate yields. The European is very driven by the diesel market and the diesel demand so that's very important for that, but, as I said, it's a situation that you try to fit the best you have available in the market. We know some of the new streams coming online from Guyana might be more suitable, I can comment a little bit on that, but that has a little bit of a better yield on this list, so what that may imply for the pricing moving forward, but that's what we are seeing for the interest in Guyana.

I think there's one thing that is important to consider is what will change in the Atlantic Basin is if we start to look a little bit forward. This is the situation now, but we have Dangote refinery coming online this year, next year we are predicting Olmeca refinery in Mexico coming online, there's a few capacity additions in Brazil. That will change crude oil markets in the Atlantic Basin as well, refined products, and that will have implications how Guyana markets its crude oil.

Jeff Mower:
I was going to say on the distillate front, Europe was a big importer of Russian diesel as well so I can see how having a crude with a good diesel cut would be extremely important, and diesel has been tight for a while. But I'm curious on those two refineries you mentioned, Dangote and the Olmeca refinery, how do you think that will shift the flows going forward or what would that mean for Guyana crude going forward?

Felipe Perez:
Right. If you think about Dangote refinery, that will be taking primarily Nigerian crude. Nigerian crude tends to be very light so will create a big hole in the market that refinery starts using that. Nigeria won't have that much, and we're talking about 600,000 barrels a day, so a significant chunk of that light crude. For Guyana, it's somewhat good news. It opens a little bit of a space in the Atlantic Basin but on the other hand, you have situation in Europe and North America, potential destinations that demand for crude oil, as we know, all the energy transition pace happening in those regions are moving forward and the prospect down the road is not so great, but I think for the next couple years, the situation, for example, for Dangote might be interesting.

On the Olmeca refinery, the story is more a little bit of the heavy crude that that refinery will take, but will change the balance there. Overall, those two refineries change the dynamic of the crude oil market, giving opportunities and challenges I think for Guyana. Also, what is going to be the interest of all the refineries in the region to move the refined products and what crude they will be selecting. Are they going to be focusing more on the gasoline market? Are they going to be focusing on more on diesel or both? That's I think something for Guyana to pay attention in the next couple years.

Jeff Mower:
Now, Pat, what kind of recent buying patterns are you seeing for Guyana crudes? I mean, I know as Felipe was saying plenty of it goes to Europe. I think we also see some of it go to the US West Coast as well or at least it goes through the Panama Canal, right? What is spot market availability? That's something I don't quite understand about Guyana crudes, how much of is available to spot? How much of it is sort of termed up?

Pat Harrington:
Well, as far as I know there's very active spot market activity. I mean, I think the last loading program we saw, I think that there were 14 cargoes in February. Some of them got pushed over from January, but there seems to be quite a bit of spot market activity, which of course we like. One thing that I wanted to touch on because it really goes into what Felipe was talking about is that we didn't always assess three Guyanan crude grades. We started assessing Liza crude in February of 2021. One of the reasons that we did not launch an assessment of Unity Gold until August 1st of 2023 is that Liza and Unity Gold were the same price until the flows started primarily going to Europe and European refiners really started showing their preferences. That's when you saw Unity Gold starting to price above Liza and it made sense for us to do an assessment.

Then of course we recently launched an assessment on December 1st of the Payara crude. If you look at just the assays for these crudes, Payara is a 28 API crude and about 0.58 sulfur. Liza's 32 API and 0.58 sulfur. It looks like Payara should be the cheapest of the crudes, but what we started hearing was that no, Payara is going to have a greater distillate yield and because European refiners covet that distillate yield, Payara despite the assay is going to be the highest-valued crude. When we first started assessing it, that didn't happen because it was a new crude, it was unknown, and it started trading at a very deep discount to the other grades, but it has recently really shot up and is now on par with Liza and looks like some of those initial projections might come to fruition and Payara may be the most expensive of those crudes precisely for that distillate yield that Felipe was mentioning. From the pricing perspective, it really is all about the European refiners. Some does go to the US West Coast, but Europe has certainly been the dominant player importer certainly from the start of this year.

Jeff Mower:
Yeah. I remember late last year the Johan Sverdrup grade in Northwest Europe was under quite a bit of pressure in part because of the Guyana crudes coming into Europe, but now I think it's interesting that the Johan Sverdrup, the prices have really rallied recently. I think because of what's going on in the Red Sea, there's been this sort of scramble to buy up that crude, but we haven't really seen the Guyana crudes follow. What do you make of that follow on the way up there?

Pat Harrington:
Yeah, thanks for that. That's a really interesting point. Johan Sverdrup, as you mentioned, has kind of shot back up to above a $2/barrel premium to Dated Brent, which is getting back up there in record territory for Johan. Johan Sverdrup and Liza used to be kind of moving in lockstep because they were seen as competing for the same refiners, but what's really happened with that Red Sea disruption is that when you can't get those barrels from Saudi Arabia and those freight rates really spike up, you see the preference for short travel crudes. Johan is a short travel crude. It doesn't travel long distance. Then the longer travel crudes, like from Guyana, are kind of unaffected, so Guyana so far has not experienced the same boom and demand from the Red Sea disruption that we're seeing for Johan Sverdrup. We're told that the same is true for the Eastern Canadian crudes that also previously compete with Johan Sverdrup going into Europe. It's really all about rising global freight and a rush to the shorter travel crudes.

Felipe Perez:
Jeff, if I may here just jump on some of the comments there and I give the perspective of the consumer, the client of Guyana, from the refining perspective Guyana crudes, all the streams are coming online and Liza is one that you can see find its destination as a crude that refiners like. It's not something that gives you a big headache. I think on that perspective, I think Guyana is very fortunate. If you think about the quality of crudes, how that fits well, I think the question will be if this changes in the market moving forward, how you price it well. So pricing I think is going to be very key for Guyana and in what market that that price will be tied in, as we know that all this change is in demand for refined products but also this new capacity of refining coming online. I think that the whole perspective for Guyana is positive, but how I can comment is if we don't have more of the political, the attention, the geopolitics there with the neighbor Venezuela, what is the true perspective of investment, the environment of above ground for investment, and the projection for that production in Guyana to continue being a star of the non-OPEC producers?

Ha Nguyen:
The thing is it's... I call it the new crude on the block since 2020. It's one very cheap barrel of all the non-OPEC producing areas and it's deepwater. As you said, Felipe, this type of grade, there's been a shortage in the market of that 32.5, and so it's ideal for any consumer to essentially use it or blend it. I don't see it immediately going away if, let's say, tomorrow Venezuela invades because Exxon and Chevron are not going to back down immediately. They put so much investment in there. Until we see signposts though, all their employees leaving, then maybe it's like, "Okay, now we need to change our forecast." But we haven't seen anything like that. If anything, Exxon announced that they're going to keep drilling. So yeah, we'll continue to see that growth until we see some signpost of any of the industry workers leaving the country, similar to what we saw in Venezuela a few years ago.

Jeff Mower:
When you say it's a cheap grade or a cheap crude, you mean like cheap to produce? Break evens are low.

Ha Nguyen:
To drill. To drill.

Jeff Mower:
To drill.

Ha Nguyen:
Yeah. So dollar per barrel, the drill is I think $20 to $30 because there's no royalties or anything in the crude and so it's very cheap to extract and it goes straight into FPSO and out to the market. It's just ideal and the infrastructure is really just FPSO platforms.

Jeff Mower:
All right. Well, thanks very much, Ha, Felipe, and Pat for joining me in this conversation, and thank you to our listeners for tuning in. For a deeper dive in our Guyana coverage, including price assessments, a recent infographic, news, and analytics, subscribe to Platts Connect, which will be linked in our show notes. This Oil Markets episode was produced by Jennifer Pedrick in Houston.