[Editor's note: A version of this story appears in the May 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

In the 1600s, the Spanish conquistadors who first reached Guyana were apparently so unimpressed by its mineral wealth that they simply moved on.

As it turns out, the Spanish explorers were just too early—by about 500 years.

Guyana, a nation of 740,000 people in a country the size of Idaho, is used to being snubbed. The scenic but disregarded nation is poor and isolated. Few flights connect it to the rest of the world. Per capita GDP is roughly $4,800—about half that of its neighbor to the south, Brazil.

Then came the oil.

“We were arguably one of the most ignored countries in the world,” Dominic Gaskin, the Republic of Guyana’s business minister, said during a February symposium at Rice University in Houston.

In 2015, oil and gas operators began to drill exploratory wells offshore Guyana, revealing what Guyanese officials called an “unprecedented string of discoveries in the deepwater environment offshore Guyana.”

The discoveries by ExxonMobil Corp. and partners Hess Corp. and China’s CNOOC have uncovered vast, rich pools of crude—at least 5.5 billion barrels of oil equivalent (Bboe).

In the southern reaches of offshore Guyana’s Stabroek Block, an area about 10,300 square miles, ExxonMobil has made a dozen discoveries—including two in 2019.

As Guyana, a former Dutch and British colony, and Exxon prepare for first oil by 2020, further exploration has the potential to unlock even more resources.

Roughly 350 miles north of the equator, the discoveries have heralded a broader, though nascent, renaissance in deepwater projects. But this is also the era of shale oil. Many of the companies exploring offshore Guyana are part of a shift in the competitive tension between long-cycle developments and shale’s quick returns. Production in the Permian Basin, Bakken and other plays are helping to foot the bill for giant offshore projects.

Exxon has yet to quantify its two most recent discoveries: The Tilapia-1 and Haimara-1 wells in the southeast section of the Stabroek. Neil A. Chapman, ExxonMobil’s senior vice president, said during a March investor presentation that each discovery helps piece together the region’s geology.

The company plans to drill at least 10 more exploration wells in 2019 and 2020 and has upped its production forecast from 500,000 barrels per day (bbl/d) of oil by 2025 to 750,000 bbl/d.

Chapman said considerable potential remains and hinted that the major’s recent discoveries may have revealed something else. They have “opened up some new geological concepts, which are positive and somewhat surprising to what we had historically,” he said, without elaborating.

“This is a rapidly evolving field,” he added, noting that in a year’s time the company had “nearly doubled” its previous estimate of 3.2 Bboe in resources.

The expected payoff is already changing Guyana, which Bernstein analysts noted has a budget about three and a half times smaller than that of the city of Houston. In the coming years, its per capita GDP may one day exceed Kuwait’s, Gaskin said.

“Guyana has not produced a drop of oil as [of] yet, but I’m encouraged by a lot of what I’ve seen in the past three years,” he said.

In November, American Airlines began offering flights to the country. International cafés and hotels are opening, and hotels are booked in advance, said Valérie Marcel, associate fellow, energy, environment and resources at Chatham House, the Royal Institute of International Affairs.

“The world is coming to Guyana—or at least international advisers, consultants and companies looking for business are flocking to the country,” Marcel told Investor. “This is typical of countries with oil discoveries.”

Finding Liza

About 130 miles offshore Guyana, in a spot 5,719 feet above the ocean floor, ExxonMobil first encountered the ancient world of the Tyrannosaurus Rex—and a lot of oil.

The company had been prospecting offshore Guyana since 2008. In 2015, it finally hit pay dirt by plowing through nearly 3 miles of water, seabed and rock before hitting a 296-foot band of oil-drenched sandstone. The 85-million-year-old Cretaceous rock has since led to another 11 discoveries.

The drilling by ExxonMobil affiliate Esso Exploration and Production Guyana Ltd. is part of a partnership that includes ExxonMobil, which owns a 45% interest in the Stabroek Block, Hess Corp., which owns 30%, and CNOOC Nexen Petroleum, which owns 25%.

By 2016, ExxonMobil said, additional drilling had confirmed a “world-class resource discovery” in excess of 1 Bboe. By 2017, additional discoveries would more than triple that assessment.

Now, an international flotilla of drilling ships has amassed offshore Guyana. In the Stabroek, the Norwegian-owned Ramform Tethy conducts 3-D and 4-D seismic surveys. Under the guidance of ExxonMobil, Noble Corp. Plc’s Liberia-flagged Noble Tom Madden drillship—twice the length of a football field—and the U.K.-flagged Stena Carron, owned by Stena Drilling Ltd., are among three drillships working in Guyana’s maritime zone.

In the next several years, a fleet of five floating production, storage and offloading (FPSO) vessels, one leaving Singapore this summer, will arrive to begin extraction. Hess and Exxon are pressing to produce oil within five years of discovery.

Chapman said that would put the company four years ahead of the industry average from deepwater discovery to production.

“We’re pushing to do better,” he said. “I said [in 2018] we would have that boat online in the first quarter of next year. We will certainly do that, and we’re hoping to do a little bit better than that.”

ExxonMobil, Hess and Nexen have sketched out two phases of an ambitious development plan, Liza Phase 1 and Liza Phase 2.

Liza 1 calls for 17 wells, including eight producers, six water injectors and three gas injectors, according to Hess’s December investor day. Average well costs of $85 million will result in a $35-per-barrel breakeven oil price.

Dutch oil service company SBM Offshore is refitting a very large crude carrier (VLCC) that will become the Liza Destiny FPSO. The vessel is designed to produce up to 120,000 bbl of oil and 170 million cubic feet of gas per day. The FPSO is being built to store 1.6 MMbbl of oil.

The Liza 2 development calls for a more sprawling operation, with 30 wells, including 15 producers, at an average well cost of $58 million. Hess expects a breakeven price of $25 per barrel.

Hess indicated that there’s consideration being given to development of a fourth and fifth FPSO in parallel, reflecting the company’s confidence in Guyana, Goldman Sachs analyst Brian Singer wrote in a March 15 report.

In July 2018, SBM was awarded the contract for the second FPSO, the Liza Unity, which will be the company’s largest to date. The vessel will be designed to produce 220,000 bbl/d of oil and store about 2 MMbbl of crude oil.

SBM Offshore is already constructing its first standardized hull, which is still subject to authorizations as well as a second generic hull.

In SBM’s annual report, the company said the decision to start construction in anticipation of future orders is “unique in the industry and reflects management confidence in the market upturn and the increased interest from customers” for its products.

That reflects a broader consensus that deepwater activity is picking up, particularly in South America. In a February report, Rystad Energy noted that 16 fields are up for final investment decisions in 2019, more than triple that of last year.

While Brazil currently dominates South America’s offshore greenfield developments, Guyana’s Liza Phase 2 is expected to generate $3 billion in service industry revenues.

And much remains to be investigated.

In The Deep

Passengers aboard the Nautilus, the fictional 1870s submarine imagined by Jules Verne, peered through the submarine’s crystal panels and “a window opened into this unexplored abyss.”

About 145 years after Jules Verne wrote “20,000 Leagues Under the Sea,” 80% of the ocean remains unexplored, unmapped and unobserved, according to the National Oceanic and Atmospheric Administration.

The Stabroek Block explorers will do their part. So far, they have concentrated on its southern portion, where the Liza, the Liza Deep, Payara, Snoek and Turbot discoveries were found. Ranger is so far the only discovery to the north.

A giant area to the north and west side of the Stabroek Block, where no prospects or discoveries have been put on the map, awaits.

“We are going to acquire 7,500 square miles of 3-D seismic data and, over time, we’re going to use that data to underpin a future portfolio and our understanding of the basin,” Barbara Lowery-Yilmaz, senior vice president of exploration for Hess, said during a December 2018 presentation.

Existing data for other parts of the Stabroek Block will be reprocessed to “further refine and incorporate well results to continue to mature our prospect inventory.”

Hess is also preparing for activities in Block 59 offshore Suriname, where it is partnering with Equinor and ExxonMobil. The partners plan to acquire a 2-D seismic survey to help define play concepts before shooting 3-D.

“All of this will mature the inventory as we go forward well into the next decade,” Yilmaz said.

Hess also has positioned itself in the 5,225-square-mile Kaieteur Block offshore Guyana and Block 42 offshore Suriname, where several prospects—including a large carbonate play called Walker—have been identified. Plans are to begin drilling in late 2019 or early 2020, working with Chevron Corp. and Kosmos Energy Ltd. as the operator on the latter. At the end of 2018, ExxonMobil held 4.7 million offshore acres. In a February earnings call, Darren Woods, chairman and CEO, said that in 2019, the company plans to sanction “a number of key projects, including the next two phases of Guyana,” including the Liza 2 and Payara discoveries.

Woods added that the final investment decision for Payara was advanced to late 2019 from mid-2020, “reflecting the development plans and the progress that we’re making beyond the plans we laid out last year. Later this year we plan to mobilize the FPSO for the first development of the phase in Guyana, putting us on track for an early 2020 start-up.”

With the discoveries it has already announced, Woods said he sees an additional FPSO offshore Guyana.

“We’re still a long way … from fully exploring the opportunities out there,” he said. “So as we continue to advance that exploration, we’ll see how it plays out. And we’re optimistic that we’ll find some additional opportunities there and that will continue to grow that resource.”

While Guyana offers a considerable prize, it also comes with its share of hazards, particularly from its chaotic neighbor to the west, Venezuela.

Sea Maneuvers

Like the sailors in Herman Melville’s “Moby Dick,” offshore oil and gas exploration are sometimes called to “sail forbidden seas, and land on barbarous coasts.”

In December 2018, ExxonMobil said two vessels operated by Norway’s Petroleum Geo-Services ceased a 3-D seismic data acquisition in the northwest Stabroek when they were approached by the Venezuela navy. Exploration and development drilling continued in the southeastern part of the block.

A long-running dispute along the border of Guyana and Venezuela—initially thought resolved in 1899—flared up at the end of 2018 as conditions in Caracas deteriorated.

Guyana has largely been a bright spot for offshore oil and gas development, though it faces risks as a “government of modest means and sophistication,” Bernstein analyst Bob Brackett wrote in December 2018.

One of the pushbacks to companies tied to offshore Guyana, such as Hess, is the geopolitical risk of resource nationalism, Brackett said. As recently as 2012, the Argentine government seized the assets of Spanish oil company Repsol, forcing the company into arbitration at the World Bank.

Brackett cited investor fears of geopolitical upheaval as a key risk while actual turmoil is unlikely.

“Colloquially, in a world where earthquakes could halt the Permian, votes could halt the Niobrara, the government could halt oil sands, tariffs could halt materials etc., discounting Guyana on these fears in our view represents more investor worry about the unknowns than knowledge of known worries,” Brackett said.

Woods said when asked during the February earnings call about the state of the Guyanese government that the company has no concerns about the political dynamics in the country, including expected general elections sometime this year.

“We understand that that’s the nature of governments and countries around the world. We basically expect governments to change over time,” he said. “Again, when you’re coming into a country for 30 years … I think it would be extremely naive to think that you’re only going to have one constituency there for the timeframe.”

Current Guyana leaders intend to create a well-regulated industry, Gaskin said. After witnessing the mistakes other oil-rich countries have made and the negative consequences of rapid economic growth from oil, the country intends to strengthen its agricultural, mining, forestry and tourism sectors.

Oil production, however, is not a priority for the country’s development efforts, he said. “Not because it’s not important, but because this sector has already generated tons of interest and the truth is, we don’t have to promote it because it promotes itself,” Gaskin added.

Velda Addison contributed to this report.

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SIDEBAR:

Mixing Water And Shale

In echoes of former Fed Chair Alan Greenspan, John Hess, CEO of Hess Corp., said there’s an unhealthy industry obsession with shale.

“I’ll tell you, it’s irrational exuberance here and irrational fear outside of the United States,” Hess said during a panel discussion at CERAWeek by IHS Market in March.

“Shale is only 6% of oil supply in the world. It will probably grow to 10% in mid-decade and then it plateaus,” he said. “Shale is not the next Saudi Arabia.”

However, Hess noted during a December analyst presentation that the company’s portfolio, which includes Bakken assets, is the strongest it’s been in the companies’ history. Hess said Guyana’s first two phases of the development areas are prefunded, with no need to raise capital through equity or debt.

Yet as Goldman Sachs analyst Brian Singer noted, Hess’ strategy is underpinned by its ability to execute in the Bakken and Guyana. As John Hess put it in December, “the Bakken is a major cash generator.” The company expects to generate $1 billion of free cash flow at a Brent oil price of $65 per barrel.

Hess is not alone in making a direct link between its onshore shale operations and shale oil.

ExxonMobil Corp.’s Permian Basin plans call for an army of 55 rigs supported by 16 frack crews in 2019. By 2023, the company expects to clear $5 billion in revenue in the Permian after capex.

As Simmons analysts noted in a March 7 report, “The Permian Basin remains the largest single focus of the company in the near term.”

Apache Corp., which has long split between international and U.S. opportunities, is planning its own exploration wells in offshore Suriname, next door to ExxonMobil’s discovery wells. Apache has contracted a drillship and anticipates spudding its first well on the block around mid-year, according to the company’s February earnings report.

Yet three-quarters of Apache’s $2.4 billion capex will head to U.S. upstream operations, where the Midland and Delaware basins make up nearly 60% of the company’s production.

Hess emphasized that the larger point is that the oil and gas industry cannot keep pace with demand since investment in new projects fell during the 2015 downturn.

“The only area up in that group was shale, and it wasn’t from internal cash flow at $40 or $50 a barrel,” he said. “It was from outside investment” through public and private equity.

Hess emphasized that the larger point is that the oil and gas industry cannot keep pace with demand since investment in new projects fell during the 2015 downturn.

“The only area up in that group was shale, and it wasn’t from internal cash flow at $40 or $50 a barrel,” he said. “It was from outside investment” through public and private equity.

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Offshore