Investors Betting On Suriname’s Offshore Discoveries

Guyana is the new hot topic for oil. In its shade could rise Suriname, a now poorer—and once much wealthier—neighbour. Industry giants APA
APA
Corporation (US) and TotalEnergies (France) have also found vast deposits of oil in its territorial waters. Creditors have produced an innovative “oil warrant” in the restructuring of its defaulted debt, betting on an oil boom.

The entirety of South America never ceases to interest the great powers: it is a region abundant in all kinds of natural resources. Only in the realm of energy, it harbours all from vast deposits of fossil fuels to the metals essential for the green transition. Across the region, we are seeing US, European, and Chinese corporations scramble for access to such resources.

The commodities rollercoaster

In the 2000s commodities boom, most economies in Latin America basked in their newfound wealth. Dutch-speaking Suriname included. The revenues were very welcome; many of them came from a “lost decade” in the 1980s and 1990s—it was a rather long one.

Guyana did not enjoy the profits from high commodity prices as much as its neighbours, however. It was left out, yet now its national economy is growing faster than anyone’s. During the global boom, its neighbours Brazil, Venezuela, and Suriname saw their national economies triple or quadruple.

Now the region seems to be enduring a new “lost decade” just as Guyana grows at an unprecedented speed—this time not because of high prices, but as large reserves are being discovered just off its Atlantic shore. Gross Domestic Product (GDP) per capita has tripled in just three years—from $6,950 to $20,560.

Suriname has not only fallen behind its lucky neighbour. Its economy has also underperformed compared to the broader region. Out of 23 countries in the Latin America and Caribbean area, in 2010 Suriname was the sixth in the list in per capita GDP terms. By 2022, it was the seventeenth—using World Bank data.

Revolutionary restructuring

The government technically entered default on $675 million of its debt in July 2020. After three difficult years in default, the country and its creditors are now banking on a welcome discovery: like its neighbour, Guyana, high quality oil fields have been discovered just offshore, the largest of which is Block 58, being developed by TotalEnergies. To bridge the divide between the country and its creditors, bondholders have come up with a revolutionary oil-linked value recovery instrument, a “VRI” or an “oil warrant.”

As part of the agreement, Suriname will issue a new bond for $650 million with a 7.95% interest rate; representing a 25% reduction to recognised claims. However, it will also issue oil warrants that will pay a portion of royalties from Block 58: after the first $100 million, bondholders are to receive 30% until they have recovered their forgiven claims.

“For the past two decades, these VRI instruments have been based on GDP growth” explained AJ Mediratta, President of Greylock Capital Management, a US hedge fund, and a member of the bondholder Steering Committee that negotiated with the country. In such scenarios, countries would make an additional payoff whenever economic growth rates overcame a certain threshold, potentially offsetting the haircut on bond payments that creditors had agreed to.

However, Mediratta pointed out while this concept was nice in theory, it was disappointing in practice. “GDP is a theoretical construct to begin with, frequently revised in subsequent quarters and, every other decade, completely rebased. This makes it extremely difficult to model and virtually all these instruments have traded well below their theoretical value, disappointing issuer and creditor alike”.

In the case of Suriname, investors took a different track. Instead of focusing on a VRI that came out of the bottom of the waterfall, like the GDP warrants, they and the country designed a VRI that came out of the top of the waterfall, linked to future oil revenues. “TotalEnergies is a public company with quarterly reports detailing expected oil production. It should be relatively straightforward to predict and model out future royalty payments to the state.”

Without the warrant, Suriname’s creditors would have been forced to wait until the IMF included future oil revenues in their projections, which would only come once TotalEnergies has made their final investment decision, presently scheduled for next year. However, with this agreement, Suriname can now access debt relief much sooner, unlock additional funds from the IMF and potentially regain market access while bondholders receive the potential of better recoveries if oil exports materialise.

Yes but, how much oil?

The region is widely associated with oil—think Guyana, Brazil, and Venezuela. However, Suriname only produces 16,400 barrels per day, while it consumes around 13,000. Uncovering new offshore, easily accessible reserves would be revolutionary. The economy has until now focused on mining, primarily for gold ore. According to CEPII, this metal amounted to almost 80% of exports in 2021.

The offshore area where the discoveries have been made is called “Block 58”. APA Corporation and TotalEnergies made important discoveries there between 2020 and 2022. It is adjacent to Guyana’s Stabroek block—the source of its newfound fortune. There could be around 6.5 billion barrels of oil resources in the area.

In September this year, APA identified 700 million barrels of oil “recoverable resources” in the Sapakara and Krabdagu discoveries, within Block 58. The plan is to produce 200,000 barrels per day alongside partner TotalEnergies, through a Floating Production, Storage and Offloading unit (FPSO). This would be achieved by 2032 after the final investment decision was postponed to 2024.

José Chalhoub, an oil and political risk consultant at Venergy and Azur, argued that Suriname already has some advantages when compared to other regional players. First, “unlike Guyana, it already has a national oil company, Staatsolie, since 1980. The country anticipates that there could be up to 30 billion barrels of oil offshore. Furthermore, the oil discovered so far is of a higher quality than in much of South America, with medium to light sweet crudes. This means lower break-even costs, and a higher attractiveness for refiners.”