Oil, high expectations, and   cautious optimism

        By Anthony Bryan

 

     "Clear de way Guyana coming

      back" is the title of a lively

      vintage calypso by Dave

      Martins and the Tradewinds

      about several Caribbean

      nations in a virtual horse

       race competing for

       prominence.

 

 

Perhaps it was a harbinger for Guyana! Apparently the country is on the verge of untold riches. The international oil companies (IOCs) ExxonMobil (14) and Tullow Oil (2) have made a record of 16 oil discoveries in the Stabroek Block of the deepwater Guyana Suriname Basin. ExxonMobil will begin oil production sometime this month at the Liza Phase 1 well site.  

The statistical projections are tectonic. The Guyanese economy could grow by 86%, and its per capita income could more than double (to $10,000 USD) by next year 2020. By the end of the decade the country could be producing more than one million barrels of oil equivalent daily. Rystad Energy estimates that consequent revenue will amount to more than US$117 billion over the lifetime of the projects. Analysts at the energy consulting firm Wood Mackenzie have stated: "Guyana is the gift that keeps on giving." With the windfall, and a population of less than 800,000 inhabitants, Guyana could become one of the world’s richest nations per capita. Obviously it will not happen overnight. The IOCs have to recover their investment and projected peak production is still some years away. A national sense of euphoria is high and caution may be in short supply. But the geology is right!

A reality check

Guyana is new to the game of oil and gas production and it should expect a steep learning curve. Four years ago it had no known oil reserves. Now it's in a race to provide the necessary legislation, institutional structures, and management for first oil. As a frontier oil province, it is vulnerable to the many "above ground" pitfalls that could accompany the boom. The explosion of money could be difficult to absorb and to manage in a nascent oil economy. Is Guyana ready?

Drawing on my experience of more than two decades of consulting and writing about Caribbean and Latin American energy I find myself cautiously optimistic about Guyana’s ability to manage the windfall. Notably, with support from international partners, the country is trying to put proper systems in place. In 2017, Guyana joined the Extractive Industries Transparency Initiative (EITI) that will monitor its resource governance. A Sovereign Wealth Fund (SWF) has been established to invest and spend oil revenues in a manner that transcends political cycles and generations. Parliament has passed the Natural Resource Fund (NRF) that will strengthen revenue management. The government has also put forward a Green State Development Strategy: Vision 2040 that is the roadmap for an economy defined by sustainable, efficient, low-carbon and resilient development for successive generations.

The key to Guyana's success is the effective management of the oil and gas sector. The first steps included the establishment of an Energy Department under the auspices of the Ministry of the Presidency and the addition of a Petroleum Department at the Ministry of Natural Resources. A Petroleum Commission to regulate the oil and gas sector has been set up, but a Bill for its legal establishment is still before Parliament. Unfortunately, the political impasse in 2019 has delayed the implementation of some institutional arrangements for the management of the sector. Obviously the best laid plans are useless unless they are implemented!

What are the next steps?

Analysts expect that there will be a governance framework for the oil sector with policy and legislation as key components of regulation.  New governments can adjust the policy, but a shared national vision of development that integrates the role of the sector must be the foundation. Legislation is the mechanism for implementation. Independent regulators can be responsible for various parts of the oil (and gas) value chain, while parliamentary oversight committees can audit and report on the state of the industry and its long term policies and strategies. Many will hope that some form of bipartisan action is possible following the March 2020 elections to help to bolster public confidence in the governance structures.

Judging from the experiences of other emerging oil provinces worldwide, further steps could include the development of human resources for the oil sector--including incentives to encourage the return of skilled nationals from abroad; and the facilitation of "local content" in the industry. ExxonMobil has provided a start, building a local workforce which now accounts for half (1700) of its employees in country. It is also putting in place a local content policy built on workforce and supplier development, and strategic community investments. Knowledge transfer and shared technology should also occur.

How will the government spend its share of the windfall? Properly administered, the SWF will monitor the collection and expenditure of revenue from oil and gas. Oversight, transparency, and timely information for the public about expected income flows and expenditures are best practices for the successful management of the sector.

The primary question, since oil is a depleting asset, is how to convert the income flows into physical, human and financial capital that can benefit generations. To that end, should Guyana seek to keep the oil in the ground for longer periods or to extract it rapidly and diversify into a more sustainable economy in case the value of the resource diminishes?

The Devil’s Excrement

Looking beyond these steps there are serious challenges for the government. The most pernicious is the "resource curse" or the “paradox of plenty” where the destabilization of traditional economic sectors occurs as the country becomes overly dependent on exports of a single commodity. Some poor but resource-rich countries tend to be underdeveloped, not despite their hydrocarbon riches, but because of their resource wealth! Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s, and one of the founders of OPEC, was the first to call attention to the oil curse. Oil, he said, was not black gold; it was the devil’s excrement! 

The danger is that any government will spend now on future earnings taking on debt. Inflation can rise stifling the development of other industries. The population can become frustrated at the lack of any immediate tangible benefits that they may have expected from the oil revenues. Managing public expectations is critical. Regulations must be developed to protect against environmental degradation including oil spills. And finally there is the elephant in the room--namely corruption. The oversight institutions are crucial in order to combat this curse.

A vaguely optimistic future

This year Brazil, Guyana and Mauritania are the new darling frontier petro-states of the IOCs. Next year who knows? The oil price fluctuates constantly. Drilling is going on worldwide. The planet is awash with oil. Hydrocarbons will be with us for some decades to come, but they will be replaced eventually by forms of renewable energy (RE). The IOCs know that and they themselves are investing heavily in RE. In the meantime the onus is also on the IOCs to create value for Guyana even at a time in some countries when public trust in the oil companies is low and their commitment to RE is being questioned.

But for now clear de way! The country is at the starting gate.  It will prosper if the massive revenue transforms the economy and the quality of life for its citizens. If not, 'Guyana coming back" can be a nightmare horse race.

 

Professor Anthony T. Bryan is a Senior Associate of the Center for Strategic and International Studies (CSIS) in Washington, D.C. He has written on Caribbean oil and gas issues for two decades. He is a former Director of the Institute of International Relations at The University of the West Indies Campus, St. Augustine, Trinidad and Tobago.