By Anthony T Bryan
Guyana’s oil reserves, only discovered in 2015, are vast. They are estimated at 11 billion barrels of recoverable oil – one of the highest levels per capita worldwide.
The country’s current daily production of 400,000 (b/d) is projected to be more than one million b/d of oil equivalent (boe) by 2027. Although Guyana only produced its first barrels of oil in December 2019, it recorded the globe’s highest GDP growth rate of 2022, a remarkable 57.8 percent. Its annual earnings from the sector could be US$10 billion by 2030. However, the global media hyperbole that is accompanying the boom is boisterous and overwhelming, and raising Guyanese public expectations to an uncomfortable level. So perhaps it is time for retrospection, a reality check, and a cautionary note.
Dealing with this windfall is a new experience for the Guyanese government and its people. There is a race to provide the necessary legislation, to create the institutional structures, and to devise strategies to manage an oil economy.
Obviously, one danger is the onset of the dreaded ailment known variously as the ‘resource curse,’ the ‘paradox of plenty,’ or the “Dutch Disease,” where destabilisation of traditional economic sectors occurs as the resource-rich country becomes overly dependent on exports of a single commodity and suffers drastic inflationary consequences.
On August 27, 2023, vice president, Dr Bharrat Jagdeo was reported in the energy publication OilNOW as saying “We are hell-bent on ensuring that we do not make the same mistakes that other oil-producing countries have made.”
It will be avoided by Guyana’s careful fiscal management of the energy sector, including its Local Content Act, and a “dedicated policy” towards diversification, he further stated.
But most energy analysts would still agree on some cautionary notes for Guyana.
First, it is the government’s responsibility to ensure that the country has all the contractual provisions in place to earn and distribute its fair share of the windfall. The population can become frustrated by the lack of any immediate tangible benefits that they may have expected from oil revenues. Managing public expectations is critical. Also, in multi-ethnic Guyana the possibility of political and ethnic strife is a constant threat if the benefits of the windfall are not distributed evenly among the various ethnic groups.
Second, although international credit agencies report that Guyana still has a low level of corruption, regulations must be developed to control that elephant in the room. Energy exploration and production has a long supply chain, and many opportunities exist for diversion of revenue and profits. Third, the impact of the oil and gas windfall on Guyana’s economy can be convulsive. Guyana may become one of the world’s richest nations per capita. But attaining high-income status from natural resource wealth
does not always translate into improved human development outcomes. Citizens must be shown that the wealth generated from oil and gas will be used prudently and transparently and for the people’s welfare.
Now for a reality check. Guyana is not slowing down on its oil and gas exploration and production, nor should it do so. In fact, it is preparing to auction off 14 coveted oil blocks during 2023 in its first-ever government-regulated offshore licensing round. But even with the new PSA signed with Exxon which split the revenue 50-50 with a 2 percent royalty paid to the government, Exxon has a sweetheart deal – considering that the global average for a government’s take in offshore projects is 75 percent.
The contract also includes a strange provision that permits Exxon to immediately recover costs for exploratory work within the lease area. Exxon effectively then pays itself back for those costs out of the oil revenue that would otherwise go to the government. With an oil field lease this large (28,806 square kilometres), easy to drill, and highly productive, Guyana should have negotiated much better! Nevertheless, the country is going to realise tremendous revenue from oil and gas for a nation of 800,000+ inhabitants.
The windfall presents many challenges. Guyana can accrue more debt even with the surplus oil money. Both the IDB and the IMF are advising the government to save for a rainy day and to exercise caution in the way in which it goes about taking on new loans. The IMF notes that while surging oil output could help address development needs, buffer the economy, and retire expensive outstanding public debt, it also faces risks from volatile oil prices, a slowing global economy, and possible difficulties managing the resource.
Guyana’s political leaders have emphasised that certain services should be reserved for Guyanese procurement. The Local Content Act seeks to protect local Guyanese companies. While this is a commendable objective, just filling percentage workforce with nationals in the name of ‘local content’ or giving preference to local companies that may not be up to the tasks, are mistakes to be avoided. This is not about numbers; it’s about investing in the long-term benefits for the country and its people.
As Guyana moves forward there are very positive signs that it is going in the right direction. Globally, investment is slowing down in new oil provinces, but Guyana’s light sweet crude is an exception to the trend. Its energy resources are attracting a lot of investment, but there are lots of investment opportunities in the non-oil sectors as well. Large investment in agriculture for the benefit of Caricom members is a major objective and regional momentum is under way. From a business perspective, the investment opportunities in Guyana are as extensive as one’s imagination or skill set, once there is a Guyanese mindset that is open to foreign investment and to regional cooperation.
But there are concerns as well. Despite withdrawals in 2022 and the first half of 2023, the National Resources Fund (NRF) had a market value of US$1.72 billion as of June 30, 2023. It is expected to close in 2023 with about US$2.1 billion. So, while Guyana may be immune from any serious depletion of the NRF at this time, given the massive financial inflows, tapping into it to meet budget deficits, unforeseen production failures or shortfalls, substantial declines in the global prices and markets for oil, economy crippling pandemics, and serious debt incurred for rapid infrastructure development that does not produce revenue – can all impact on future drawdowns on the NRF.
When new provinces come into massive oil wealth, the resource is often controlled and dominated at an early stage by foreign companies interested in developing oil and returning profit to their shareholders. They are very rarely interested in general national economic development. So far, the international oil companies (IOCs) in Guyana, ExxonMobil and its partners, appear to be investing in subsectors of the economy that advance their portfolios with some benefit to the Guyanese economy. Eventually, Guyana might find the Trinidad and Tobago model – where the state chose to be an active participant and a leader in the first stage of the country’s industrialisation by becoming an equity investor in most of the energy enterprises – to be a useful initiative. Guyana will have the money to do it!
Looking forward, Guyana has attributes that can make it a regional energy leader. Its forests have created environmental space for simultaneous development of its oil resources and its net carbon sink credentials.
While it may seem to be in a contradictory position as a current victim of climate change and an actor exacerbating the problem, Guyana can become a major supplier of fossil fuel that uses the money from its oil and gas resources to invest in renewable energy and facilitate its transition and that of the Caricom region to net-zero status.
