The Challenge of Economic Transformation
Despite significant gold, diamonds, bauxite, and manganese deposits, the 214,970 km2 (about the size of the U.K or Kansas) Guyana has consistently ranked among the least developed countries in the Americas. Now, opportunity and possibilities suddenly abound in a tiny country that has remained mostly anonymous to all but its closest neighbors. First oil production from the Liza discovery is scheduled for March 2020 at a rate of 120 mb/d. Guyana’s government revenue will likely increase by more than 32% in the first full year of oil production (2021); its 2016 revenue, which came from gold, rice, and bauxite exports, ran at about US$ 901 million. Guyana’s government revenue will continue to increase throughout the 2020’s, as oil production grows, and ExxonMobil and its partners recover their CAPEX. In fact, Guyana’s production could rise to 400 mb/d by 2026, effectively quadrupling the country’s revenue. The impact on a US$ 3.5 billion GDP economy with a 773,000 population will be staggering. By comparison, in 1969 when the Ekofisk field was discovered in Norway, that country’s GDP was US$ 11 billion.
The Guyanese people are now well aware of terms like “Dutch Disease” and “Resource Curse Thesis.” Both terms apply to countries where the real effective exchange rate (REER) appreciates due to an influx of significant foreign exchange related to the collection of revenue in US dollars from the oil industry. The appreciating REER means export-related sectors like agriculture, manufacturing, and mining then become less competitive. These sectors also begin to lose labor to an expanding services sector and start to wither.
Since ExxonMobil’s 2015 discovery, various multi-lateral agencies, including the IDB, World Bank, UNDP, and the Commonwealth Secretariat have stepped in to advise Guyana. These organizations have generally focused on institutional strengthening to help the country get the most out of its coming oil windfall. To Guyana’s north, Trinidad provides a good case study of a hydrocarbons-rich economy that has gotten some things right — and some things wrong. Trinidad has monetized natural gas to become a major exporter of LNG, ammonia, and methanol. It also provides a stable environment for investors. But its oil and gas sector has become less competitive over the years, its productivity is on the decline, and industrial relations issues plague the industry. Trinidad was also late to establish a sovereign wealth fund. The Guyanese will not want to make that same mistake.
A Nascent Legislative and Policy Framework
The challenge of the new oil and gas industry means Guyana’s government will have to work with some of the world’s largest and most sophisticated multi-national corporations. It must establish a regulatory framework and infrastructure base to support its new industry. To that end, a Petroleum Commission bill was introduced in Parliament in mid-2017. In a nutshell, the bill creates the Petroleum Commission, which will monitor and regulate the efficient, safe, effective, and environmentally responsible exploration, development, and production of petroleum in Guyana. The Commission will also execute the Guyanese government’s petroleum policy agenda.
A joint select committee of the Parliament is currently reviewing the bill. There will surely be amendments and changes before it becomes law. Parliament will no doubt seek to ensure that there are checks and balances between commission and government powers. The government has also been developing a local content policy that will act as the basis for the inclusion of the Guyanese private sector in the oil and gas industry. There will also be new demands on the Guyanese Revenue Authority, which must now be strengthened with the appropriate skills. The government, and, indeed, oil majors must also craft a strategy to communicate with a skeptical population, for whom the oil industry is a generally unknown quantity.
All of the recent oil discoveries lie in deep water. The recent Ranger-1 discovery, made in 2,500 meters of water, presented ExxonMobil with a new carbonate reservoir system as opposed to the sandstone reservoirs that were previously discovered. Deepwater means development via Floating Production Storage Offloading vessels (FPSOs). Some hold that the potential for national development will be limited to collection of royalties and “profit petroleum,” which is the government’s share of profits after cost have been recovered.
One common discussion among members of the Guyanese public is the feasibility of a refinery. An international consultancy hired by the Government of Guyana has since concluded that a refinery would be unfeasible. Trinidad and Tobago’s State controlled oil company Petrotrin has indicated interest in refining Guyanese crude. However, it will have to first be determined whether the Pointe-a-Pierre refinery is compatible with the quality of crude discovered so far in Guyana which is around 32 degrees API.
Another topical issue is the monetization of the associated natural gas which will be produced with oil production. There are discussions concerning the feasibility of piping this gas ashore for use in gas fired power plants. This has prompted discussions as to where this gas line should make landfall and where new power plants should be located. Guyana generates its electricity using fuel oil, diesel and biomass in the form of bagasse from the sugar industry.
The Twist: Venezuela
And then there is Guyana’s north-western neighbor, Venezuela. Shortly after ExxonMobil announced its Liza discovery in 2015, Venezuela resuscitated its centuries-old claim to Guyana’s Essequibo region. The issue adds a layer of complexity to the development of Guyana’s oil industry. But both countries agreed to allow the United Nations to handle the matter. Guyana has long maintained that the International Court of Justice (ICJ) should assess Venezuela’s claim. Venezuela, on the other hand, preferred mediation. In September 2017, speaking at the UN General Assembly, Guyana’s President, David Granger, described Venezuela’s position as one of “attrition that is increasingly more blustering and militaristic.” In January 2018, after the UN was unable to make progress, it referred the case to the ICJ.
Guyana has not awarded any new acreage for exploration since ExxonMobil’s discoveries, perhaps because it prefers to wait until the boundary dispute has been settled. Only seven offshore blocks exist right now, and the boundary dispute affects most of Guyana’s current offshore acreage holders — particularly Anadarko, whose block is active but under a suspension agreement. The company will probably not undertake any activity in that block until the border dispute is resolved.
In a related matter, it was revealed that ExxonMobil paid the Guyanese government a US$ 18 million signing bonus that was not reported to the public and was placed in a special account at the Bank of Guyana. Guyana’s opposition groups cried foul, claiming that the money should have been deposited in the consolidated fund as per standard practice. Government players explained that they separated the money from general revenue so that it would be available if the country had to pay legal fees associated with the boundary dispute. The signing bonus issue, and its declaration, only strengthened the public’s calls for the production sharing agreement between ExxonMobil and Guyana to be made public. The government complied with the demand in late December 2017, when the agreement was made public.
Over the next 30 months, the race to prepare Guyana for the biggest event since its 1966 declaration of independence from Great Britain will be on. The Petroleum Commission bill will have to be passed, the Petroleum Commission established, and a sovereign wealth fund founded. And that is just for starters. Multi-nationals and service companies like Halliburton, Schlumberger, Technip FMC, Saipem, and SBM Offshore are also preparing facilities to house their local operations. The challenges are tremendous, but not insurmountable. The key, though, is that Guyana, ExxonMobil, and all the other multi-nationals need to get things right from the start. The population of Guyana and the Guyanese diaspora living abroad in places like Toronto, New York and Miami could be forgiven for their skepticism. Prior to the discovery of oil Guyana’s mineral and land endowment have failed to move the country beyond the status of one of the poorest in the Americas. This time people want a different approach to resource governance one that insulates the management of the new oil sector from undue political interference and one which is free from corruption.
Kevin Ramnarine is IPD’s senior consultant for Trinidad & Tobago, Guyana and Suriname