Guyana: the fast rising Commonwealth petro- state. What lies ahead?

This week’s blog is being presented by Prof Anthony Bryan, Senior Associate with the Center for Strategic and International Studies (CSIS), Washington, DC and former Director of the Institute of International Relations, University of the West Indies,  St Augustine. He advises that while Guyana celebrated “First Oil” on 20 December 2019, the focus of this blog is on "first lift" scheduled  by March 2020.  He explains that “First lift  is the technical term referring to the method that involves the use of artificial means to increase the flow of crude oil from a production well. That is when an abundant amount of crude is actually  produced to meet the objectives of barrels daily”.

​The Commonwealth has an estimated 232 billion barrels of oil reserves or about 17% of the world’s total. Reserves from 17 member countries contribute to this stock. Canada and Nigeria are the leaders. Guyana is about to join the team in a big way.

By the end of November 2019, the international oil companies (IOCs) Exxon-Mobil and Tullow Oil had made a record of 16 oil discoveries in the Stabroek Block of the deep water Guyana -Suriname Basin and ExxonMobil was preparing to begin oil production at the Liza Phase 1 well site. Production from that field should reach 120,000 barrels a day (b/d) in 2020.
Guyana’s first lift is expected by March 2020. By 2025 production could be 750,000 b/d and by the end of the decade, more than one million b/d of oil equivalent. Under the current Production Sharing Agreement (PSA) the IOCs have a 75% cost recovery with the remaining 25% profit oil equally split between the licensees and Guyana. The current royalty rate is 2%.

The impact on the Guyanese economy can be convulsive. In 2020 it will grow by 86%, and the per capita income could more than double to US$10,000. Rystad Energy estimates that national revenue will amount to more than US$117 billion over the lifetime of the projects.
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. The geology is right. But a national sense of euphoria is high and caution may be in short supply.
There are some harsh realities. Guyana is new to the game of oil and gas production. Four years ago it had no known oil reserves. Now it must race to provide the necessary legislation, institutional structures and management for first oil. Crafting oil legislation is a new experience for the Guyanese.

As a frontier oil province, the country is vulnerable to the many ‘above ground’ pitfalls that could accompany the boom. The explosion of money might be difficult to absorb and to manage. Inflation can rise stifling the development of other industries. The immediate danger is that any government will leverage now on future earnings taking on more debt.
 
The looming pitfall is the ‘resource curse’ or the ‘paradox of plenty’ where the destabilisation of traditional economic sectors occurs as the country becomes overly dependent on exports of a single commodity. Some cash-poor but resource-rich countries tend to be less developed precisely because of their resource wealth.

The government must ensure that the country has all the provisions in place to earn its fair share of the windfall. 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 leadership corruption – which is rampant in some emerging oil states. Maybe Guyana does not have such levels of corruption; but oversight institutions are crucial in order to combat this curse.

There are positive signs. 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 (GSDS) that is the roadmap for an economy defined by sustainable, efficient, low-carbon and resilient development for successive generations. The hydrocarbon resource revenues are expected to be the catalyst for growth and funding of the GSDS.

The key to Guyana’s success is the effective management of the oil and gas sector. Unfortunately, the political impasse in 2019 has delayed the implementation of some institutional arrangements for the management of the sector. The best laid plans are useless unless they are implemented.

Since oil is a depleting asset, the primary question 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 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. Guyana will prosper if the massive revenue quickly transforms the economy and the quality of life for its citizens. I am cautiously optimistic.

Anthony Bryan 

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