Can Guyana Avoid The Oil Curse?

Tiny Guyana, a former British colony in South America of less than one million, is on the cusp of becoming a major global oil exporter. In as little as four years, the impoverished country, situated in the northeast of the Amazin, went from first discovery to first oil, an incredibly short time for the petroleum industry, and is now lifting an average of around 400,000 barrels per day. For this reason, Guyana’s one-time flailing economy, which was hit hard by the 2020 pandemic, is booming. With more than 11 billion barrels of exploitable oil resources identified and over 35 discoveries to date, along with Exxon ramping up development of the offshore Stabroek Block, there are signs Guyana’s oil industry and the economy will continue booming. This is provoking fears that Guyana will become vulnerable to the oil curse.

The oil curse is where a country becomes overwhelmed by the tremendous wealth generated by petroleum while ignoring other economic sectors in preference to maximizing the windfall delivered by oil. This typically leads to heightened political and economic dysfunction due to weak governance, rampant corruption, malfeasance and heightened conflict over control of the vast wealth that petroleum generates. It also makes countries extremely vulnerable to declines in the oil price, such as the oil shocks of the 1980s, as their economic dependence on the commodity grows. This leads to a phenomenon known as Dutch Disease, where all other sectors of the economy are ignored due to the tremendous wealth being generated by petroleum.

Extreme political instability is a key result of the oil curse, and this is exemplified by Venezuela, a country considered the epitome of a ruined petrostate, where petroleum is the primary source of fiscal income and the main export. A series of political and economic crises erupted during the 1980s as international oil prices collapsed, which in turn fueled extensive civil unrest that ultimately led to Hugo Chavez winning the presidency and commencing his socialist Bolivarian revolution. As the rule of law decayed and power increasingly became concentrated in Chavez’s hands, rampant corruption, as well as malfeasance, flourished. Those events, coupled with weak governance and an over-dependence on revenue generated by petroleum exports, left Venezuela especially vulnerable to weaker oil prices and capital flight.

After Chavez embarked upon nationalizing Venezuela’s oil industry by seizing assets from foreign energy majors, including Exxon, ConocoPhillips and Chevron, there was a massive flight of capital from the country’s economically vital hydrocarbon sector. This caused oil investment to sharply decline, which weighed heavily on production and petroleum exports. When oil prices collapsed in late-2014, with the international Brent price plummeting from over $100 per barrel to less than $30 by early January 2016, Venezuela spiraled into a political and economic crisis.

The deepening economic catastrophe caused Caracas’ revenue to plunge, leaving national oil company PDVSA incapable of undertaking crucial maintenance and refits of vital petroleum infrastructure. As critical oil infrastructure fell into decay and exploration as well as development activities lapsed, oil production plummeted ever lower, compounding the fallout from weaker oil prices for a petroleum-dependent Caracas.

The impact of these events was magnified by ever-tighter U.S. sanctions, which by early 2019 had cut Venezuela off from global energy markets, exacerbating the massive economic and humanitarian catastrophe that has been unfolding since 2015. The situation is so severe that despite a slight improvement in conditions, Venezuela’s vast oil reserves of around 303 billion barrels could become the world’s largest stranded asset.

There are considerable fears that Guyana is facing a similar future. A long history of weak government institutions and poor governance means that corruption is rife in the former British colony. Global corruption watchdog Transparency International ranks Guyana 85th out of the 180 countries globally that it evaluated in 2022. The lower the ranking, the higher the perceived degree of corruption. While the administration of President Irfaan Ali, who took office in August 2020, is focused on improving governance and significantly reducing corruption, there are fears that the massive financial windfall delivered by oil will derail those reforms.

The revenue petroleum exports are generating for Guyana is substantial. According to the Bank of Guyana, the country’s central bank, the oil industry generated $439 million in revenue for Georgetown during the second quarter of 2023. This was comprised of $11 million earned from industry royalties and $428 million generated by oil profits. Since oil production began in Guyana in 2019 until the end of the second quarter of 2023, the former British colony earned nearly $2.7 billion from 29 oil lifts comprised of $331 million from royalties and $2.3 billion from profit oil.

As a result of that vast offshore petroleum wealth, Guyana’s gross domestic product between 2019 and 2022 grew nearly threefold to $14.5 billion. That sees the former British colony now ranked as the fastest growing economy in the world, with IMF data showing Guyana’s GDP expanded by an eye-popping 62% during 2022. If China’s Macao Special Administrative Region is excluded, Guyana will top the list again for 2023, with the IMF estimating the tiny South American country’s economy will grow by 37%.

Georgetown is resolutely focused on rapidly expanding the former British colony’s oil industry, including exploration drilling as well as petroleum production and exports, with Guyana expected to be pumping 1.2 million barrels per day by 2027. While this will amplify the tremendous economic windfall being received by Guyana, it will make the tiny South American country of less than one million financially and economically dependent upon petroleum. This magnifies the risks of Guyan’s economy being roiled by a sharp decline in oil prices while bolstering the potential for conflict over control of the vast petroleum profits and corruption to multiply significantly.

A key part of Georgetown’s oil industry reforms is updating Guyana’s production sharing agreement. This is being performed by the Ministry of Natural Resources with a focus on boosting the state’s cut from oil production and eliminating many of the overly favorable terms awarded to Exxon for the Stabroek Block. Essentially, the new PSA will retain the existing 50:50 profit share, implement a 10% royalty regime compared to the 2% secured by Exxon, reduce the cap for cost recovery oil to 65% in contrast to 75% for the Stabroek Block and introduce a 10% petroleum tax. To ensure the new PSA is ready to be implemented when new oil blocks are awarded, Georgetown postponed its first offshore auction of 14 blocks until August 2023. Those amendments, while boosting Guyana’s share of revenue, still leave the country as a profitable jurisdiction that is competitive when compared to its South American neighbors. When considered in conjunction with the light sweet oil discovered in Guyana, which has a relatively low carbon footprint to extract, foreign energy majors will continue to flock to the former British colony.

While there is considerable good news surrounding Guyana’s offshore petroleum potential, including CGX Energy and Frontera making two promising discoveries in the Corentyne Block, there have also been some unfavorable developments. Tullow Oil which was roiled by a series of poor drilling results in offshore Guyana, has agreed to sell its Orinduik license to Eco Atlantic Oil & Gas for $700,000. Spanish oil major Repsol is also struggling to hit oil in Guyana’s territorial waters. The driller has yet to make a commercial discovery in the Kanuku Block and, at the start of 2023, was reputedly considering embarking on a large-scale field survey.

By Matthew Smith for Oilprice.com