Hopes high as Guyana finds black gold

Hugging the shoulder of South America, Guyana – population less than 800,000 – until now has much lower profile than its larger, more fractious neighbours. Major commodity discoveries look set to change this. The country is poised to become a leading oil producer after major offshore reserves were found in 2015. The size of these discoveries keeps increasing: at the end of July, oil major Exxon Mobil revised estimated reserves for its finds in Guyana upwards, from 3.2 billion barrels to four billion.

Black gold

If all goes according to plan, at peak production the government could see as much as $700m in revenues per year flowing into its coffers. Both the consortium led by Exxon – which includes minority partners Hess and China National Offshore Oil Corporation (CNOOC) – and Guyana’s government are preparing for first production in 2020. The UK’s Tullow Oil and Spain’s Repsol are also exploring in the area.

Hopes are high. Guyana remains one of the poorest in the western hemisphere – and if managed well, the oil boom – with reserves valued at nearly 50 times current gross domestic product – could lift the country out of poverty. But some are tempering their optimism.

“This income [from oil] can create a lot of opportunity for development, for good quality spending in health and education. This is a very small country so the potential for good is very great,” says Francisco Paris, Latin America regional director at the Extractives Industries Transparency Initiative (EITI). “The risk is they deviate, or use it for white elephant projects or corruption, so things end up costing much more than they should.”

Managing the resource curse

In many places around the world, the discovery of vast reserves of oil has not had a positive outcome. In countries such as Nigeria, Venezuela or Equatorial Guinea, oil wealth has eventually entrenched corruption, bankrolled dictators or destroyed the non-oil economy.

The resource curse and so-called Dutch Disease – when the dominance of one lucrative sector kills other industries – are well-documented consequences of oil bonanzas gone wrong. Guyana has a history of weak institutions and corruption – though its government is democratic. It has also faced significant brain drain as many of its brightest citizens have left to find opportunities elsewhere.

Furthermore, the Guyana Geology and Mines Commission, which is responsible for regulating the oil sector from production to geological research, currently has only nine technically trained employees. “Guyana has almost zero capacity for dealing with oil and gas,” said Jan Mangal, former oil advisor to Guyanese president David Granger, during a presentation at the University of Guyana in February.

Despite the capacity challenges, EITI’s Mr Paris says the government wants to get it right. The Guyanese government is consulting widely on industry best practices with neighbouring oil producers as well as the International Monetary Fund (IMF) and the World Bank, and is receiving a lot of donor support.

The country joined the EITI, a global standard setter for transparency, in October 2017. Additionally, under public pressure the government published its contract with the Exxon consortium in December.

A sovereign wealth fund, designed to manage and invest Guyana’s oil revenues long term, is also in the works. Draft legislation will be brought to parliament by December, according to finance minister Winston Jordan, and a technical expert from the Commonwealth Secretariat is advising on the framework.

Minister of natural resources Raphael Trotman has been resolutely upbeat. “Each Guyanese is going to be a US dollar millionaire, or worth that, in a few years,” he told The Wall Street Journal in June, referring to the sovereign wealth fund’s potential.

Others are more circumspect. “They need to get serious about implementing the advice they are currently getting,” Mr Paris says. “The opportunity to create that capacity is there – the challenge is to really create a level field [for the oil industry] that is robust and not politicised.”

A good deal?

While the publication of the contract terms is seen as a positive step towards transparency, critics question whether Guyana’s government has negotiated a good deal on the country’s behalf. They say Guyana’s royalties take is very low, at 2%. The government also agreed to exempt the oil companies from taxes. “What we can do is look at what are the international norms. Royalty, when you look around, is more between 10% and 20%, not 2%,” Mr Mangal says.

The IMF agrees. In a 2016 report examining the terms of the contract, it said “existing production sharing agreements appear to enjoy royalty rates well below of what is observed internationally” while allowing that “it is not unusual to see more favourable fiscal terms for early investments”. It also advised the government not to award more licences until the country reviews its tax and fiscal framework.

From Exxon’s perspective, it explored for 16 years before discovering oil, assuming a large part of risk for the earlier stages of the project. Now the company plans to invest $4.4bn to get the fields to the point of production. In addition to royalties, Guyana will also receive around 52% of profits from the project after operating costs have been recovered. “Government take is generally lower in frontier plays … as governments need to incentivise companies to undertake high-risk exploration,” Exxon said in a statement.

Exxon also says that along with its partners, it has spent over $24m with some 300 local suppliers so far, and donated $10m to the University of Guyana to train local operators.

But Open Oil, a Berlin-based transparency non-governmental organisation, found that in comparable frontier market projects in Ghana, Senegal, Papua New Guinea, Mauritania and Guinea, the average country take was well over 60% .

A much-needed win

The 26,800 sq km Starboek block, where Exxon began exploratory drilling in 1999, will be operated by Exxon affiliate Esso Exploration and Production Guyana, with a 45% stake. Hess holds a 30% interest while CNOOC has 25%.

Exxon has struggled to recover following the oil price shock of 2015. Ageing fields, coupled with bets on expensive Canadian tar sands extraction and natural gas when the market was at its peak, have not panned out as planned. Meanwhile, US sanctions on Russia scuppered projects in the Black Sea and the Arctic circle.

Furthermore, Guyana’s oil is light crude, meaning it requires minimal processing. Its estimated break-even point of $26 per barrel will help ensure profits even at lower points in the oil price cycle. Exxon has said Guyana is one of its most promising prospects globally for the coming years.