By Arthur Deakin and DrRemi Piet
The Guyanese government expected to receive U$300 million in oil revenues during its first full year producing oil. A sharp reduction in global demand and the OPEC-supply war caused prices to fall, cutting the original revenue targets by more than half. Naturally, Guyana’s precarious economic situation will be aggravated. Lower-than-expected revenues will impact the country’s ability to drive forward much-needed infrastructural and societal reforms.
Other industries, such as sugar, are already struggling. The government-owned Guyana Sugar Corporation (GuySuCo) is unable to pay workers’ salaries and is awaiting a U$3.6 million lifeline from the government. GuySuCo is the largest employer in the country, where it supports thousands of lower-income families. Without that funding, workers might be laid off; the second harvest of the season could also be jeopardized.
The approval of the Payara oil field is another important development that the upcoming administration needs to address headfirst. Any further tardiness could have a domino effect on the remaining projects being developed in the country. The delay in this project’s approval will subsequently postpone the receipt of oil revenues, affecting investments in other areas of society, such as the sugar industry. The timeline for the construction of schools, hospitals, roads and electricity, is long overdue. Delays will also have a direct effect on Guyana’s job creation and GDP growth.
The Payara project was initially projected to be approved in 2019 with first oil by 2023. Due to delays in governmental authorizations and a still undecided presidential election, new projections expect Payara to be approved in the first half of 2021 and achieve first oil by 2024. Rystad Energy projects that a mere three-month delay from this newly updated timeline will result in Guyana extracting ten million barrels of less oil by 2030. In dollar terms, a 12-month delay would mean that the Guyanese government would lose U$330 million in Net Present Value; a 24-month delay would result in a U$575 million loss.
If the Payara project is approved within this new time frame, it can still produce about half its oil reserves by 2030, delivering U$7 billion in income to the government. That is much greater than Guyana’s GDP from 2019.
Before investments start flowing, some issues do need to be addressed. Investors have voiced concerns over a greater application of US sanctions due to the inconclusive nature of the March Presidential elections. Our view is that the recently imposed sanctions are unlikely to be more than a temporary punishment. Rather, they are simply a measure to pressure the current administration to give way to the next administration. In the long-term, these sanctions will be irrelevant.
Another concern is the potential transition towards a new People’s Progressive Party/Civic (PPP/C) administration. It is no secret that the PPP’s presidential candidate, Irfaan Ali, will be stricter on the demands made by oil companies. He has also indicated that he will try to alter the oil-fiscal framework moving forward. Albeit, this may be causing a certain amount of apprehension for oil companies, Ali has said that Exxon Mobil’s production-sharing agreement for the Stabroek block will not be renegotiated. He knows that any changes in the said agreement would be an utmost violation of investor rights and cause serious reverberations across the world. He also recognizes the importance of the oil sector in the development of Guyana.
Despite the economic and oftentimes political uncertainty caused by COVID-19, many large firms in North America and Europe are flush with cash. They are eager to invest in emerging markets, seeking to find greater returns. For many, Guyana could be a juicy fish in a massively competitive ocean. But first, it needs to implement a sustainable regulatory framework after it ensures a democratic transition to the next administration.
Investors will inherently gravitate towards countries with predictable political and regulatory frameworks. Those that do not meet that criteria will have to compensate with much higher returns. Guyana’s main appeal has been the profitability of its oil operations due to its low extraction costs. With oil prices looking gloomy, Guyana has lost some of its edge.
Discoveries in nearby jurisdictions may also threaten to sidetrack investments. In July 2020, Touchstone Exploration’s Cascadura project confirmed a discovery of up to 571 billion cubic feet of natural gas in neighboring Trinidad and Tobago. Guyana will need to find other answers to attract investors—a potential solution is an administration that promotes investment while abiding to established frameworks. If they fail to do so, Argentina and Mexico’s past experiences may provide some insight on what to expect.
Similar to Guyana’s efforts in the Stabroek block, the development of Vaca Muerta—a shale formation in Argentina’s Neuquén Basin—is a crucial part of the economic recovery of Argentina. In September 2019, drillers began to pull back from Vaca Muerta because of government-imposed price controls aimed at controlling inflation. By February 2020, before the COVID-19 crash, the number of operating rigs fell by 29 percent.
In July, Argentine president Alberto Fernández used the pandemic and the fragility of his country’s economy to indefinitely suspend the construction of a $2 billion-dollar pipeline approved by the former Macri administration. The move was announced during a tumultuous time and should be monitored closely—investors may see it as a warning sign that past projects can be undone. In fact, Vaca Muerta’s annual investments are estimated to be 40 percent lower for 2020.
Argentina needs to restructure U$65 billion in bonded debt urgently, and it should also pass a new special legislation to protect investors in the Nequén Basin. Without a stabilized economic and political environment, the extraction of 927 million barrels of proven reserves may take a deadly wrong turn.
In Mexico, the situation is more dire. Contrary to the trend in most of the developed world, president Andrés Manuel López Obrador (AMLO) is shifting towards hydrocarbon development via state-owned Pemex. Motivated by AMLO’s ideology, the energy ministry is publishing harmful rules without abiding to the standard consultation process. These decrees are aimed specifically at hindering the development of renewable generation and encouraging fossil-fuels. AMLO plans to increase Pemex’s production by a third and has promised U$15 billion in aid for the company, straining the country’s financial resources on a company that had a record U$23 billion loss in the first three months of 2020.
As in Guyana, detrimental energy policies in Mexico may have a ripple effect on its entire economy. Bank of America has warned that Mexico could lose its investment-grade credit rating in 2021, as public debt reaches 60 percent of GDP, investors are crowed out of the energy sector and the economy collapses. J.P. Morgan, another leading US bank, estimates that U$44 billion in Mexican bonds are at risk of forced selling in the event of a junk credit rating. Mexicans, foreseeing a bumpy fiscal and political road, have already increased their assets abroad by U$5.5 billion in the first quarter of 2020. Direct and portfolio investments in the country, another indicator of investor confidence, fell by 15 percent and 63 percent, respectively.
Guyana, like Mexico and Argentina, needs to have a minimum level of institutional stability and certainty to attract foreign investment. Transparency, through adherence to the rule of law and open communication with the private and public sectors, is of paramount importance. Free-market economic policies that ensure the fiscal health of the country and the thorough development of industries, rather than their downfall, will assuage investors’ concerns. During this time of risk aversion, investments must be safeguarded from political meddling and provide generous returns in order to attract the right kind of capital.
That said, there will be no progress or sustainable investment in Guyana until a democratic transition is ensured. The electoral situation in the country is beyond scandalous, with 100 countries across the globe demanding that the recount figures be formalized. Juan Guaido’s representative to the Organisation of American States (OAS), Gustavo Tarre, said that the Guyanese elections are reminding him of Venezuela’s situation during the past 20 years. It is still possible for Guyana to avoid that tragic fate.
Dr Remi Piet is a Senior Director at Americas Market Intelligence (AMI)/ Africa Market Intelligence (AfMI) and leader of the firm’s Natural Resources and Infrastructure Practice.
Arthur Deakin is an Analyst at AMI and AfMI where he conducts political, economic and other risk analysis activities for the mining, energy and infrastructure sectors in both Latin America and Africa.