The question hanging over Guyana’s next phase of Oil development

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Dr Remi Piet and Arthur Deakin

By Dr Remi Piet and Arthur Deakin

The Payara well, located 190km from the shore of Georgetown, is expected to have 500 million barrels of recoverable oil. Discovered in 2017, Payara was the third of what is now 16 major oil findings made by the Stabroek Consortium off the Guyanese coast. The discoveries represent roughly 8 billion barrels of recoverable oil (and counting).

Although the Payara project was set to start operations by 2023, the initial start-up date has been delayed by six to twelve months. The government argues that the field development plans presented by the Stabroek Consortium remain incomplete. But the more likely explanation is that Guyana’s political impasse has prevented government officials from making any important decision in the past four months. Until the next administration is sworn in the government will remain in this detrimental limbo that is freezing the country’s economic momentum.

In a country where 40 percent of the population still lives on less than U$5.50 a day, the approval of the Payara project may seem irrelevant—too many locals, it may even feel out of touch. As citizens struggle to put food on the table at the time of COVID-19, oil discoveries are likely buried deep in the back of their minds. But the Payara project is more than just another oil field. It will likely be the first major project decision by the upcoming administration, serving as a guiding point for foreign investors looking at Guyana.

From the outside looking in, the delay of the Payara project could portray an image that Guyana is desperately trying to avoid: an unreliable country lacking the stability requested by foreign investors. Nearby in Mexico, president Lopez Obrador’s volatile attitude towards infrastructure and energy projects has led to a 24 percent decline in foreign direct investment in 2019. Like Mexico, an unstable, delay-prone regulatory process in Guyana will limit the arrival of new revenues and could deprive the country of much needed regulated private investments.

At a time of great economic uncertainty and cuts in capital spending, a predictable framework will help lure international players looking for certainty in their investments. Delays in the approval of the project, including technical assessments and the evaluation of societal benefits, will also impact the trickling down of economic growth to those who need it the most in Guyana.

In terms of sheer numbers, the Payara field is expected to produce roughly 220,000 barrels of oil per day, representing an estimated U$465 million in annual revenues for the government (based on Brent Crude at U$40/barrel). This is nearly half a billion dollars that could be used for schools, hospitals, and the strengthening of an inadequate seawall. A deferment in these funds may put essential infrastructure on pause in a country whose population can rely on only few economic alternatives.

By the end of July, the legitimate winner of Guyana’s presidential elections should be settled at the State House. The importance of these elections cannot be understated; the next president will have access to more money than any previous leader in Guyanese history. Their decisions will play a fundamental role in how the abundant petrodollars are spent, creating either a resource-dependent or a resource-rich society. Regardless of who is at the helm, the citizens must demand a transparent, depoliticized regulatory process from the upcoming administration. This will ensure that policymakers are held accountable and that decisions are made based on the merit of applications—not in the interest of a political party or politician.

Fortunately, major oil companies that make up the Stabroek Consortium have the financial resources to weather the storm and have reiterated their long-term commitment to Guyana. In early July, it was announced that Exxon Mobil would move forward with its drilling of the Kaieteur block, despite the challenges brought forth by COVID-19. The next administration should embrace these companies as partners, ensuring that the millions of dollars invested are put to good use for the Guyanese people.

The main objective should be to provide opportunities for the people of Guyana while diversifying the economy. Oil majors, in collaboration with the government, should continue to develop onshore infrastructure and create jobs for local citizens. The diaspora of college students, at a rate of 80 percent, will significantly decline if skilled job opportunities start presenting themselves.

The latest swing of volatility in oil prices have put countries highly dependent on oil revenues, such as Ecuador and Venezuela, gasping for financial resources. Guyana should avoid this at all costs and implement specific policies aimed at knowledge transfer and support to local entrepreneurship. With the correct policy frameworks, the country can define a path away from the pitfalls of resource curse scenarios. The development of the energy sector is needed for Guyana but has to be harnessed as a vector of value creation.

Revenues of oil will need to be channeled towards diversification both within the extractive sector and in the rest of the economy. The strengthening of regulations in the energy and mining sectors, led by the presence of established actors, would lead to a pipeline of alternative energy projects and regulated mining operations. More importantly, revenues from the extractive sector should serve to support private entrepreneurship and strengthen institutional and corporate governance. It could also help restructure the sugar industry, and agriculture, whose efficiency, standards, and cost-effectiveness need to be improved.

Sole diversification of the economy will not be sustained unless structural reforms are undertaken, establishing robust institutions and a strong regulatory framework. This will not be done overnight but the path is clear. On the institutional side, having a legitimate, legal resolution to the political impasse will create stability. In the regulatory realm, keeping regulators free from political meddling is a priority.

The government decisions in the following months will be instrumental in shaping Guyana’s position for generations to come. Guyana has been dealt pocket aces; it is up to the next administration how they decide to play the remainder of their hand.

About the Authors

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.

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