Guyana must embrace transparency to realise oil wealth
Grasping the lessons from the mistakes of other countries in the region will be vital to maximising the country’s resource potential
Latin America’s most recently established oil producer, Guyana, is poised for an enormous financial windfall over the next decade. US major ExxonMobil estimates that recoverable reserves in its Stabroek block alone hold more than 8bn bl, and the United States Geological Survey (USGS) rates the Guyana-Suriname basin as the second-most prospective unexplored basin in the world. Geologically, the region is strongly analogous with prolific offshore West Africa.
But while there is huge potential, Guyana’s lack of experience could have detrimental consequences. The former British colony needs to learn important lessons from its Latin American peers to capitalise on its resource potential and the abundant financial opportunities ahead.
One positive for Guyana has been the backing it has received from foreign companies. In contrast, Mexico and Brazil both initially had legislation preventing investment in their respective oil and gas industries, measures that were removed only later.
8bn bl – Stabroek block recoverable reserves
Nevertheless, Guyana has negotiated all of its petroleum agreements on a one-to-one basis to date, rather than through bidding rounds, and as a result lacks transparency. Some negotiations have never been made public, while others have been released only after a significant period.
By contrast, both Mexico and Brazil have engaged in competitive bidding rounds. Brazil started offering blocks in 1999 and has since undertaken 16 auctions. To qualify, applicants must meet the technical, economic and legal requirements defined by state agency the ANP. The bidding criteria include a cash bonus and minimum exploration programme, while the legal framework ensures crucial transparency.
Mexico has conducted bidding rounds and published the names of the participants, the winners and the government officials involved as well as the bidding criteria. Guyana should adopt a similar process to allocate its remaining oil and gas blocks. The current method of one-to-one negotiations lacks transparency and risks widespread corruption.
Bury the hatchet
Political instability has plagued many Latin American countries, and Guyana is no exception. A winner has yet to be declared from the country’s general election on 2 March, following which there have been various court proceedings amid accusations of voting irregularities. A recount took place, but this was also challenged in the courts.
Neighbouring Suriname is suffering its own political instability following its disputed election, although there are signs incumbent president Desi Bouterse has accepted the result and could step down.
The current method of one-to-one negotiations lacks transparency and risks widespread corruption
At Guyana’s other border, US sanctions on Venezuela have stoked existing political instability and devastated the country’s oil sector. Oil production has slumped from 1.3mn bl/d in 2018 to just 570,000bl/d in March, according to Opec’s monthly oil report. Political instability will significantly affect investment in the oil and gas sector, and on its current trajectory Guyana risks following in the footsteps of its volatile neighbours.
Avoiding the resource curse
Another important lesson that has been demonstrated by major Latin American producers is the importance of diversifying the economy following the arrival of significant oil wealth. Ecuador first extracted oil in 1972, and it was expected to propel the country’s development. But as Ecuador’s GDP grew over the next 10 years, the state became dependent on oil revenues. The country became increasingly indebted and underperformed compared with the rest of the region.
Similarly, Venezuelan government policy has caused catastrophic economic harm. When oil prices were high from 1998 to the early 2010s, much of the country’s oil revenues were used to fund unsustainable social programmes aimed at addressing poverty and inequality. By 2015, 96pc of Venezuela’s exports and 60pc of the government’s revenues were drawn from the oil sector.
Failure to diversify the economy will make Guyana increasingly vulnerable to volatile oil prices, as exhibited by Venezuela’s historic GDP collapse since 2014 and more recently in the fallout from the Covid-19 pandemic.
Fernanda Delgado is a senior researcher for Brazilian thinktank FGV Energia; Eduardo Pereira is a senior researcher at the Brazilian University of Sao Paulo; and Michael Jaganan is a senior researcher at the University of the West Indies in Guyana.