Guyana Challenge: Managing Growth of Oil Sector

Guyana is expected to see record GDP growth of 56 percent this year. Here capital Georgetown. (Photo: Dan Sloan)


The checks and balances implemented are closely tied to the executive branch.

BY ENERGY ADVISOR
Inter-American Dialogue

Guyana’s government revenue from domestic oil and gas production is on track to break the $1 billion mark this year and accelerate to $7.5 billion annually in 2030, according to research that Rystad Energy released in July. Guyana is likely to become a global leader in oil and gas output in the coming years, and by 2036 could be the fourth-largest global offshore oil producer, leapfrogging the United States, Mexico and Norway, the firm said. Has Guyana put in place institutions and policies necessary to manage its energy sector well? Does it have the capacity to curb corruption and oversee state revenues effectively, problems that have plagued some other oil-producing countries? How should Guyana go about both benefiting from its natural resources while playing a constructive role in the global energy transition to cleaner fuels?

Riyad Insanally, senior fellow at the Caribbean Initiative of the Atlantic Council’s Adrienne Arsht Latin America Center and former ambassador of Guyana to the United States: Record GDP growth projected at 56 percent in 2022 accounts for much government optimism. According to Finance Minister Ashni Singh, in his mid-year economic report to Parliament on Aug. 29, the government ‘has embarked on a period of rapid transformation and ... has laid out a master plan for the rapid development and transformation of Guyana.’

The ‘master plan’ appears to be based on the deliverables promised in the ruling PPP/C’s 2020 elections manifesto. Non-oil growth at 9.6 percent is encouraging and points to an awareness of the need to guard against the resource curse. Much work remains to be done, however, to put in place the required architecture and to build capacity to manage the oil and gas sector effectively. True, an updated Natural Resource Fund Act and a Local Content Bill were passed in 2021, but a Petroleum Commission is yet to be established. A National Economic Advisory Council would also be commendable. The government’s focus on education and training is a good start to empower Guyanese, especially young Guyanese, to participate in the new economy, but it will take time before critical mass is achieved. Natural Resources Minister Vickram Bharrat has confirmed that work is ongoing to ‘refine’ the 2019 $20 million World Bank loan to build capacity. Both President Ali and Vice President Jagdeo have acknowledged the need to import labor and expertise to implement projects. Efforts should now be accelerated to build technical and institutional capacity, outsource skills, including from the diaspora and through appropriate immigration policies, to maximize profits from the country’s newfound resources and to work toward the bigger objective of moving to clean energy and low carbon development. Success at the national level would pave the way for Guyana to anchor regional energy security and perhaps even become a key player in the hemisphere.

Arthur Deakin, director of energy at Americas Market Intelligence: Guyana has established several different organizations and institutions to manage the energy sector and its funds. However, when doing a deeper analysis, the checks and balances implemented are closely tied to the executive branch. Most of the members appointed to the committees responsible for the management of the oil monies, ranging from the NRF Board of Directors to the Investment Committee, have either been appointed directly by the president or chosen by the National Assembly, where the president’s party has a majority. This prevents the much-needed separation between political influences and the billions of dollars flowing into the country. It is also concerning that $400 million was drawn down from the Natural Resource Fund in May and July, before any of these oversight mechanisms were in place. This money has been allocated to finance ‘national development priorities,’ but it is unclear where exactly it will be spent. Guyana needs the participation of an independent and international body in the monitoring of these funds to ensure appropriate and transparent spending of the revenues. Regarding Guyana’s role in the energy transition, it can start by monetizing its gas reserves and ensuring that it replaces other dirtier forms of energy, such as coal or heavy fuel oil. It should also invest its oil revenues on climate mitigation and adaptation mechanisms within its own borders.

Theodore Kahn, senior analyst in the Global Risk Analysis team at Control Risks in Bogotá:  As a developing country with no prior commercial hydrocarbons experience, Guyana has faced daunting challenges since the discovery of massive offshore oil deposits in 2015. Establishing a contractual framework, setting up an independent regulator, creating institutions to manage oil revenue, defining a local content policy—all this had to be done essentially from scratch. The country has made progress (albeit uneven) on many of these items. A sovereign wealth fund and local content policy, while imperfect, are now in place. The much-criticized production-sharing agreement with Exxon and partners is not out of line with international standards for new producers and has served the goal of bringing production—and therefore government revenue—online fast.

The key question is how President Irfaan Ali’s government will spend it. The administration has laid out a compelling vision that includes major infrastructure projects (such as the gas-to-shore initiative), immediate support for struggling households and industries, and an ambitious plan to transform Guyana’s energy matrix to achieve over 30 percent renewable sources by 2027. Making this a reality given the country’s weak fiscal institutions, limited public sector capacity and labor shortages will not be easy.

Then there is the political element. Ali will have to convince Afro-Guyanese that these new institutions, policies and projects will benefit them as well. If he fails to, political instability and social unrest will increase. Even so, the strong fundamentals of Guyana’s large, relatively low-cost and low-carbon oil reserves will likely ensure it emerges as a key global producer before long.

Steven Debipersad, lecturer at Anton de Kom University of Suriname: The dependence of Guyana’s economy on petroleum revenues is ever increasing. For 2022, a $1 billion contribution is estimated, which amounts to one-seventh of the country’s GDP. Toward 2030, the annual contribution could steadily increase to $7 billion, which corresponds to the 2021 GDP. Guyana is thus transitioning from a more agriculture-based economy to one mostly driven by oil and gas, with which entrepreneurship, the labor market but also education systems must drastically change. To support these changes, a new policy framework is necessary.

This should primarily protect against Dutch Disease due to the country’s newfound resource wealth. Second is the resilience to the resource curse that many petroleum producers in the world struggle with. The cabinet of the vice president supervises oil and gas activities from within the government, and a local content policy should result in more national earnings from offshore operations. To make growth sustainable, all oil and gas activities must be decoupled from politics and institutionalized. In this way, transparency and earnings can further increase, while the private sector can work on more spillovers to other national sectors, toward a more significant long-term role, as is already the case in neighboring Trinidad and Tobago. The increased government revenue stream should be channeled to pursue a national energy transition while simultaneously capitalizing on the national green economy potential.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

 

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