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Samuel Braithwaite | What oil means for Guyana

Published:Sunday | September 11, 2016 | 9:00 AMSamuel Braithwaite
People walk near the central bank in Georgetown, Guyana, where the discovery of major oil and gas deposits offshore in the Atlantic has ignited hope that one of the poorest countries in the Western Hemisphere will undergo an economic transformation.

Oil exploration in Guyana, onshore and offshore, dates back to 1917 and has intensified over the last two decades.

There were many moments of frustration with each dry well or international incident over a maritime boundary. This frustration was compounded by the fact that Guyana's neighbours - Brazil, Suriname, Trinidad, and Venezuela - are all endowed with commercial quantities of oil.

Then, in May 2015, in the midst of a historic general election, ExxonMobil confirmed the discovery of "recoverable" commercial quantities of oil in its Stabroek concession (Liza-1), 120 miles offshore. In June 2016, a second discovery in the same area (Liza-2) confirmed the initial finding. In total, it is estimated that Guyana's recoverable reserves are in the vicinity of 0.8-1.4 billion barrels of oil.

To put the find into perspective, Trinidad's total proven reserves stand at approximately 0.7 billion barrels of oil, while Venezuela has approximately 300 billion barrels of oil reserves - the world's largest. Of course, Guyana could find more oil. One estimate suggests that the Guyana-Suriname basin could hold as much as 13 billion barrels of oil.

 

ESTIMATED PRODUCTION TIME

 

ExxonMobil expects to start production in 2020, with production estimated to last for about 20 years. The current Production Sharing Agreement (PSA) will see Guyana getting 12.5 per cent of the revenues. ExxonMobil and its partners will get 75 per cent of total revenues (cost oil) Guyana will then get half of the remaining 25 per cent (profit oil). The current PSA will be renegotiated at some point in the future.

Producing 100,000 barrels per day (bbl/d) at a conservative price of US$50 per barrel, Guyana will get approximately US$228 million per year. This amount is approximately 25 per cent of Guyana's budgeted expenditure for 2016, or about 30 per cent of the cost of Jamaica's recently completed North-South Highway.

Guyana's per-capita income would increase from US$4,000 to about US$6,300. While Guyana has recently moved into the World Bank's upper-middle-income category, oil production will cement the country's place in the category. Of course, moving into a higher category also means that Guyana will not be eligible for certain concessionary loans from international institutions.

Trinidad provides a natural reference point for Guyana, especially as regards the possible pitfalls. Trinidad has suffered from both the Dutch disease and the resource curse.

Dutch disease occurs when a significant inflow of foreign currency, caused by a resource boom such as oil, leads to an appreciation of the real exchange rate. An increase in the real exchange rate makes the country's exports more expensive (less price competitive). The resource curse is the idea that the economies of resource-rich countries do not perform as well as less-endowed countries.

These twin evils have to be given close attention. To their credit, current and past Guyanese administrations have done, and are doing, the right things to prepare Guyana for the production of oil. Assistance has been received from foreign governments, international organisations, and companies. For example, the minister of finance, Winston DaCosta Jordan, and the minister of natural resources, Raphael Trotman, visited Uganda in July to examine the Ugandan sovereign wealth fund model. It remains to be seen how well these plans will be executed.

 

MUSGRAVE'S VIEW

 

To better understand how the government of Guyana (GoG) can best govern once the oil starts flowing, it is apropos to use Richard Musgrave's public-finance view of the functions of government, i.e., distribution, allocation, and stabilisation.

The allocative role is primarily concerned with the provision of goods and services for which the private sector is not willing and able to produce, or could produce, but at high costs. These include education, health, infrastructure (inclusive of those related to oil production), and national defence. Surely, oil revenues will allow the government more fiscal space to better carry out this mandate. However, in executing its allocative role, the GoG must be careful to not unduly distort the market through populist policies. In the long term, populist policies usually end up harming the very people they were meant to help.

Moving on, increased tax revenues are expected, directly and indirectly, from oil production. The distributive role will see a redistribution of revenues garnered from this increase. For example, vulnerable segments of the population could benefit from much-needed increases in public assistance. Finally, the Guyanese government has to stay the course of maintaining a sound macroeconomic environment. This entails, for example, ensuring stable prices for goods, services, and foreign currency (exchange rate). Stable prices are especially important in the fight against Dutch disease.

Finally, but very important, the government has to strengthen the social fabric of Guyanese society. President Donald Granger must be commended for creating a portfolio in his government that deals specifically with the issue of social cohesion. However, while there have been a few initiatives, much more needs to be done. Going forward, creative initiatives need to be infused into every sphere of national life. Without strong and successful efforts towards social cohesion and, by extension, a better political culture, Guyana's oil boom is likely to engender greater ethnic conflict, corruption, and continued underdevelopment.

- Dr Samuel Braithwaite is a lecturer in the Department of Economics, UWI, Mona.

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