By raisa on Tuesday, 13 October 2020
Category: News

Oil sector a welcome addition to Guyana’s economy but will not necessarily cure economic and social ills

By Dr Tara Singh

 

Many news headlines read, “Guyana to enjoy unprecedented oil wealth,” following the discovery of 8 billion barrels of recoverable oil by Exxon and its subsidiary ESSO E&P Guyana Ltd and partners (Hess Guyana Exploration and CNOOC Petroleum Guyana Ltd) in the Atlantic Ocean, some 120 miles+ off the Atlantic coastline.

The wealth explosion will supposedly culminate in Guyana’s economy tripling its current size (of US$3.4 billion) to US$13 billion) by 2025, according to Myers Jaffe. Should anyone take these “wonderful” figures and wait for the oil economic nirvana to happen? Or should one become sceptical and also continue to embrace the growth of the other sectors of the economy?

I have done a crude calculation on estimated oil revenues for Guyana by 2025. My calculation is based on a few assumptions: (i) $35 per barrel; (ii) daily oil production at 750,000 barrels; (iii) 14.5 per cent profit sharing; and (iv) 360 workdays, and it yields an estimated US$1.37 billion in 2025. From a negative perspective, the magnitude of the oil revenue lost because of poor PSA (Production Sharing Agreement) negotiations between Exxon and the Guyana Government, has been given as US$ 50+ billion over the life of the project.

Having reviewed several pieces of information on the oil sector, and taking into consideration the negative impact of COVID-19 on current oil production, as well as other factors, I will not allow these “exciting” figures to dull my intellect or play havoc with my emotions. At this point, I remain apprehensive about the lofty assertions of wealth flowing into Guyana from oil proceeds. Also, if there is an agreement to install gas pipelines from the Stabroek Block to onshore location(s) to produce electricity, that would add around US$ 400 million to Exxon’s cost recovery bill.

I admit that my initial exuberance about oil discovery has been later tempered by my introspection into this matter. I know that segments of Guyanese society embrace, with great expectation, the oil sector’s massive potential contribution to the country’s economy. Apart from embracing the mantra of unprecedented oil wealth, they are also probably influenced by the US$300 million investments injected into the economy by Exxon in 2020, combined with the employment of 2000 local workers and the development of 70 joint ventures between Exxon and local companies.

Impressive as these figures suggest, I still believe that the impact of the oil sector on the national economy will not be that spectacular for the first 5 years in particular; rather it will be gradual but incremental during the 2020s (depending on production and pricing levels), and probably become exponential during the 2030s as cost recovery would have amortised by then.

In 2020, profit oil for Guyana is estimated at US$200 million; in 2021, it is estimated at US$300 million. As cost recovery decreases and as more oil is produced, the annual Government revenue will increase substantially according to a few sources such as the IMF, which projects, on the basis of production at Lisa I, Lisa 2, and Payara, that by 2054 Guyana could earn US$49 billion in revenue.

Notwithstanding this rosy projection, there are factors other than production and pricing levels that could affect the rate of profit oil, such as oil spills and environmental pollution. But the major challenge will come from alternative sources of energy (wind, solar, hydro, hybrid vehicles) especially in the 2030s and beyond.

With growing emphasis on clean and renewable energy, the force of oil in national economies will progressively decline. It is no wonder that the Florida-based NextERA Energy (wind and solar producer) whose value is US$143.8 billion, tops Exxon as the most valuable US energy company.

From a high stock value of over US$300 billion in 2016, Exxon’s current worth is less than NextERA Energy by US$ 900 million. NextERA Energy’s value is US$2 billion more than Chevron. Tom Mitro reported that Texas, despite being the top US petro-state, is moving away from fossil fuel to alternative energy sources, such as wind. In New York, solar energy is being aggressively promoted and incentivised.

In addition, there is the prospect of the “resource curse.” The World Bank has commended such oil-producing states like Dubai and Malaysia for having diversified their economies and for avoiding the resource curse trap. Guyana has already taken steps to strengthen its other sectors such as mining, forestry, and agriculture.

Several tax concessions were offered to these and other sectors like construction to promote growth. The sugar industry is being revitalised, while rice production and exports are on the rise. These traditional sectors employ more than ½ the labour force, while the oil sector is expected to employ 3000 workers. Most Guyanese will benefit indirectly from the oil sector through the proportion of oil revenues that will be spent on infrastructure projects, education, health, and social services.

The oil sector is a welcome addition to Guyana’s economy. But it will not necessarily cure Guyana’s economic and social ills. It is not anyone’s economic nirvana either. Other sectors are vitally important to move the country forward.