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Guyana and first oil

Dec 15, 2018 Features / Columnists, Peeping Tom

Guyana is not yet ready for first oil. Oil will be produced by Exxon by the end of 2020, but in terms of Guyana’s preparation to ensure that the country is not swindled of its deserving wealth, the country is far from ready.
The government does not appreciate the gravity of the task required to prepare for first oil. These tasks require far more sums to be allocated to help enact the regulatory framework, build local capacity to manage the industry, and develop the institutions, which will be needed.
Guyana’s oil reserves are estimated conservatively at US$4B. Yet all the government has allocated to the Energy Department for 2019 is a mere US$2M. Can anyone take this APNU+AFC administration seriously when you look at these numbers?
It is clear that the government is clueless about what it will take in order to develop a full functional Energy Department in time for first oil in 2020. Guyana is now beginning to establish the institutions, which will be needed to oversee the industry – it started out on a controversial note by placing an environmentalist in charge of the Energy Department and an energy specialist in charge of the Environmental Protection Agency.
As if these choices were not inexplicable enough, the government is now only allocating US$2M for both capital and recurrent expenditure for the energy department. This is the department, which will have to hire a firm to do the audits of the pre-production costs of ExxonMobil. This is the department, which will have to recruit experts to advise on negotiations with Exxon, including hiring legal experts.
If the cost of legal services to prosecute Guyana’s case before the International Court of Justice is anything to go by, then that US$2M is grossly inadequate.
The government is also trying to disclaim contentions by the Leader of the Opposition that the massive benefits from oil will not flow until 2025. The government should not be trying to create false expectations, because Exxon itself has indicated that in the early years, Guyana is likely to earn US$300M per annum, and as production increases this sum is likely to grow.
Right now Guyana has another worry. It has to be concerned about the decline in oil prices and whether ExxonMobil and its partners will be willing to start production in 2020 as a result.
Up to yesterday, the price was hovering slightly below US$52 per barrel. At that price, Guyana will barely rake in US$300M, after costs. So the Leader of the Opposition is right in cautioning the government not to create false expectations.
There are attempts being made to keep prices from falling too low The United States is running low inventories in the hope of boosting prices, but those plans may be offset by the recovery efforts in Venezuela. A joint venture between that country and China has seen an increase in production in one venture, which accounts for 10% of Venezuelan oil production.
Guyana has already moved to table a Natural Resource Fund Bill in the National Assembly. This is elsewhere referred to as a Sovereign Wealth Fund. But it still needs technical assistance to recruit someone to forecast the movement of oil prices, because such information would be able to determine how much monies are likely to enter into the Sovereign Wealth Fund.
All of this makes the relatively small appropriation for the Energy Department even more scandalous. The government, one year before first oil and with so much uncertainty in oil markets, should have pumped more resources into the Energy Department.
Guyana is not going to be ready for first oil. And what this means is that the country will be unable to exercise the level of oversight that is necessary over the oil companies.

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