A Not-To-Do List for Guyana’s New Administration When It Comes to Oil

Aerial view of Georgetown, Guyana. Credit: Desmond Brown/IPS

By Jeremy M. Martin and Kathryn Hillis
LA JOLLA, California, Aug 24 2020 (IPS)

Just over five years ago, a major oil discovery occurred on the
northeastern coast of South America. There have been a series of
additional discoveries ever since. But this time it was not
Venezuela. It was Guyana.

Fast forward to August 6 when Irfaan Ali assumed the presidency.
The country had been plunged into a political crisis since its
March election and allegations of fraud.

The situation had become dire and sanctions were levied against
the former government of David Granger. As the new government
reviews its policy and regulatory frameworks, there is, in our
estimation, what could be called a not-to-do list when it comes to
oil governance.

The well-known and hugely studied resource curse has confronted
countries such as Venezuela for decades. In many cases, significant
natural resources correlated with depressed development as other
sectors are neglected and currency appreciates causing
uncompetitive exports

Given the major oil discoveries, political instability was
problematic for the economic outlook and development of the nation.
It was particularly acute for managing the oil resource and income
on the horizon.

Earlier this year, oil was commercialized from the Liza field.
With that milestone, solving the political crisis was essential in
order to allow the new administration to grapple with the key oil
governance challenge and the what, where and how they should focus
when it comes to the emerging oil sector.

Guyana need only look to its neighbor Venezuela to see the
perils of abundant oil resources. The well-known and hugely studied
resource curse has confronted countries such as Venezuela for
decades. In many cases, significant natural resources correlated
with depressed development as other sectors are neglected and
currency appreciates causing uncompetitive exports.

It bears noting that even before the political crisis, Guyana
received a host of international experts, institutions and donors
eager to dispense advice as to how to avoid the grim fate of the
resource curse. But as much of the literature illuminates, many of
the recommendations are easier said than done.

For example, economic diversification and rooting out corruption
are excellent and obvious ideas that many larger and more
prosperous countries have failed to achieve.

So, back to our not-to-do list that we feel contains five
feasible, actionable ideas for the Ali administration.

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First, avoid overinvestment in the oil and gas
industry. While there should be adequate infrastructure for
drilling and shipping the oil, the country should resist the urge
to move downstream of the wellhead. Any refineries built would
likely be deeply unprofitable.

For context, the last new refinery in the United States was
built in 1977, as refining is a high cost venture that can take
many years to turn a profit. Additionally, most energy economists
point to an oversaturation of global refining capacity, especially
as many people are looking to decrease their use of fossil fuels.
This truism has been deepened by the impact of COVID-19 on the
global fuels market.

The previous administration in Guyana hired a consultant who
determined building a refinery would cost around $5 billion and not
generate significant revenue to outweigh expenses. In addition to
the cost issue, a refinery built before the state has enacted
proper oversight and regulatory agencies could become a vehicle for
corruption and crony capitalism. Look no farther than another
neighbor, Brazil, as to the pratfalls of this issue.

Second, do not subsidize gasoline. In Latin
America, an abundance of oil has led to a sense of resource
nationalism, causing citizens to view gasoline as a public good
rendered nearly free by government subsidies.

There are many cautionary tales that demonstrate the folly of
this logic, with the most drastic in Venezuela, but also the recent
example of Ecuador. These extreme subsidies are not sustainable and
are nearly politically impossible to remove once they become
expected by the people. Moreover, as economists around the world
intone: they can be quite regressive.

While a gasoline subsidy can, in the short term, provide a quick
jolt of economic growth to a developing country, it is not worth
the long-term debt. To avoid the future need for the IMF and
possible citizen uprisings, Guyana should keep gasoline at market
value.

Thirdly, and perhaps not a typical theme to
consider: Do not turn away dual citizens. Transitioning a largely
agricultural country into the world’s newest oil nation requires
significant technical expertise and talent.

Given Guyana’s small population, this can be hard to find.
Fortunately, Guyana has a large diaspora across the globe comprised
of individuals with experience and ability.

The government should appeal to its far-flung citizens to return
home and share in the newfound opportunities. While this seems
obvious, there is a pervasive nationalistic pride that makes
accepting dual citizenship difficult.

For instance, it is illegal to be a member of the Guyanese
parliament while holding dual citizenship. Several Guyanese
politicians recently had to make the choice to either step down or
renounce their foreign citizenship after the High Court of Guyana
reaffirmed the restrictive law.

This type of nationalism cultivates the exact nature of policy
that could hinder the success of Guyana. In order to benefit from
its rich oil resources, the country needs individuals with the best
education and diverse experiences working not just as engineers in
oil companies, but also serving in the government.

Insulating industry and governance from foreign influence is a
path to incompetent organizations and increased risk of
corruption.

Fourth, do not disregard the potential to
monetize associated natural gas resources. The noted offshore oil
discoveries have also proven a considerable amount of what is
referred to as associated natural gas, that is a byproduct of the
oil being extracted.

Historically, the associated gas in offshore oil projects was
not necessarily a valued commodity and other than some uses for
reinjection was more often than not flared, or burned off, given
that the real value was in the oil being produced.

Major developments around the use of natural gas as a cleaner
burning power generation source, as well as the importance of
avoiding flaring for emission and environmental reasons point to an
obvious win-win for Guyana to monetize the associated natural gas
primarily for use in power generation.

Moreover, the newfound power generation source would greatly
complement a largely hydroelectric power system and one that is
currently expensive and in need of enhanced reliability.

Lastly, do not encourage delusions of grandeur.
After ExxonMobil discovered the first massive oil field, an
expectation developed of great, and fairly immediate, wealth
derived from the offshore discoveries.

While there will be significant economic development and by
extension the opportunity to attain greater wealth derived from the
oil resource, the average citizen will most likely not see an
immediate large-scale change in their circumstances. The government
needs to convey this reality to the people in order to keep
expectations accurate and of a realistic timeline.

When the population is anticipating wealth that may not occur on
the level or timetable perceived, the simmering displeasure with
government could lead to unrest and destabilizing protests.

The reality check and need to manage expectations, while
politically unpopular, will also help to ensure for the population
that governance of the oil wealth is wise, long-term and not one of
associated with the expectation of a rapid, endless financial
windfall and deluge of funds.

Hopefully, Guyana will be able to use the bevy of outside advice
it is receiving to turn its resource curse into a resource
blessing. At least with these ideas there a few items to cross of
its to-do list.

 

Jeremy M. Martin is Vice President, Energy and
Sustainability at the Institute of the Americas at the University
of California San Diego.

Kathryn Hillis is a second year graduate
student at the School of Global Policy and Strategy at the
University of California San Diego and an intern at the Institute
of the Americas.

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A Not-To-Do List for Guyana’s New Administration When It Comes to
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Source: FS – All – Ecology – News
A Not-To-Do List for Guyana’s New Administration When It
Comes to Oil