The emerging oil and gas sector


– how will Guyana benefit?

Continuing the discussion from last week, we saw that it is unclear what model of profit sharing will be used and the confusion between profits and revenues is worrying. Clearly if the deal stipulates we are going to earn 50 per cent profit, we have to question whether Exonn (Guyana) will ever declare a profit. Even if they do, it may take them 10-20 years after recovering all of their investments before a profit could be realised. It is therefore imperative we seek clarity in this regard and if this is so, Guyana needs to negotiate for a share in the revenues and not profit.
Given the offshore nature of the oil and gas operation, it would be difficult to regulate the core operations of the sector. Consideration needs to be placed on the fact that most of the high-profile and technical jobs will not be granted to Guyanese. This is an acknowledged fact and hence, every effort needs to be employed to ensure maximum benefits received by way of the supporting sectors – the supply of goods and support services.
While all of this is happening – a large influx of consultations in which an abundance of information is channelled to policymakers with the view of setting up the correct framework and management of the new sector, there is distraction from other important matters as regards the management and performance of the economy. Crucial productive sectors are underperforming. Weak and contracted performances were recorded in the output of sugar, rice and forestry as well as wholesale, retail trade and manufacturing industries. Quantifying these, agricultural sector’s performance relative to Gross Domestic Product (GDP) fell to 19.4 per cent as at the end of 2016 when compared to the corresponding period in 2015 from 22.8 per cent. Manufacturing and services sectors declined to 3.9 per cent and 52.9 per cent from four per cent and 54.2 per cent respectively for the fiscal year of 2016. Conversely the mining sector (particularly gold) recorded 4.5 per cent increase to 15.4 per cent contribution to GDP in 2016 in comparison to 10.9 per cent in 2015.
What this means is that almost all of the current productive sectors have underperformed and contracted to some extent with the exception of gold. This could be a terrible thing economically, because if gold collapses tomorrow the economy is in trouble – an economic crisis will be imminent and perhaps instant in such a circumstance. A situation of this nature occurred in 2013 on a micro level. The North West region of Guyana (Region One (Barima-Waini)), is largely dependent on gold mining. Early 2013, gold price on the word market plummeted which translated into a direct and instant adverse impact for that region – instantaneous downturn stemmed as a consequence. For persons who are not familiar with gold mining regions, prior to 2013 that region was booming as there were large circulations of money. To this day, North West has still not recovered, in fact it is now in a depressed state, people are moving out in large numbers from there. Prior to this, for you to conceptualise this scenario, people from all parts of the country migrated to that particular geographic location to capitalise on the benefits in those days. For example, just to give an idea, I recall when I was there in 2013 a taxi driver net more than $200,000 in one week. Such was the magnitude and economic excitement during that period.
I have given this illustration to make the point that, while this was on a micro level – just one region, such a situation could occur at the macro level, thereby threatening the entire country. In fact, to put this over a bit clearer, this is the risk we are surrounded by and it is being escalated by the very fact policymakers are distracted. The economy is very volatile. Policymakers, by virtue of this column, I would like to urge them that they need to contain their excitement within these respects. They have got to be careful not to hype up the hopes of the Guyanese people around the oil and gas anticipated revenue. I conclude by making another critical point which I shall expound in forthcoming articles on this subject.
In Alaska, a Spanish oil company named Repsol made a similar oil find to that which we are all excited about in Guyana. This discovery was only announced recently in May of this year where they have found a massive oil field that could hold some 1.2 billion barrels of oil. Bearing in mind exploration is ongoing there and in many other parts of the world. The irony of this new oil find is that it parallels the developments in Guyana and production is also set to commence in 2020 the same timeline with Guyana. These findings will obviously have a bearing on the oil price come 2020 onwards, an element of the debates not being considered. This column however, will be dealing with this matter by way of a series of articles premised on some robust analysis.