ExxonMobil Guyana granted approval for its Liza Phase Two operations in Guyana
– What does this mean for Guyana, and how can Guyana benefit from its massive oil wealth offshore?
The Environmental Protection Agency (EPA), a local regulatory agency in Guyana that has responsibility to take the necessary measures to protect, conserve, manage and improve the environment, has granted approval for ExxonMobil to commence its Liza Phase Two operations in Guyana through its subsidiary, namely Esso Exploration and Production Guyana Limited (EEPGL).
There are many public discussions and debates from commentators and analysts alike regarding whether Guyana can benefit from its oil wealth offshore. The question is: how should Guyana spend the potentially massive wealth it is poised to earn in less than two years’ time? The most recent such public pronouncement was made by the General Secretary of the Guyana Trades Union Congress (GTUC) in its Labour Day celebration in Georgetown — a national holiday event in Guyana. In his speech at that forum, he made calls for free education and nationwide healthcare.
There was also a suggestion put forward by a prominent professor of economics for cash transfers of US$5,000 to be made to each household, among other things.
In the analysis that follows, the author, for now, examines the cash transfer debate within the context of Guyana’s economic development and status, and how economically sensible some of these proposals might be in the long run. Proponents of this proposal are of the view that a policy of this nature would aid in poverty reduction, and is perhaps the best mechanism by which every Guyanese would be guaranteed direct benefit from the oil & gas production operations in Guyana; especially since this new sector would not provide a fantastic amount of job opportunities for locals.
The contrary view of other analysts and economists alike is that such a policy would engender hyperinflation, and may not be fiscally sustainable.
In my analysis, I would therefore explore a broader spectrum of implications of the proposed cash transfer policy.
Guyana’s population is roughly 750,000 people. So, assuming that each household in Guyana has an average number of four (4) persons, then using four as the denominator and the population size as the numerator, this computation would give rise to 187,500 households. For simplification, the total average number of households is rounded to 200,000. Therefore, an annual cash transfer of US$5,000 from the potential oil revenue would cost US$1.0 billion, or Gy$206.5 billion annually.
This figure of Gy$206.5 billion is equivalent to 50.8 per cent of real GDP (2017), which was Gy$406 billion, and represents 82.6 per cent of the size of the National Budget for 2017, which was Gy$250 billion.
Further, considering competing priorities and opportunity costs, the new Demerara Bridge is estimated to cost some US$150 million; the Cheddi Jagan International Airport Expansion Project is some US$150 million; the engineer and design cost to build the road linking Guyana and Brazil is about US$10 million – assuming that road might cost about US$20 million. These figures combined give rise to a sum total of US$320 million, or Gy$66 billion; which means that a total cash transfer of Gy$206.5 billion annually to each household could — almost three times — cover the combined cost to build a new bridge over the Demerara river, the International Airport expansion project, and the road linking Guyana to Brazil.
That being said, it is important to note that the net cash flow from oil commencing from 2020 would not reach US$1.0 billion; which means that — if considered, and at whatever figure — such a policy is unlikely to take effect at the immediate onset of oil production. During the first two years into production, net revenue from oil is estimated at just over US$300 million; from 2022 to 2025, at a production rate of 220,000 bpd, net revenue is estimated to be at about, or just over, US$750 million but less than US$1.0 billion. When production is significantly increased to 300,000/500,000 bpd, net revenues would reach and/or surpass the US$1.0 billion mark (note that these estimations are based upon ExxonMobil’s production alone); but this level of increased production is likely to occur until after 2025.
In the synthesis of current global evidence of the impact of cash transfers in developing countries — and of what works in different contexts, and/or for different development objectives — it has been found that such transfers have proven potential to contribute directly or indirectly to a wider range of developmental outcomes.
Essentially, cash transfers are direct, regular, and predictable non-contributory cash payments that help poor and vulnerable households to raised and smooth incomes. The term can be administered through a range of instruments, such as social pensions, child grants or public works programmes; and a spectrum of design, implementation and financing options (DFID, Evidence Paper, 2011).
Henceforth, perhaps if the Government of the day were to decide on the cash transfer policy, the current proposed methodology, inter alia, the direct cash transfer to each household may indeed fuel hyperinflation – an undesirable outcome policymakers would have to guard against. As such, it would probably be better to consider other instruments; or, even better, a combination of different instruments to administer such programmes. For example, grants geared towards promoting entrepreneurial activities might be a better way to do so, as against direct cash transfers annually to each household. Or careful thought should be given to the eligibility criteria for cash transfers; for example, the high income (the rich) class should not be eligible.