High Court could negatively affect offshore drilling

Dear Editor,
My attention was drawn to an article published by “The Guardian” with the caption “Could Guyana’s Exxon ruling scare big oil off risky exploration?” The article is an interesting read, and the thrust of it is spot on. It is precisely for this reason that the Vice President, Dr. Bharrat Jagdeo, in his press conference(s) following the High Court’s ruling, put forward the following contentions:
a) That Guyana is playing in the big league now, and the High Court’s ruling will not be without ramifications for Guyana.
b) Indeed, the ruling will certainly have an adverse impact on current and future investment prospects, as it sends a worrying signal to investors.
c) That “investors must be assured of predictable policies when they invest in Guyana, and reasoned that the recent ruling may be antithetical to that.”
d) “It’s important that institutions act in a professional manner, because we are attracting large volumes of capital from around the world, and what could have passed in the past as some sort of nationalism or economic nationalism will not hold water in the new dispensation.”
e) The Environmental Protection Agency (EPA), in a statement, noted that the Environmental Act states that an “amount” must be specified.
f) The Vice President as well as this author has argued that there is no such thing as an “unlimited” guarantee in the industry. I also demonstrated that the GAAP reporting guidelines in this respect guarantees that there is no such provision as an “unlimited guarantee” per se, save and except for the terms and conditions where a guarantee does not include a stated cap. An estimate is nonetheless required, reflecting a reasonable estimation of the maximum potential exposure.
g) And where it is not possible to make a reasonable estimation of the maximum potential exposure, future performance is expected to be either immaterial or have only a remote chance of occurrence, based on a risk assessment (and the same applies to (f) above).
In addition to the foregoing, I would like to address commentaries on the subject by one commentator who is associated with the Oil and Gas Governance Network (OGGN). In a letter to the media earlier this week, the OGGN author contended that the Government should not challenge the High Court’s ruling, and that the Government should allow ExxonMobil to walk away, because there are many other oil companies waiting for that to happen. In this light, the OGGN is advocating for the suspension of oil and gas production, exploration, and development without any concern for the ramifications. In fact, the ramifications have not been acknowledged by OGGN.
With this in mind, I am inclined to put into perspective, for the readers’ benefit, what those ramifications referred to would effectively translate to, and how it would impact the economy, the business sector, and, by extension, the Guyanese population.
Let’s start with local content in-country spend. The annual local content spend is now pegged at US$700 million or G$146.3 billion. This amount represents 19% of the 2023 national budget, 14% of non-oil GDP, and 5% of overall GDP. With ongoing strengthening of the Local Content framework and continuous improvement in capacity building, the local content annual spend is projected to reach US$1 billion, or G$200 billion annually. Therefore, any suspension of oil and gas activities would immediately translate to a loss of $146b – $200b annually. Further, this would translate to hundreds of companies that collectively employ thousands of Guyanese workers having to halt operations, thereby placing thousands of ordinary Guyanese workers and professionals on the breadline.
Further, a cessation of production activities would result in a loss of the annual earnings in profit oil and royalty, which approximates to about US$1.6 billion, based on current production rates and prevailing market price for crude. And so the national budget will revert to its pre-oil levels, and all of the capital development projects in infrastructure etc., currently ongoing across the country, partially funded by the oil revenues, will be jeopardised. This situation could result in a loss of income for thousands of households across the country.
Now, to understand the ripple effect on the economy: how this situation would affect household income, the business sector, and Government spending, we can use a conservative multiplier of 2x – the local content spend plus the annual earnings in profit oil and royalty (US$2.6b X 2 = US$5.2b). The resulting effect is an adverse impact on the economy equivalent to an estimated US$5.2 billion annually, representing 100% of non-oil GDP (2022), 37% of overall GDP (2022), and 144% of the 2023 national budget. The oil and gas value chain employs an estimated 20,000+ persons, multiplying this across all the other sectors that will be affected is an estimated 40,000-100,000 (conservatively) families that would be affected, inter alia, a loss of household income.
Then there is the geopolitics ramification. The OGGN’s proposition to ‘let go of Exxon or forcefully push Exxon out of the country’ is precisely the mistake Venezuela made more than a decade ago, which largely contributed to the state that country has now found itself in: from being one of the richest countries in the world to becoming one of the poorest. ExxonMobil and another oil company had taken legal action against the Venezuelan Government for compensation, which resulted in Venezuela being ordered to pay Exxon and joint venture partner a total sum of US$40 billion in compensation. If the Government acts in a manner as the OGGN oil and experts are proposing, Exxon and its co-venture partners will be well placed to undertake similar action as it did in the Venezuela case. Bearing in mind that Exxon and its partners have committed over US$30 billion investment in Guyana already. This sum is equivalent to 2.1 times overall GDP, 6 times non-oil GDP, and 33 times the country’s international reserve held at the Bank of Guyana.
Altogether, we are looking at a potential US$35 billion or G$7.3 trillion (minimum) in economic costs to the country in a worst-case scenario if this situation turns out a certain way. Guyana doesn’t have this kind of funds in the bank. The sum total of the country’s international reserves: the funds in the Government’s deposit accounts and the funds in the Natural Resource Fund (NRF), represents no more than 6% of the potential economic costs. In other words, this would be the outcome of the actions of a certain newspaper publisher and others, OGGN included, if the Government is to act in such a manner based on their proposals. Simply put, it will be detrimental, bearing in mind that the hypothetic scenario presented herein is not an exaggeration.

Yours sincerely,
Joel Bhagwandin
Public Policy and
Financial Analyst