How Guyana can maximise its value from the oil and gas industry through local content

In order to understand how Guyana can maximise its value from the oil and gas industry, we first have to understand the value chain of the industry. To this end, the value chain of the industry is divided into three sectors as follows:
1. The Upstream Sector
2. The Midstream Sector
3. The Downstream Sector
The Upstream Sector: this sector includes activities such as geological surveys, mining and drilling. In other words, this sector includes all activities that are categorised either as exploration activities or production activities.
The Midstream Sector: includes activities such as storage, transportation (pipelines, rail and trucking). The Midstream Sector centres on moving the oil or gas products from the production sites or oil fields to the market and further to the consumers. This sector essentially connects the Upstream Sector to the Downstream Sectors. The industry uses different modes of transportation to move oil and gas products such as pipeline and pipeline networks, rails and trucks for land transportation, and barge and tanker for maritime transportation. Hence, notable examples of midstream players are pipeline transport companies, trucking and hauling companies, shipping companies, and terminal developers and operators, among others.
Other midstream activities include storage of oil and gas products, delivery from fields to processing plants and further down to distributors and consumers, and trading and marketing of wholesale oil and gas products, as well as raw oil and gas products.
The Downstream Sector: includes distribution and retail outlets and all activities revolving around the refining of crude oil and the processing and purification of natural gas, as well as the selling and distribution of final oil and gas products such as jet fuel, gasoline, diesel, kerosene, and liquefied natural gas, among others. Other examples of final oil and gas products produced under downstream activities include lubricants, waxes, asphalt, and plastics, as well as other petrochemicals such as olefins, aromatics, methanol, formaldehyde, methane, ethane, propane, and butane.

Value maximisation through local content
While it is true that there will be limited employment opportunities for Guyanese nationals in the upstream industry, largely because oil and gas, in general, is a highly-sophisticated industry and Guyana lacks the experience, there are things that Guyanese can benefit from through the value chain nonetheless. For example, logistics and brokerage services, transportation services and shipping.
Through local content, targets need to be identified in terms of what percentage of services oil companies should seek to contract out to local players. For instance, there are Trinidad companies in Guyana operating logistics and trucking services to service the industry, while Guyana can provide these services through local players. Unless there is a set target to the extent of 30% or 50% of these types of services that will be awarded to indigenous companies, Guyana will not be able to maximise local content.
In the Midstream Sector, there is a need for collaboration between private investments and the public to invest in the infrastructure such as the storage facilities and ports in order to accommodate the offshore operations. If enough of these types of investments are not coordinated and pursued, then these types of services will be transferred to neighbouring Trinidad where these facilities and infrastructure are in place.
Value can also be maximised through capacity building and technology transfer and again, targets need to be set and monitored, and the mechanism in place to facilitate this. In Ghana, for example, through local content, oil companies were mandated to set up a Local Content Fund for the purpose of local businesses being able to access financing at concessionary rates for capacity building. The bigger pie Indigenous companies can obtain, would mean more job creation through expansion and wealth maximisation through higher incomes.
Services such as welding and fabrication, and logistics, local players need to form synergies in order to build their capacity and share resources, and by doing so, enhances their competitiveness against the foreign players in the industry competing for similar services that can be done by locals.
Natural gas seems to be ignored in the national dialogue. Consideration for the use of natural gas, if proven to be sufficient quantities to come onshore, can facilitate an industrialisation plan for Guyana which would be aimed at reducing the cost of energy, and of course the by-products of natural gas. This is how Trinidad, for example, is very competitive because natural gas is part of their energy mix. Finally, on the downstream side, we have to reconsider the feasibility of a refinery. There are modular refineries that are more economical to build, that would cost about US$300M-US$500M. If Guyana invests in a modular refinery with a production capacity of 30,000 BPD, this would be enough to satisfy local consumption which is around 14-18k barrels per day, which will also save a hefty import bill of over US$500 million on fuel annually, and the excess can be exported to the region, which will also bring in more foreign exchange.

By: JC Bhagwandin, MSc

Email: [email protected]
(The author is an experienced Macro-finance and Research Analyst and a Senior Lecturer of BBA/MBA programmes at Texila American University, University of Bedfordshire and the Association of Business Executives (ABE) programmes in Guyana. The discussions and analyses presented are exclusively his own and do not necessarily reflect the opinions of this newspaper nor the institutions he is affiliated with.)