Rapid oil field development could affect Guyana’s profit oil take – IMF

Article IV Mission Statement
– as Govt expresses worry about lack of ring-fencing laws
– IMF recommends NRF not to use finance budget deficits

The International Monetary Fund (IMF) has noted that, with the lack of ring-fencing provisions in the Stabroek block Production Sharing Agreement, rapid oil field development could see oil and gas revenue for Guyana being affected.

This is contained in its concluding statement for the 2019 Article IV Mission, which was issued on Monday after an IMF team had spent time in the country and had held meetings with various stakeholders.
“The authorities have indicated their concerns that the absence of a ring-fencing arrangement in the Stabroek Production Sharing Agreement could potentially affect the projected flow of government oil revenues.
“The rapid appraisal and development of multiple oil fields could affect the timing and amount of profit oil to be shared with the government from a producing oil field by allocating costs from various fields under development to the producing field,” the IMF warned in its statement.
But, in the same breath, the IMF said the authorities are developing strategies to mitigate such a possibility. One such strategy, according to the IMF, is a National Oil Depletion Policy to guide extraction and production, as well as clearer ring-fencing rules for new investments.
Ring-fencing is a system which prohibits oil companies drilling multiple wells from transferring costs from one well to the next, thus reducing the overall profit cuts. In the case of ExxonMobil, the company is expected to use revenue from its production in the Stabroek block to recoup its capital investment. Whatever remains of this is the ‘profit oil’ Guyana will have to split with the oil company and its associates.
The IMF has also reiterated the importance of Government addressing the weaknesses highlighted in the 2017 Public Investment Management Assessment. This is especially important, the fund noted, in light of the impending oil and gas sector coming on stream.
“The mission notes authorities’ intent to move to rigorous project selection and prioritization criteria within the context of the new, long-term Green State Development Strategy. The authorities are committed to considering mechanisms to further improve fiscal transparency, including relating to the management of natural resources.”

NRF
The IMF did commend the Government for passing legislation to create the Natural Resources Fund (NRF), which is intended to save and grow proceeds from the oil and gas sector through investments.
At the same time, the IMF warned that certain supporting mechanisms have to be put in place to ensure money from the fund is not consumed by debt payments.
“To ensure fiscal responsibility is achieved, the mission recommends complementing the NRF legislation with a fiscal framework that constrains borrowing and achieves a balanced budget in the near-to- medium term. To achieve this target, the annual non-oil deficit should not exceed the expected transfer from the NRF.
“This would ensure that excessive public expenditure will not lead to debt growing at the same time as the NRF accumulates. It is also necessary to preserve the spirit of the NRF framework, which appropriately aims to save part of the income from oil as net wealth for future generations.”
The IMF has, further, recommended a gradual scaling-up of public spending when the oil revenues start rolling in. This, the Fund noted, is to avoid wasting the money, and to minimise macroeconomic problems related to the ‘Dutch disease’, which the IMF noted often affects economies experiencing large increases in resource-based income.