A not-to-do list for Guyana’s new
administration when it comes to oil
By Jeremy M. Martin &
Kathryn Hillis
LA JOLLA, California, Aug.
24, 2020 (IPS) – Just over five
years ago, a major oil discovery
occurred on the northeastern
coast of South America. There
have been a series of additional
discoveries ever since. But this
time it was not Venezuela. It
was Guyana.
Fast forward to Aug. 6 when
Irfaan Ali assumed the presidency.
The country had been
plunged into a political crisis
since its March election and
allegations of fraud.
The situation had become
dire and sanctions were levied
against the former government
of David Granger. As the new
government reviews its policy
and regulatory frameworks,
there is, in our estimation, what
could be called a not-to-do list
when it comes to oil governance.
Given the major oil discoveries,
political instability was
problematic for the economic
outlook and development of the
nation. It was particularly acute
for managing the oil resource
and income on the horizon.
Earlier this year, oil was commercialized
from the Liza field.
With that milestone, solving the
political crisis was essential in
order to allow the new administration
to grapple with the key
oil governance challenge and
the what, where and how they
should focus when it comes to
the emerging oil sector.
Guyana need only look
to its neighbor Venezuela to
see the perils of abundant oil
resources. The well-known and
hugely studied resource curse
has confronted countries such
as Venezuela for decades. In
many cases, significant natural
resources correlated with
depressed development as other
sectors are neglected and currency
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appreciates causing
uncompetitive exports.
It bears noting that even
before the political crisis, Guyana
received a host of international
experts, institutions and
donors eager to dispense advice
as to how to avoid the grim
fate of the resource curse. But
as much of the literature illuminates,
many of the recommendations
are easier said than
done.
For example, economic diversification
and rooting out corruption
are excellent and obvious
ideas that many larger and
more prosperous countries have
failed to achieve.
So, back to our not-to-do list
that we feel contains five feasible,
actionable ideas for the Ali
administration.
First, avoid overinvestment
in the oil and gas industry.
While there should be adequate
infrastructure for drilling and
shipping the oil, the country
should resist the urge to move
downstream of the wellhead.
Any refineries built would likely
be deeply unprofitable.
For context, the last new
refinery in the United States
was built in 1977, as refining
is a high cost venture that can
take many years to turn a profit.
Additionally, most energy economists
point to an oversaturation
of global refining capacity,
especially as many people are
looking to decrease their use
of fossil fuels. This truism has
been deepened by the impact
of COVID-19 on the global fuels
market.
The previous administration
in Guyana hired a consultant
who determined building a
refinery would cost around $5
billion and not generate significant
revenue to outweigh
expenses. In addition to the cost
issue, a refinery built before the
state has enacted proper oversight
and regulatory agencies
could become a vehicle for corruption
and crony capitalism.
Look no farther than another
neighbor, Brazil, as to the pratfalls
of this issue.
Second, do not subsidize
gasoline. In Latin America, an
abundance of oil has led to a
sense of resource nationalism,
causing citizens to view gasoline
as a public good rendered
nearly free by government subsidies.
There are many cautionary
tales that demonstrate the
folly of this logic, with the most
drastic in Venezuela, but also
the recent example of Ecuador.
These extreme subsidies are
not sustainable and are nearly
politically impossible to remove
once they become expected by
the people. Moreover, as economists
around the world intone:
they can be quite regressive.
While a gasoline subsidy can,
in the short term, provide a
quick jolt of economic growth
to a developing country, it is
not worth the long-term debt.
To avoid the future need for the
IMF and possible citizen uprisings,
Guyana should keep gasoline
at market value.
Thirdly, and perhaps not a
typical theme to consider: Do
not turn away dual citizens.
Transitioning a largely agricultural
country into the world’s
newest oil nation requires significant
technical expertise and
talent.
Given Guyana’s small population,
this can be hard to find.
Fortunately, Guyana has a large
diaspora across the globe comprised
of individuals with experience
and ability.
The government should
appeal to its far-flung citizens
to return home and share in
the newfound opportunities.
While this seems obvious, there
is a pervasive nationalistic pride
that makes accepting dual citizenship
difficult.
For instance, it is illegal to
be a member of the Guyanese
parliament while holding dual
citizenship. Several Guyanese
politicians recently had to make
the choice to either step down
or renounce their foreign citizenship
after the High Court of
Guyana reaffirmed the restrictive
law.
This type of nationalism cultivates
the exact nature of policy
that could hinder the success
of Guyana. In order to benefit
from its rich oil resources, the
country needs individuals with
the best education and diverse
experiences working not just
as engineers in oil companies,
but also serving in the government.
Insulating industry and governance
from foreign influence
is a path to incompetent organizations
and increased risk of
corruption.
Fourth, do not disregard the
potential to monetize associated
natural gas resources. The
noted offshore oil discoveries
have also proven a considerable
amount of what is referred to
as associated natural gas, that
is a byproduct of the oil being
extracted.
Historically, the associated
gas in offshore oil projects was
not necessarily a valued commodity
and other than some
uses for reinjection was more
often than not flared, or burned
off, given that the real value was
in the oil being produced.
Major developments around
the use of natural gas as a
cleaner burning power generation
source, as well as the
importance of avoiding flaring
for emission and environmental
reasons point to an obvious winwin
for Guyana to monetize the
associated natural gas primarily
for use in power generation.
Moreover, the newfound
power generation source would
greatly improve a power system
that is currently expensive and
in need of enhanced reliability.
Lastly, do not encourage
delusions of grandeur. After
ExxonMobil discovered the first
massive oil field, an expectation
developed of great, and fairly
immediate, wealth derived from
the offshore discoveries.
While there will be significant
economic development and
by extension the opportunity to
attain greater wealth derived
from the oil resource, the average
citizen will most likely not
see an immediate large-scale
change in their circumstances.
The government needs to convey
this reality to the people in
order to keep expectations accurate
and of a realistic timeline.
When the population is
anticipating wealth that may
not occur on the level or timetable
perceived, the simmering
displeasure with government
could lead to unrest and destabilizing
protests.
The reality check and need
to manage expectations, while
politically unpopular, will also
help to ensure for the population
that governance of the oil
wealth is wise, long-term and
not one of associated with the
expectation of a rapid, endless
financial windfall and deluge
of funds.
Hopefully, Guyana will be
able to use the bevy of outside
advice it is receiving to turn its
resource curse into a resource
blessing. At least with these
ideas there are a few items to
cross off its to-do list.
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