Can Guyana Avoid The Resource Curse?

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Guyana has emerged as one of the world's most exciting offshore oil plays. In a mere eight years, the tiny South American country of less than one million has gone from first discovery to pumping around 350,000 to 400,000 barrels of oil per day, with signs that Guyana will be lifting at least 1.2 million barrels daily by 2027. There are fears the former British colony will struggle to avoid the oil curse because of poor governance and weak democratic institutions. How the government in Georgetown manages the vast wealth flowing from the former British colony's offshore oilfields is especially important, with mounting global pressure to reduce fossil fuel consumption and carbon emissions. This adds to the considerable risks that have the potential to interrupt Guyana's colossal oil boom, which has already delivered a massive economic windfall.

An Exxon-led consortium has made over 35 high-quality discoveries in Guyana's 6.6-million-acre offshore Stabroek Block. Exxon, which is the operator with a 45% interest in the block, with Hess controlling 30% and CNOOC the remaining 25%, is making significant investments to exploit the more than 11 billion barrels of oil resources discovered. The consortium has approved six projects, with two, Liza Phase 1 and 2, now operational, with four more to come online by 2027. The latest to be approved was the $12.93 billion project to develop the 2021 Whiptail discovery, which will consist of 72 wells with the capacity to pump 250,000 barrels per day. On commissioning, which is expected at the end of 2027, Whiptail will boost Guyana's oil production to around 1.3 million barrels per day. Based on global 2022 production data, this will see Guyana emerge as the world's 15th largest oil producer, ahead of OPEC member Algeria.

Guyana's massive oil boom is delivering a tremendous economic windfall for what was once one of the poorest countries in South America. Guyana's 2019 gross domestic product per capita was $13,610; by 2022, it had jumped threefold to $42,700, making Guyana, on the basis of this measure, the richest country in South America. The former British colony for 2022 possessed the world's fastest-growing economy, with GDP expanding by a stunning 62.3% to $14.53 billion or nearly three times the $5.17 billion reported three years earlier when production began in the Stabroek Block. It is anticipated that Guyana's economy will grow by a whopping 38.4% as rapidly rising oil revenues bolster growth.

Petroleum revenues since 2019 have been expanding at a solid clip. According to the former British colony's central bank, the Bank of Guyana, the country is receiving a significant volume of oil profit from the Stabroek Block despite the Exxon-led consortium securing a highly favorable production-sharing agreement. During July 2023, Guyana received oil profits of $73.8 million, with a further $166.2 million paid during August 2023 and $85.3 million for September 2023. That, along with July 2023 royalties of $54.4 million, saw Guyana earn nearly $380 million for the third quarter of 2023 from its burgeoning offshore oil boom. The volume of income flowing in from petroleum royalties and sales will continue growing at a feverish clip over the next four years.

Exxon is developing the Payara project in the Stabroek Block, which comes online this year and will add 220,000 barrels per day of capacity. Once Payara reaches full capacity, which can take time because of the need to iron out operational bugs and implement efficiencies, petroleum production will reach around 620,000 barrels per day. There is the 250,000 barrel per day Yellowtail development, expected to come online toward the end of 2025, which will lift Guyana's oil production to nearly 900,000 barrels per day upon reaching full operational capacity. During August 2023, the Exxon-led consortium earmarked the sixth project for development in the Stabroek Block, the $12.93 billion 263,000 barrel per day Whiptail discovery, with the final investment decision expected during the first quarter of 2024.

The Payara and Yellowtail assets, upon commencing production and reaching operational capacity, will give Guyana's oil profits and royalties a further solid boost, with Georgetown's petroleum revenue expected to exceed $2 billion annually by 2025. Those operations, along with the growing state share of oil revenue, will fuel further rapid economic expansion, with the IMF forecasting annual GDP growth rates in excess of 20% from 2024 to 2027. That rising oil revenue coupled with strong economic growth, if used appropriately, will lift people out of poverty in a country where 35% of the population lives below the poverty line. This is a boon for the South American country of less than one million people where a lack of opportunity and spiraling cost of living were impacting a population harshly hit by the 2020 COVID-19 pandemic.

Nonetheless, poor governance, racial fractures and weak democratic institutions along with an inefficient criminal justice system provide fertile ground for corruption to flourish. These negative factors are triggering fears that Guyana will be a victim of the oil curse. Global corruption watchdog Transparency International in its 2022 Corruption Perceptions Index ranked Guyana 85th out of the 180 countries it monitors globally. While an improvement of one place over 2021, it still indicates that Guyana, with a score of 40, suffers from significant levels of corruption on a scale similar to neighboring Suriname, Colombia and Brazil, which all had similar or slightly lower scores. This sparked fears that the massive amounts of revenue flowing into Georgetown's coffers would cause corruption to spiral out of control.

Despite accusations the Exxon-led consortium operating the Stabroek Block used financial muscle to dictate the terms of the production sharing agreement securing it on very favorable terms, there are signs corruption is not as severe as believed. The administration of President Irfaan Ali ordered a review of Guyana's burgeoning oil industry, which included formulating and implementing a new PSA for Guyana's first-ever oil auction, which closed in mid-September 2023. Georgetown received eight bids for the 14 blocks on offer and plans to award acreage by the end of the year. The new PSA substantially increases Georgetown's share of the proceeds from oil production in Guyana's territorial waters, which will boost petroleum income. The changes include boosting the royalty rate from 2% to 10%, introducing a 10% corporate tax and reducing the proportion of cost-recovery oil from 75% to 65%.

There are fears the fiscal terms of Guyana's new PSA will deter investment by big oil, but this is unlikely. The terms and conditions are still highly competitive when compared to other oil-producing countries in South America. The quality of oil discoveries already coupled with low breakeven prices, estimated to be around $35 per barrel, and the low carbon intensity of the light sweet crude found in offshore Guyana will ensure the country attracts further considerable investment. That will spur further offshore oil development. Those events, as they occur, will bolster the economy, leading to rates of growth that will likely outstrip the forecasts made by the IMF, particularly if international oil prices remain at elevated levels.

By Matthew Smith for Oilprice.com

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