What Lies Beneath Guyana's Petroleum Future

6 MINS READOct 30, 2017 | 09:00 GMT
Guyana is a member of Petrocaribe, an alliance between Venezuela and Caribbean countries. The alliance's third summit was held in Caracas, Venezuela, in 2007.

Guyana is a member of Petrocaribe, an alliance between Venezuela and Caribbean countries. Recent discoveries by ExxonMobil show that offshore Guyana is rich in oil and natural gas.

  • ExxonMobil will start producing oil from offshore wells in Guyana by 2020. The country's initial oil production is expected to begin at around 120,000 barrels per day.
  • Guyana's government likely will become dependent on oil revenue over the next decade. But greater oil revenue won't necessarily lead to economic benefits for the entire country.
  • Neighboring states, such as Venezuela, may gain from rising demand for services in Guyana as new funds flow into the government and private sector. 

Until a few years ago, Guyana was known as a sparsely populated economic backwater on South America's Caribbean coastline. Then ExxonMobil announced a series of discoveries at its prospects off the Guyanese coast, revealing the latest find in early October. Now the country is poised to receive a windfall from oil and natural gas production. But as Guyana's government eagerly awaits what it hopes will be an oil-rich future, the country as a whole will reap fewer economic rewards than it might seem.

ExxonMobil's oil and gas blocks in Guyana

A Low Priority, Once

Guyana's rise as South America's newest oil producer will sharply contrast with its history as an impoverished, British-influenced enclave. Guyana is a small country, with only 800,000 inhabitants who are concentrated along the coastline and in the capital, Georgetown. Like neighboring Suriname and nearby French Guiana, Guyana evolved from a European power's land claim on the continent's northeastern edge to a territory with a distinct cultural identity, albeit with poorly defined borders and a poorly exploited interior. In 1966, Guyana gained independence from the United Kingdom and was ruled by a nominally socialist government until the 1990s. During the Cold War, it did not align with either the United States or the Soviet Union. As a result, the United States did not cultivate close ties with Guyana, which was a low priority for Washington because of its geographic isolation and small size.

Guyana's economy has long centered on mineral extraction and agriculture, and it has a small domestic market that foreign investors and exporters have largely ignored. At least, until now. ExxonMobil intends to exploit its discoveries within the next three years. In July, the U.S. oil giant estimated that its Stabroek block — home to all of the company's discoveries — could have gross recoverable resources of between 2.25 billion and 2.75 billion barrels of oil equivalent. By 2020, ExxonMobil's fields in the block could be producing 120,000 barrels of oil per day. Though other foreign energy companies, such as Anadarko, CGX Energy and Total, also have stakes in offshore blocks and have conducted exploration, ExxonMobil will be the first to begin production from Guyana's offshore oil deposits.

The sudden influx of oil revenue into the Guyanese government's coffers, combined with greater economic growth driven by the jobs attached to oil production, will alter the country's economic landscape. Last year, Guyana's exports totaled less than $1.5 billion, with gold exports (mainly to Canada) accounting for around 45 percent of all exports by value. Oil production will substantially boost this income: At current prices, 120,000 barrels per day of oil would add nearly $2 billion to the country's annual export revenue.

Labor Limitations

This new revenue will certainly carry some economic benefits. Guyana's standard of living may rise over the coming decades because the government will have more money to spend on public works and entitlement programs. Other countries in the region may even stand to gain if the Guyanese government's newfound wealth translates into public works programs that require extra labor. Guyana's rise will occur as neighboring Venezuela languishes in a lengthy economic crisis; any uptick in demand for labor across the border could prompt thousands of Venezuelans to migrate eastward. The growth of at least some higher-paying jobs in Guyana may also spur demand for services, which would offer more employment opportunities to Venezuelans and other immigrants. 

Still, the nature of oil production in Guyana isn't conducive to stimulating economic growth through the creation of plentiful, high-paying jobs related to the exploration and production of energy resources. Most, if not all, of Guyana's future production will be offshore, requiring oil to be extracted through floating platforms or rigs and loaded onto tankers. Even if Guyanese energy regulations stipulate that oil companies must hire a percentage of workers locally, domestic employment opportunities will still be limited. Guyana's labor pool simply isn't large enough or specialized enough to fill most jobs related to offshore oil production, making it likely that the bulk of the sector's positions will go to foreign workers.

Political Dangers

Guyana's success in attracting investment also may be limited in the coming years, thanks to an almost complete lack of regulatory institutions in the energy sector. Guyana is in the process of drafting legislation to address this deficiency, but as of now, it has no national entity charged with overseeing the industry's exploration and drilling or the administration of bidding rounds. The government will try to develop these capabilities over the next few years, but without such institutions, other companies may find it difficult to commit to more investment or even to enter the country. And in the absence of credible institutions that can interact with foreign companies, corruption may become rampant if the officials assigned to negotiate firms' entry into the Guyanese upstream sector demand bribes in exchange for concessions.

Politically, the influx of oil wealth could also have some negative side effects. Guyana's government is broadly divided between two coalitions that are nominally left of center, one representing the People's Progressive Party and the other representing several parties, including the People's National Congress, which ruled through an authoritarian government for nearly two decades. It is possible that any party in power would try to use oil revenue to bolster its rule by funding populist programs. Should one party try to grow stronger at the expense of its peers, tension among them would likely intensify as the party's rivals attempt to prevent its consolidation of power. Such an outcome, of course, is far from certain. Guyana's political elites could instead work out informal agreements to manage and share the country's oil wealth.

Venezuela's stake in Guyana's success, meanwhile, likely poses little threat. Venezuela has claimed Guyanese territory west of the Essequibo River since 1962 and has conducted occasional incursions into their disputed territory. In 2013, for instance, Venezuelan forces temporarily seized a ship conducting exploration activities on behalf of Anadarko. For now, however, the Venezuelan government will continue to be preoccupied with military dissent at home. Moreover, deploying thousands of troops to Guyana to lay claim to land there would risk angering the United States, potentially leading to heavier sanctions against Caracas.

In the long run, Guyana might experience some of the pitfalls that have plagued other petro-states in the region, such as Venezuela and, to a lesser extent, Colombia and Ecuador. Though Guyana is positioned to benefit from the next upturn in global oil prices, its economy and government will also become reliant on oil revenue, leaving future Guyanese governments almost entirely at the mercy of the highs and lows of the global oil market. Thus Guyana will find that while oil certainly has its perks, it also comes with liabilities, and it will not be a cure-all for the country's economic stagnation.

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