Argument

New Oil Finds Could Mean a Tripling of Guyana’s GDP

Here’s how the country can avoid the resource curse.

The flag of Guyana is seen in Surama on Dec. 3, 2016.
The flag of Guyana is seen in Surama on Dec. 3, 2016. Chris Jackson/Getty Images

This year, ExxonMobil announced its 11th and 12th oil finds in the small South American country of Guyana. The estimates of recoverable crude in the country now stand at roughly 5 billion barrels. On a per capita basis, this would put Guyana among the top 10 oil producers in the world. Whether the people of Guyana see much benefit from the windfall could have much to say about the fate of the oil industry, which is facing an uncertain future during an ongoing energy transition.

The response to the discoveries in Guyana has varied. Amy Myers Jaffe, the director of the energy security and climate change program at the Council on Foreign Relations, captured the view of those concerned about the much-studied resource curse. “There is no way the explosion of money will be managed properly,” she said. Responsible stewardship is indeed hard to imagine. Guyana is a country of about 780,000, and it could produce the same number of barrels of oil per day. At a price of $50 per barrel, that means a total revenue of close to $15 billion per year within the next decade—a staggering sum that other nascent oil nations have struggled to absorb effectively.

And those numbers are just from one company—ExxonMobil. Others such as Total and Tullow Oil are actively engaged in the country as well­—the latter announced positive results from offshore wells 14,000 feet deep in August. Tullow’s investments may reap up to 200 million barrels in recoverable reserves, though concerns remain about commercial viability given the fields’ high sulfur content. As a result of all this activity, the International Monetary Fund has predicted the country’s economy could grow 86 percent next year. “That’s 14 times the projected pace of China,” Bloomberg reported.

How resource extraction benefits Guyana’s society, environment, and economy will set an important precedent for continued oil extraction in a carbon-constrained world. Responsibly converting oil revenues into societal benefits can bolster industry efforts to play a positive and productive role in the energy transition toward heavier reliance on renewable sources. Guyana may occupy a small share of the global petroleum market, but its success could provide a blueprint for future producers wary of making oil commitments in light of increasing interest in alternative energy sources.

The initial odds are not in Guyana’s favor. There is a long and rich line of social science research that links oil extraction with myriad sociopolitical maladies, including debt crises, sluggish economic growth, corruption, conflict, gender inequality, and authoritarianism. Even onetime success stories such as Venezuela are now infamously wracked with political instability and a crumbling economy.

Still, research has also identified pathways to avoid the so-called curse, starting with diversifying the local economy, building financial institutions to smooth out the vicissitudes of the oil markets, and developing regulations to protect against environmental degradation. Perhaps most important of all, Guyana will have to get on a path where it doesn’t solely rely on the oil sector but continues to develop other potential industries, such as sugar cane, tourism, and gold mining, while also protecting the Amazon.

The onus is also on the energy companies to create value for Guyana. For example, firms can commit to transparent accounting practices, using local content and domestic labor, and financing renewable energy projects to improve the country’s aging electricity infrastructure. Helping in this way serves a moral imperative but also a business one at a time when trust in oil companies is very low and their legitimacy in a future low-carbon energy sector has been called into question.

No less important are questions about how Guyana itself will manage the oil revenues and whether it should save part of them in a fund along the lines of Norway’s oil fund (formally, the Government Pension Fund Global), which is oft-cited as the exemplar. The success of the Norwegian sovereign wealth fund, worth roughly $1 trillion, relies on a strict adherence to investing new assets and spending only the returns from that investment rather than the core fund itself. It also requires robust institutions.

Government officials often underappreciate how long it will take to start getting revenue from oil finds; large upfront investments to bring new fields online often mean that it will take years to recover costs. Cost recovery will be particularly slow in Guyana, where the initial government take will be quite low as companies prioritize recouping their own investments. Some observers have recommended publishing the existing contracts with the oil companies to ensure transparency and maintaining Guyana’s earlier commitment to the Extractive Industries Transparency Initiative, a global standard to improve governance in the oil and mining industries.

Strong institutions are key for the effective management of a rapidly growing oil sector. And on that score, Guyana has started on the right path. The New Petroleum Producers Discussion Group, an international forum for addressing development challenges in emerging petroleum markets, tackled some major issues in concert with Guyana’s Natural Resources Ministry in a seminar that focused on preparing for the first oil that comes out of the country’s ground. The ministry has since been working on the establishment of a petroleum commission, whose role will be to oversee the oil sector (and has invited members of the public to comment on draft bills). Research shows that independent oversight institutions such as these are crucial to fight corruption.

Even given conservative assumptions, Guyana could see a doubling or tripling of its GDP over the next 10 years. While it looks closely at lessons from the oil curse in other countries, the companies—ExxonMobil, Total, Tullow, and others—should play a strong role in ensuring the success of this small nation. Not just because it is the right thing to do but because it may well ensure their own future.

Morgan D. Bazilian is the director of the Payne Institute and a professor of public policy at the Colorado School of Mines.

Paasha Mahdavi is Assistant Professor of Political Science at the University of California, Santa Barbara.

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