In the exploitation of many depletable resources, two separate investment activities can be distinguished that must take place if production is to continue in an orderly fashion: exploration and development. It is well accepted in economic theory that land which covers a resource commands a rent, even if it is unsuited to any other use. It is sufficient that the resource be desirable (i.e. in demand), finite in extent (i.e. scarce), and of non-uniform quality or productivity.
In a competitive free market under the usual idealised conditions, demand elicits supply at a market price which rewards superior land with a conventional rent, marginal land with none. The annual rental streams, when discounted to the present, determine the land value. The yearly differential between revenue and extraction costs (including rentals and taxes), when discounted to the present, determines the net present worth of the venture. The optimal rate of extraction is that which maximises this worth (Stern 1977).
Therefore, the extractives-led development rhetoric may not only overrate the ability of a country such as Guyana to rise to the considerable challenges it faces. Perhaps more important, it may also obscure the possible comparative benefits and savings involved in developing other sectors or developing the extractive sector at a much slower pace than that advocated automatically by industry and investors. Salient questions in this context, for the emerging Guyanese economy, are:
- To what extent is the Guyanese economy of today receives the lion’s share of extractive investment facing structurally different conditions from those of the previous generation as a resource producer, which is the source of much of the evidence about the resource curse?
- Given the increasing prominence of climate-sensitive development planning and the growing interest of countries in avoiding the negative impacts of emissions-intensive industrialisation, can extractive-sector development be compatible with clean-environment efforts?
- Should Guyana, as an emerging or prospective oil and gas producer be encouraged to develop its nascent extractive industries as a basis for broader development?
- Or should Guyana be warned about the negative consequences of the resource curse and seek to develop other sectors?
- Do shifts into downstream processing constitute a significant move away from hydrocarbons driven development?
However, it is not only the experience of the last decade or so that challenges the wisdom of the extractives-led growth agenda. Contextual factors also play a role – namely, the downturn in commodity prices, strengthening global moves to displace fossil fuels in the energy mix, mounting competition for resources that are closely linked to environmentally friendly technologies in the extractive industry such as clean water and air, and growing pressure for a diverse ecology. Those factors pose questions about both the extent to which below-ground resources can serve as future sources of income and the reliability of existing development models (Steven et al. 2015).
Volatility of the Commodity Markets
The steep decline in the oil price in the second half of 2014 – which had been preceded by several commodity price dips – demolished the main assumption of the extractives-led development agenda: that prices of raw materials would continue to increase as global demand grew and well-established sources were exhausted.
Uncertainties cloud the market outlook for the short to medium term. The end of the commodities super-cycle – which resulted from factors such as the discovery of the new sources of both oil and gas and slower growth in demand for energy and mineral resources – is prompting several international companies to re-evaluate investment. That development gives rise to new questions for emerging producers:
- To what extent will planned projects be implemented and deliver resource revenues?
- What will be the revenue contribution of those that are implemented relative to projected public finances?
- Given tighter profit margins on those projects, will investors look more closely at country risks, including poor sector management and limited institutional capacity to support project development and ensure that it meets international standards – which have been raised significantly over the past 25 years?
Such questions do not mean that new or prospective producers will be unable to benefit from developing below-ground resources. Even at US$50/barrel, the price of oil is still historically ‘high’, while a lower oil price may in any case benefit some of the other mineral industries because the cost of transportation and smelting goes down. However, expectations about revenue will need to be altered.
This poses a political challenge, especially for a country like Guyana. Since around 2005 many countries have responded to higher commodity prices by attempting to revise contracts, regulations and tax and royalty regimes for foreign companies in order to obtain a larger share of their resource wealth. Some of those measures were only just being implemented when international prices began to falter.
Owing to the lower commodity prices and thus, the reduced value of extractive assets, the cost of borrowing has risen for producers too. Indeed, the impact of changes on the oil markets since June 2014 is a salutary reminder of what the resource curse is all about namely, creating an economy overly dependent on revenue from a volatile and finite source. In the current price climate, it is the traditional producer countries that are often holding the best cards thanks to their well-established infrastructure and large sovereign wealth fund cushions. The focus on cost-cutting has made investors reluctant to accept the huge risks associated with developing mega-projects in countries that have very little capacity to provide the infrastructure and services to support those ventures. As a result, it is now more difficult for latecomers to jump on the bandwagon and will remain so in the foreseeable future.
Global Changes in the Energy Mix
Most governments, multilateral agencies, development banks and businesses acknowledge that the decarbonization of the economy is the inevitable way ahead for all countries. As the discussions at the annual international Conference of Parties to the UN Framework Convention on Climate Change demonstrate, the bones of contention are the timeframes, practices and technologies to be applied and who should meet the costs. Since fossil fuels account for around 65 per cent of emissions of greenhouse gases – mainly carbon dioxide – political attention has tended to focus on how to shift economies away from a model in which production and consumption processes depend on persistently increasing carbon-dioxide emissions. In other words, there is a general move towards a low- or zero-carbon outcome. Policies, investment and personal choices based on the vision of at least a lower-carbon future will influence the markets for fossil fuels, but tend not to be taken into account in the extractives-led development agenda.
The Effects of Climate-Smart and Low-Carbon Economic Models
Greater understanding of climate change and how much more carbon can sensibly be emitted is influencing investment and national policies that affect demand for fossil fuels. Owing to increasing investment in research and development of non-fossil fuel energy and more efficient systems of use, it is far from certain that there will be market demand for such products beyond 2030. The Paris climate-change conference has produced a new agreement on tackling climate change that will enter into force. That document will continually include legally binding emissions-mitigation targets for major consumer countries and will almost certainly involve the transfer of finance from richer countries to help poorer countries with mitigation and adaptation.
Such developments feed into the current debate about the potential for ‘stranded assets’ or, as it has now been dubbed, ‘unburnable carbon’ (McGlade and Ekins 2015). According to that concept, one-third of proven global reserves of fossil fuels needs to ‘stay in the ground’ if there is to be a reasonable chance of global temperature rise remaining within manageable limits. It is assumed in some quarters that international agreements and/or policies affecting demand will render some fossil-fuel reserves uncommercial to produce, thereby leading to losses for companies and countries that have invested heavily in the production of those as yet untapped resources.
Major oil and gas companies, which typically hold reserves of 10–15 years, can adjust through divestment and diversification of business activities. Countries have less flexibility. Given that the realistic timeframe for resource development (from discovery to full production) can be 10–20 years in some countries, it is worth their while considering what long-term demand may be. The decarbonization efforts of the main fossil-fuel consumers – the advanced economies and large emerging markets such as China and India – are planned to accelerate in the coming decade, which could create a new driver for deteriorating terms of trade with the producers. The implications of such efforts vary from resource to resource: for example, oils that are heavy (and therefore more difficult to extract) would lose out to light oils. Much will depend on the rate of change in and the spread of user technology, particularly in transport and smart-grid systems. Another important factor is how goods will be produced and recycled – in other words, what advances are made in the ‘circular economy’ (an economic system in which production processes are designed to facilitate outputs being recycled as inputs) (Preston 2012).
Further, over the last decade, an extractives-led growth agenda has prevailed among multilaterals, consultancies and some development agencies. The assumption has been that efforts to better manage the extractive sector will be sufficient for it to spearhead positive development outcomes. As a result, countries have been encouraged to use oil, gas or minerals deposits as a basis for development – a policy that continues to influence the investment choices those countries make and the governance advice they receive. Hence, rapid growth and large-scale investment in the Guyanese economy would seem to reinforce the view that below-ground resource wealth can be good for the economy.
