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Guyana must walk tightrope to develop oil resources, demand more from future contracts – Brookings Institution

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Guyana will face significant challenges in using the oil and gas industry to bring about development without the “resource curse,” where petroleum revenues generate concentrated wealth and harm the competitiveness of other industries within the country.

A July 2018 report released by US-based Brookings Institution said policies that encourage investments in parallel industries can spread the oil and gas wealth and help prevent the resource curse. Local content policies can encourage local development and help local businesses overcome the barriers to entry—such as complicated procurement programs—of working with the large multinational oil and gas companies. Additionally, gas from the project may be used to produce power onshore, replacing diesel generation and providing cleaner and less expensive power for development of other industries, the report highlighted.

In other areas, Guyana can learn from the experiences of its neighbors, the Brookings report pointed out. “Brazil and Argentina demonstrate the importance of the policy and investment environment, including sanctity of contracts and a lack of corruption.” The report added that expropriation risk and capital controls can quickly scare off investors in even the most prospective reserves. “Investors like policy and fiscal certainty when making long-term decisions. Colombia demonstrates the importance of community support for natural resource development.”

The Guyanese government and the oil and gas industry will have slightly different goals—establishing a regulatory structure that maximizes benefit to the Guyanese people (rather than oil company profits) will be crucial as the industry makes investment decisions, the Brookings report stated. “The International Monetary Fund (IMF) has been working with the Guyanese government to improve its legal, fiscal, and regulatory frameworks for oil development. The IMF has raised concerns that the initial deal that Guyana struck with ExxonMobil is too generous by international standards.”

But ExxonMobil, the report pointed out, began exploration in 1999 when oil prices were relatively low, and Guyana’s resource potential was completely unknown. “Now that the resource base is better understood, exploration is less risky, and oil prices are relatively higher, Guyana can and should demand more favorable terms from future contracts,” the report said.

“Guyana must walk a tightrope to develop its significant resources. Guyana needs foreign investment to develop its oil and gas, but must develop a governance and regulatory structure that reassures the public that such development is in their interest,” the report further added.

“Guyana’s original exploration contracts were signed during a low-price period and are quite generous to the oil companies. Now that the resource is better understood and oil prices are a bit higher, Guyana will be able to drive a harder bargain in future contracts. The key is to find a happy medium between reaping maximum benefit for the Guyanese people and attracting investment. A moderate oil price environment makes this balance easier,” the report highlighted.

Additionally, avoiding corruption and regulatory capture, where the industry has too much say in its own regulation, will be crucial to success. The public must see the benefits of development spread broadly across the population, the report said, adding that the history and present situation of Guyana’s neighbors provide valuable lessons.

The Brookings Institution is a nonprofit public policy organization based in Washington, DC. Its mission is to conduct in-depth research that leads to new ideas for solving problems facing society at the local, national and global level.

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