Wednesday, November 30, 2022

Guyana, oil and answering Europe’s needs

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By Scott B. MacDonald – OilNOW

The Russo-Ukrainian War has been a shock-like wakeup call for Europe over its heavy dependence on Russian oil, gas and coal. As European Union (EU) and other Western countries imposed economic sanctions on Russia, Moscow responded by the weaponisation of its energy exports, radically reducing natural gas and oil flows. Russia’s message is simple – you hurt us, we’ll hurt you right back. Consequently, European countries have been left scrambling to find new energy sources, something that has become complicated by the push-pull of European environmental policies and national security. One country that is benefiting from this situation is Guyana.

Guyana exported 116,900 barrels of oil per day (bpd) of crude in 2021. Most of the oil was sold to Asian countries, including China and India, while shipments to Europe accounted for around 16% of the total. In 2022, that dynamic has radically changed. While Asian buyers remain important, Europe has assumed the lion’s share of buying of Guyanese crude. From January to early September, it is estimated that cargoes to Europe, average 110,000 bpd, account for 49% of the Caribbean country’s oil exports. It is expected that Guyana could hit 380,000 bpd on average by the end of the year.

Why Guyana? The shift away from Russian energy is a disjointing affair, leaving Europe looking to accelerate its transition to renewables. The problem is that renewables come up short for Europe’s energy demands, especially over what could be a critical next several months. Europe is relying more on coal (especially in Germany) and considering new projects.

Europe’s consideration of new projects, however, is complicated and not necessarily geared for speed. A key factor for investment in new gas fields, as in countries like Senegal, Tanzania and Mauritania, is the need for financing. In July 2022, European lawmakers approved a law designating both gas and nuclear power as sustainable energy sources for investment purposes. While the intention was to expedite new natural gas projects in a number of African countries and in the Eastern Mediterranean, that designation is now being challenged by environmental groups. Project needs as soon as possible are likely to be bogged down in the court room.

Europe’s position on environmental concerns trumping its energy needs is also causing rancor with African countries. In September, the European Investment Bank’s president, Werner Hoyer, was clear about his lending institution’s refusal to fund natural gas projects, many of them in Africa: “We as a European public institution should not invest in assets that one day will be seen as stranded assets.”  Instead of backing the idea of gas as a transitional fuel from coal, as advocated by many African countries, the bank should take “the energy transition seriously and move to renewables,” said Hoyer.

The European view, as outlined by Hoyer, runs into the reality that instead of moving ahead with gas, most countries, particularly Germany, have upped considerably their imports of coal, a much dirtier fuel. According to Reuters, imports of thermal coal from the 27-member EU bloc plus the UK will be 43% higher by next year over this year, with an additional 10 million tons of carbon dioxide (CO2) released into the atmosphere. Needless to say, Europe has opened itself to charges of hypocrisy from Africa as well as in the Caribbean over its energy policies. One response to calls for other countries to stop pumping oil and gas for the sake of a carbon-neutral future came from Guyana’s Vice President Dr. Jagdeo in 2021: “We would be shooting ourselves in the foot. It is such a stupid thing to do, to keep Saudi Arabia and the US just pumping all the oil that’s needed around the world [when] Guyana needs some of the money to decarbonise to help us build energy systems. We must sit on our hands.”

Considering all of the above, Guyana looks pretty good. The Caribbean country’s oil industry is already up and running, the major oil companies (Exxon, Hess and CNOOC) are well-established and managing the exploration and production process, Guyana’s oil is sold on the spot market, and the government is sensitive to environmental concerns (which are part of a debate within the country’s society). Guyana also has the right type of crudes for Europe, a medium to light-sweet oil called Liza (named after the offshore field) and an even lighter grade, Unity Gold. Additionally, the flow of foreign direct investment into the development of Guyana’s oil sector will help improve infrastructure and make oil available.

One last point to consider is that Guyana’s political risk on a comparative basis is lower than in a number of other key oil and gas producers. Libya is caught in a multi-year civil war; Iranian and Venezuelan oil sales are complicated by economic sanctions; and Nigeria’s natural gas pipelines are frequently victims of theft and vandalism. Guyana has no such problems.

Europe’s energy needs are also being felt in nearby Trinidad and Tobago, a major producer and exporter of liquefied natural gas (LNG). Halfway through 2022, Trinidad and Tobago’s sales of LNG to Europe have doubled to 40% of the total exports. This has been a major boost to the Caribbean country, especially its LNG exports declined to 7.9 million tons last year. Nearby Suriname, which has considerable offshore oil reserves, also hopes to tap into the changing map of energy demand.

There are three consequences that come out of Europe’s increased use of the Caribbean energy. First, Guyana’s rising importance to Europe and the UK for energy (as well as those commodities coming from Trinidad and Tobago and Suriname) reinforces the development of a Southern Caribbean energy matrix. The three Caribbean countries have considerable reserves of both oil and gas. As energy expert Tony Bryan recently noted: “The oil and gas resources of Guyana, Trinidad and Tobago, and Suriname will jointly build energy security for the Southern Caribbean countries. These nations are very minor contributors to the global carbon footprint and climate change…”

Second, increased European demand for oil and gas encourages other Caribbean countries to drill. The success of Guyana to tap its oil and pull in massive new revenues is giving a push to other Caribbean countries, like the Bahamas, Jamaica and Grenada to tap their offshore regions.

Third and finally, Caribbean energy is likely to increase Europe’s strategic interest in the region. There are risk factors that could complicate access to Guyana’s and other Caribbean energy producers, including competition from China (a major buyer of Guyanese crude) and the threat of Venezuela seeking to act on its claim of a large chunk of Guyana.

Europe’s energy transition may have been accelerated by the Russo-Ukrainian war, but a full transition to alternatives is going to take years, if not decades. Europe needs the Southern Caribbean. For Guyana, the discovery of oil continues to place it in the cross-currents of global energy politics, something that is likely to help it in the future make its own transition from oil to a more green economy and based on other non-hydrocarbon sectors.

About the Author

Scott B. MacDonald, Ph.D. is the Chief Economist for Smith’s Research & Gradings, a Fellow with the Caribbean Policy Consortium and a Research Fellow with Global Americans. His most recent book is The New Cold War, China and the Caribbean, August 2022.

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