Operationalisation of wealth fund vital when oil production begins – Global Data Analyst

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The Liza Destiny FPSO offshore Guyana

The need for Guyana’s Natural Resources Fund (NRF) to be operational when revenues begin flowing to the country from oil production is being emphasized by an analyst at Global Data who says this ensures transparency and guarantees the correct utilization of the proceeds.

Speaking in an op-ed published by Energy Voice on Tuesday, Alessandro Bacci, Upstream Oil and Gas Analyst at GlobalData, said the absence of a proper mechanism in place to manage revenue from the extractive sector results in the overdependence of a country’s economy on this sector and the subsequent decline in the manufacturing and agriculture sectors as a result of the exchange rate appreciation. This phenomenon is best known as the Dutch Disease.

“To well manage the oil revenue inflow Guyana must use part of the revenues for infrastructural development according to Guyana’s absorptive capacity and for the repayment of the country’s external debt and then to sterilize the remaining part,” Bacci stated in the op-ed.

He said it is crucial that the NRF, Guyana’s version of a Sovereign Wealth Fund (SWF), is implemented as soon as possible to sterilise Guyana’s economy from oil revenues.

“The fund may well serve as a savings fund, preserving the wealth for the future generations, and as a stabilisation fund, reducing the impact of volatile revenues on the Guyanese economy. The SWF should invest in non-hydrocarbons-related assets and should refrain from financing capital expenditures or from being used as collateral for the government’s borrowing,” Bacci stated.

He said Guyana can follow the path of Trinidad and Tobago, which in 1999 announced the creation of the Interim Revenue Stabilisation Fund which was then transformed into a full savings and stabilisation fund in 2007 under the advice of the World Bank and the IMF. Bacci said Trinidad and Tobago’s experience has been positive with the fund playing the role of a macroeconomic buffer against revenue volatility.

“However, it is advisable that Guyana’s SWF be fully operating when the first oil revenue start to flow into the government’s coffers to avoid possible deviation from transparency and to guarantee the correct utilisation of the revenues for the benefit of the Guyanese population,” the Global Data analyst pointed out.

Focusing on Guyana’s Production Sharing Agreement (PSA) with ExxonMobil, he said, “it is important not to be misled by statements comparing Guyana’s 2% royalty with higher royalties in other countries (set on average at about 10%-15%).”

Oil and gas contracts are complex, Bacci said, pointing out that they comprise several different parameters, which only when considered all together produce a petroleum fiscal framework that can at least ‘partially’ be compared with other petroleum fiscal frameworks.

“In other words, putting attention only on one single parameter is not very useful. As proof of that, for a prospective investor, each of the three main types of petroleum contracts ─ royalty and tax agreements, PSAs (the type present in Guyana), and service contracts ─ may all produce the same result if the underlying parameters are structured toward that goal,” he indicated.

Bacci said until ExxonMobil announced the Liza-1 oil discovery in May 2015, Guyana was a complete frontier area on the world’s oil and gas map. “So, it is normal for a country that has ambitions to become a hydrocarbons producer, as Guyana was before 2015, to initially offer advantageous fiscal terms to prospective investors.”

The analyst said investing in a frontier area is geologically riskier than investing in areas where companies have already discovered some hydrocarbons. “Consequently, now that Guyana is a real oil and gas province, it may advantageously modify the terms for the government because at the geological level the Guyanese offshore has been partially derisked for prospective investors.”

However, Bacci said unless there are exceptional circumstances; “the modifications to the petroleum fiscal framework must occur only exclusively in relation to future contracts as the renegotiation of existing contracts may irrevocably deter future investments.”

Modifying a petroleum fiscal framework in favor of the government as for future contracts is a natural evolution once a country has been geologically derisked, but it is always a complex procedure because a country must still maintain its attractiveness for prospective investors, he said.