The Latin American country you’ve probably never heard is on the verge of becoming the region’s latest oil power. With production coming online in 2020, Exxon Mobil is leading a consortium looking to tap into around 3.2 billion barrels of estimated reserves – a figure that jumped 28% in a bumper January 2018 find. According to BP, Guayana’s conventional oil and gas reserves now surpass Colombia’s, Argentina’s and Peru’s.
The discovery will transform tiny Guyana, which has a population of just 773,000. Guyana is poor, even by Latin American standards, with a GDP per capita, based on purchasing power parity, of $7,873 – just above Angola and below Guatemala, according to the IMF. As a measure of potential impact, we ranked Latin American oil producers on estimated reserves per capita. Guyana is leagues above every country apart from Venezuela, with more than 4,000 barrels per person.
When did this happen?
Guyana has never exported any oil – it is a true frontier market. The main foreign currency earners are gold mining, which makes up 46% of exports and rice, which account for 12%. Canadian miner Guyana Goldfields is the country’s largest foreign player and only began exporting gold in 2016.
But in 2008 a consortium made up of Exxon Mobil (45% interest), Hess Guyana Exploration (30% interest) and Chinese CNOOC Nexen Petroleum Guyana (25% interest) began looking for oil and gas in the Stabroek block. It drilled its first well in 2015 and since then six wells have been discovered, with exploration to continue this year. FTSE 250-listed Tullow Oil, in partnership with Spain’s Repsol, is in the early stages of exploration.
Golden opportunity or devil’s excrement?
Juan Pablo Pérez Alfonso, a former Venezuelan oil minister who helped to found Opec, eventually became so disenchanted with the impact of oil on his country that he labelled it ‘the devil’s excrement’. The resource curse is well documented, and Guyana will have to take measures to avoid the many pitfalls ahead. Dutch Disease is an economic problem where a commodity windfall causes a sudden rush of foreign earnings, driving up the value of currency. This makes other export goods less competitive, which causes these economic sectors to fade and die out. Brazil had this problem during the commodities boom of the 2000s – its manufacturing sector, which was nurtured under previous governments, saw its share of exports decrease significantly as it became less competitive.
“Oil dependence increases levels of corruption in a country…”
A common tactic to prevent an economy overheating is to legally guarantee that a proportion of oil revenue goes into a sovereign wealth fund. When oil prices are high more money is allocated to the fund, which helps to calm buoyant local growth. Then when oil falls the fund can release money into the local economy to help stimulate growth. It helps to balance out growth and protect an economy for the volatile swings of commodity prices. Norway and Chile have done this very successfully. Guyana, taking guidance from Mexican officials, is looking to do the same, but politics may still get in the way.
The challenges that oil wealth brings are not just economic. Oxford University economist Paul Collier has shown that oil dependence increases levels of corruption in a country. Politicians can use oil revenues to hold onto power, using handouts to secure business support and channel money into high profile schemes around election times.
Is Guyana Ready?
You only have to look at the differing fates of Nigeria and Norway to see oil discoveries don’t necessarily bring development. The clock is ticking for Guyana to prepare itself for first oil. Three institutions are being built: a dedicated oil and gas regulator, a specialised institute to teach technical skills and a sovereign wealth fund. But intentions are cheap. President Granger has already delayed the development of these institutions, and it will be a race against the clock to have them complete – and functioning efficiently – before first oil in 2020. The government is working with the Mexican authorities to build these, an encouraging sign, and Guyana has been accepted into the Extractive Industries Transparency Initiative.
It hasn’t been a smooth journey so far. In December 2017, the ruling party denied knowledge of a $18million signing fee from Exxon Mobil. The finance minister claimed ignorance, whilst the minister of natural resources said that his lips were sealed in the interests of national security. Under pressure from the opposition, the details of the payment eventually surfaced. The blunder reveals elements of government incompetence in handling the sector, as well as incomplete mechanisms in place to transparently handle incoming oil payments. Once the serious money begins to flow, it must be managed cleanly to avoid sparking social discontent.
What’s the political climate like?
Ethnic divisions determine political allegiances, creating a polarised political climate. There is an even share of citizens of Indian and African descent, which each make up 35% of the population each. The Indo-Guyanese People’s Progressive Party, which ruled from 1992 to 2015, and the Afro-Guyanese People’s National Congress, who won the 2015 election winners as part of a coalition, dominate politics.
But tribal politics is on the wane. The population is increasingly mixed race, and two of the five parties in the governing coalition campaigned on a multi-ethnic platform. So, in theory, politics should become more balanced as parties seek to win support based on policy, rather than ethnic loyalty. That’s good for investors because oil revenues should be funnelled more equitably into different areas of the economy. Elections in 2020 will be a test of the country’s progress. With oil coming online in the same year, it will be a winner-takes-all contest, with the victor becoming the first to get its hands on the oil windfall.
What about geopolitics?
Needless to say, cash-strapped, politically turbulent former oil superpower, Venezuela, isn’t the easiest neighbour. Venezuela claims ownership of Guyana’s western Essequibo region, which makes up around 40% of Guyana’s territory. The dispute dates back to the 19th century, but resurfaced when Exxon Mobil struck oil in 2015. President Maduro vociferously claims ownership of the region and its offshore oil wells for Venezuela.
The case is being handled by the UN, but will probably be transferred to the International Court of Justice. So far it has led to military exercises along the border and trade spats, but nothing more serious. And it’s likely to remain that way given Venezuela’s domestic crisis and need for military resources in Caracas, as well as Exxon Mobil strong ties to the US government, whose navy patrols Caribbean waters. However, if anyone was going to act against US interests or reject an international ruling, it would be Venezuela. Exxon Mobil will be watching the dispute nervously, as will prospective investors
How can I invest?
Guyana remains a frontier market – but a promising one. Aside from gaining exposure to its nascent oil sector through investments in Exxon Mobil and Tullow Oil, its gold mining is also very prospective. There are only around 30 international companies in the country, with Guyana Goldfields and Troy Resources the biggest players.
Producing the oil and bringing it onshore will require massive investment. Exxon expects to spend $4.4billion to get its offshore Liza 1 field online, which contains 17 wells and an estimated 450 million barrels of oil. However, size remains a challenge. For example, President Granger’s proposal for a $5billion oil refinery capable of processing 100,000 barrels a day was scrapped, partly because local oil consumption of 15,000 barrels a day is too small. The growth in oil revenues should also fund a country-wide building boom. Indeed, the government has earmarked $37.2billion to bring its infrastructure up to standard, with roads and bridges the priority. With some former top Latin American players, such as Odebrecht, disgraced, there will be opportunities for UK players to tap into this programme.
A growing economy and improved infrastructure will also bring benefits for regional partners, with Brazil first in line to benefit. Oil revenues will allow Guyana to build a long-planned road from Linden, northern Guyana to Lenthem, on its western border with Brazil. With the countries finally linked, it will open the door to bilateral trade, as well as provide Brazil with a convenient Caribbean platform to export into North America and the Caribbean. The potential for growth in trade between the two is massive as in 2016, just 0.45% of Guyanese exports went to Brazil.