Large Oil Discovery Generates Hope, Challenges in Guyana

The Liza oil field discovered off Guyana’s coast in 2015 might be the world’s biggest oil discovery in the last two years. The discovery may ultimately produce 1.4 billion oil-equivalent barrels of crude. This could have a massive economic impact on a country currently ranking among the poorest in the Latin America and Caribbean region.

The expectations of many prospective oil and gas producers have been dashed over the last two years. The global price downturn has slashed oil companies’ investment budgets and pushed back investment decisions on several major projects. Not so in Guyana. The size and quality of the Liza field has excited the global industry. ExxonMobil has announced its intentions to fast-track the project’s development.

In light of Guyana’s small population (approximately 800,000), Liza could make the country one of the world’s biggest oil producers on a per-capita basis. In a country with no history of oil production, Liza’s size and potential quick development timeline has all eyes focused on the ways in which oil could boost the country’s economy or put it at risk.

In Guyana’s capital of Georgetown this month, the Ministry of Natural Resources convened a gathering of public officials and Guyanese citizens to discuss how the country can prepare for oil. The seminar was co-organized with the New Petroleum Producers Discussion Group. Sponsored by Chatham House, NRGI and the Commonwealth Secretariat, the group brings together officials from emerging and prospective oil producing countries around the world to share experiences and approaches for responding to common challenges.

If it is to successfully extract oil, Guyana needs to build the institutions and capacity to take advantage of the opportunity the discovery could provide. Maximizing the country’s financial benefit requires working closely with international oil companies, overseeing their work and taxing them effectively. Like most new producers, in the time before this first discovery, Guyana had only minimally invested in building up an oil sector administrative staff.

The government faces a steep learning curve. Beyond fiscal revenues, Guyanese officials have also indicated that they hope to take advantage of the skills and technology associated with the complex oil space to build a more robust technocratic private sector and empower a new generation of highly skilled technocrats.

In his opening remarks at the seminar, Natural Resources Minister Raphael Trotman emphasized the goal of developing rules and policies to optimally manage the sector.

Alongside the optimism that the oil discovery will be a major driver of the country’s development, Guyanese seminar participants were also acutely aware of the risks associated transitioning to oil production, particularly in a country already facing challenges with respect to measures of government effectiveness, rule of law, control of corruption and other governance indicators. One particular concern was how the oil sector could impact the country’s green growth agenda. Guyana is roughly three-quarters covered by forest, and the government has committed to “balancing environmental sustainability with economic development.” Unchecked oil sector development can threaten environmentally friendly growth: the risk of environmental incidents rises and countries can get locked into pollution-exacerbating public policies like fuel subsidies.

The relative size of possible Liza revenues also puts Guyana at special risk of the kinds of macroeconomic distortions that have befallen other oil-dependent states. These include damage to other sectors of the economy and volatile public expenditure that tracks with volatile oil prices. These factors can be devastating to long-term economic planning, as is currently being demonstrated in Guyana’s neighbor, Venezuela. As a mechanism for reducing these risks, Trotman indicated that the country is considering establishing a natural resource fund to save for the future and reduce spending volatility.

Among other countries represented at the session were Uganda, Liberia, Suriname and Trinidad and Tobago. Officials from these countries emphasized the value of building public capacity in stages and making clear choices in accordance with a transparent overarching strategy. Many of the recommendations made by the international participants grew from the Guidelines for Good Governance in Emerging Oil and Gas Producers, which have been developed collaboratively by the countries participating in the initiative.