Tuesday, February 20, 2018

Can Guyana pull through to 2020?

With Liza-1 in 2015, then Payara in January, and the Snoek find last week, estimates of Guyana's oil resources now run to two billion barrels, perhaps even 2.5 billion.

That puts Guyana's oil reserves close to Colombia's or Argentina's, and around three times T&T's. Plus, so far, there's an estimated three trillion cubic feet of natural gas.

That's with close to 20 promising geological structures still to drill, just in ExxonMobil's offshore Stabroek block. Five prospects will be drilled this year and next.

Then there's a long, tedious wait till the oil starts to flow. Liza-1 came in May 2015, the month of Guyana's past election. Most forecasts don't see wells pumping before 2020—and that's the year of Guyana's next election.

David Granger's multi-party coalition took office in 2015, with a single-seat majority, after almost 22 years in opposition. He has to get through a full parliamentary term with no significant oil revenue. Finances look tight.

The fun starts in the next election cycle, from 2020 to 2025.

Exxon and its partners—Hess from the US and China's Nexen—plan a Floating Production Storage and Offloading (FPSO) vessel moored permanently offshore, with production of up to 120,000 barrels a day by 2020.

A second FPSO could be in place as early as 2021 or 2022, with a third to follow. Respected industry analysts Wood Mackenzie project up to 450,000 barrels a day by the mid-2020s.

Then there's the prospect of a floating LNG facility. Unfortunately, Guyana's gas is around 800 km from Trinidad—a whole lot further than Venezuela's nearby fields.

The production sharing contracts aren't public. But media leaks last year gave the Guyana government half the “profit oil,” or one-eighth of output. I have not seen that figure contradicted.

With excitement high and rising, Guyana will be able to extract better terms from future contracts.

Oil prices for 2020 are anyone's guess. But at today's US$50-plus, Guyana's share from 120,000 daily barrels would be worth an annual US$275 million. For 450,000 barrels, that rises to more than US$1billion.

Guyana's government revenue last year was US$830 million. A little US$275 million from oil would be more than helpful. And that is just for starters.

All of that comes after 2020. Until then, things aren't easy.

The sugar industry's production costs are more than double sales revenue. Huge subsidies keep the state-owned sugar company Guysuco afloat. Estates are closing, unleashing discontent. The EU's guaranteed export price is ancient history. Rice is not doing well. Neither is bauxite.

Remittances are down from the army of Guyanese migrants working overseas. Investment inflows are down. A patchwork of established tax concessions bleeds government coffers. Electricity costs are five times T&T's.

The big bright spot is gold. Output has soared, with prices fairly steady for almost four years. Canadian-owned Guyana Goldfields started production in 2015, with an Australian-owned Troy Resources running from last year, and smaller-scale local miners in full swing.

But all is not joy, even for gold. The Guyana Gold and Diamond Miners' Association is not happy with a new requirement for tax compliant record keeping, which its members say is not workable for operations in the remote interior. Meanwhile just last week, a major gold dealer was charged with fraud. His finances are now under investigation.

Guyanese wages remain ultra-low by T&T standards—and some of the day-to-day problems sound familiar.

Importers wait weeks for foreign exchange. The Guyana dollar is again depreciating. The rate for US dollars was around G$205 from 2009 up to last year. Now the central bank quotes G$210; importers complain that they pay G$216—and sometimes G$230 or more. The finance minister blames currency hoarding.

The Bank of Guyana in February blocked the use of credit cards for commercial transactions.

The bank's governor Gobind Ganga argues that foreign exchange reserves increased last year; but they have now dipped.

There are reports that T&T companies with Guyana affiliates are buying US dollars in Georgetown, then sending them to their T&T parent to by-pass T&T's own foreign exchange shortages. Kaieteur News quotes a Bank of Guyana official who says, banks are “coming in and saying all sorts of things, yet they can't say who the people really demanding foreign currencies are.” Three local banks, meanwhile, have close links to major Guyanese conglomerates.

In Guyana, as everywhere, the issue is trust. Government and private sector are saying all the right things. There are plans to join the Energy Industries Transparency Initiative and set up a sovereign wealth fund, on the lines of T&T's Heritage and Stabilisation Fund.

But Guyana's corruption track record is not good. At 108 on Transparency International's index, their ranking is worse than T&T's.

Dealing with past corruption deepens political polarisation. Constitutional challenges to proposed state asset recovery legislation are almost certain. Former cabinet members and ex-president Bharrat Jagdeo were hauled in for questioning last month; their supporters cry ethnic persecution. Guyana has an unfortunate history of disruptive mass protests.

After 2020 and all looks fine. Until then, the going looks rough.