OIL: COVID-19 Pandemic crushes Guyana’s dreams of big oil profits

— ‘Resource curse’ looms over oil-producing nations

From The Conversation – Research professor, Fletcher School of Law and Diplomacy, Tufts University

Secretary of State Mike Pompeo with Guyana’s president, Mohamed Irfaan Ali, Sept. 18. Pompeo is the first U.S. secretary of state to visit Guyana. AFP via Getty Images

This year was supposed to bring great things for Guyana.

ExxonMobil discovered massive oil deposits off the South American country’s Caribbean coast in 2015, and Guyana sold its first cargo of crude oil this February. As production ramps up, its first stage offshore wells were projected to produce 750,000 barrels a day by 2025, tripling the size of Guyana’s economy, from US$3.4 billion to $13 billion.

Guyana also received its first U.S. secretary of state when Mike Pompeo visited on Sept. 17, reflecting both its rising international status as a major oil exporter and U.S. hopes that it will be an American partner in dealing with its troubled neighbor Venezuela. 

But Guyana’s dreams of fabulous wealth this year have been dashed by COVID-19, which has delayed production and slashed oil demand. Compounding its coronavirus troubles, Guyana shows warning signs of the so-called “resource curse,” in which a country’s new oil wealth crowds out other productive economic sectors, breeds corruption and triggers political conflict.

If oil prices stay low, more countries could join the list of troubled petro-nations. My work on the link between the COVID-19 crisis, climate change risk, sovereign debt and oil suggests a looming crisis.

Burst hopes

Guyana, a former British colony with a population of 786,000, already struggles with political instability and ethnic tensions.

Earlier this year, in the first national election held since oil was discovered, accusations of corruption prompted a recount and an unclear presidential result. The transfer of power dragged on for five months, leading to deep uncertainty, violence and eventually U.S. sanctions.

Guyana’s new president, Mohamed Irfaan Ali, finally took office in August.

Ali campaigned on the issue of oil governance. Asserting that his predecessor David Granger had agreed to overly generous contracts with foreign oil investors, he promised to get Guyana its fair share of oil revenues.

So far, Ali has stopped short of saying his administration will retroactively change existing oil contracts, but calls for a review of terms have already delayed government approval for the next phase of offshore oil development, a holdup that is estimated to potentially cost Guyana over $1.6 billion in lost oil revenue.

Meanwhile, the coronavirus pandemic has delayed the ramp-up of oil production, as safety concerns prevented crews from going to work last spring.

The pandemic has also sapped oil demand worldwide, causing a glut of supply and ushering in stubbornly lower prices. That means new oil-producing countries like Guyana won’t likely see the economic windfalls that other petrostates experienced in past decades.

Looming crisis

Guyana is not the only oil-production nation facing an unexpectedly harsh political and economic reality.

Iraq, which experienced massive unrest in 2019 that led to a change in government, is expected to become a debtor nation this year, as low oil prices and high budgetary needs are forcing it to deplete its entire $62 billion nest egg. Nigeria’s looming debt – which it needs high oil prices to service – will make it harder for the government to fight the terror group Boko Haram.

In the Middle East and Eurasia, $35 billion in maturing external sovereign debt is due this year. Meanwhile, Mexico’s national oil company, Pemex, has $30 billion in debt coming due by 2024 and no prospects of profits this year or even in 2021. Brazil’s Petrobras has a staggering debt load of $78.9 billion and a similarly dismal forecast.

The coronavirus didn’t cause these problems – government debt in oil-exporting countries has been on the rise since 2016 – but it could make them worse.

The pandemic has essentially created a self-fulfilling economic prophecy for some oil nations. Low oil prices mean governments must cut the budget of their national oil company to meet other more pressing fiscal, social and health needs. That will translate into less future oil production, which, in turn, further lowers the oil revenues these places depend on.

The longer the pandemic recession lasts, the more oil producers will face this grim fate.

Betting on Guyana’s future

Though its crude has barely left the ground, Guyana was counting on oil revenues to plug its budget deficit this year. That may now prove impossible given the damage COVID-19 has done to its economy. But if Guyana can resist the urge to pay today’s costs by borrowing against future oil receipts, it could yet ride out this crisis.

President Ali has promised to create a petroleum commission to ensure transparency for how Guyana’s oil revenues are spent and to prevent undue political interference in the oil and gas sector. Guyana, which has received refugees from crisis-stricken Venezuela, is well aware of what happens when oil wealth is not properly stewarded.

But surviving this year’s low oil prices is only the beginning. To thrive in the long term, Guyana will need to sink much of its oil earnings into building other sectors to avoid overdependence on one volatile source of revenue. This is especially key in a world that’s moving away from oil as its main energy source.

The World Bank finds that very few petrostates have adequately diversified their economies. Exceptions include Malaysia and Dubai, which have both used oil wealth successfully to build a broader economic foundation and have avoided the dreaded “resource curse.”

Those countries will be models for Guyana, if can just get through 2020 first.

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Comments

  • Douglaman  On September 26, 2020 at 11:29 pm

    Douglaman reports:

    COVID Effects
    The situation here in Guyana is deteriorating in relation to the number of COVID deaths… nearly 80 ( about 60 since August 01, 2020.
    Now today (Saturday 26) the nurses are demonstrating with placards on the street demanding better pay, equipment and working conditions.
    They are saying that G$ bilions are being spent on a “dead” sugar industry while their needs, working on the frontlines against COVID, are neglected.

    The Economy:
    COVID has devastated the economy. Many businesses will not recover from this worldwide pandemic, and Guyana is no exception.
    The PPP government has come out of the gates at full speed with a new budget mostly with goodies for business, and lots of meetings and announcements …however… the reality is that the airports are still closed, the Cubans are not coming to shop; the uncertainty is at its highest. This is added to the fact that people are not shopping as they did and everyone is conserving their cash.

    Don’t look for help from up north. It is worse in places like Queens and Brooklyn NY, with many losing their jobs and businesses going bankrupt. Money transfers are a trickle these days. After all … the people outside saying “GT got oil now .boy… Dem don’t need we money”. … But they forget that GT has no real safety net….but at least we can pick some mangos or get some local food.
    Times are really rough for some people and the new budget has not addressed this reality.

    The FUTURE… No one knows when the pandemic will no longer be an issue. This uncertainty also will affect Guyana’s income from oil.
    We shall see how it unfolds…

    Douglaman

  • Winston  On September 27, 2020 at 8:47 am

    It’s no longer a dream but is certainly a nightmare for Jagdeo and his government.
    No amount of schooling in Economics will turn the economy around anytime soon. The Universe is telling us who is the boss!!!!

  • dennisalbert  On September 28, 2020 at 1:04 pm

    The PPP government don’t want give we $20,000 front line worker pay. Dreams of Pradovilles for the PPP crew, not for us. The coalition was investing in the population. The PPP cater to the business elites who building up mega high rise from Diamond to Mahaica.

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