Guyana is currently seen as the
hottest spot for oil explorers
and the country’s optimism
is based on reality. Some see Guyana
joining the top 10 biggest producers
in the world over the next decade.
ExxonMobil has announced a string
of large finds within the country’s
offshore Stabroek block, estimating
recoverable resources at over five
billion barrels of oil equivalent (boe)
- most of it is oil – while Tullow Oil’s
offshore Orinduik block potentially
holds close to 3 billion boe. There
is potential for additional production
from significant undrilled targets
and plans for rapid exploration and
appraisal drilling.
“Guyana is the jewel in the crown,
the mother of dragons. That is the
hottest exploration area in the world.
It’s no longer frontier, it’s a sub-mature
basin,” Eco (Atlantic) Oil and Gas
CEO, Gil Holzman, said. The Guyana
basin as a whole may hold another
8 to 10 billion boe of reserves. This
would take the total to three times
what’s been found so far in Guyana’s
Stabroek block. As such, it is expected
that around fifty exploration wells are
to be drilled over the next five years.
Guyana itself might be headed for
over 1 million barrels of oil per day of
production if exploration succeeds in
converting YTFs [yet to finds]. More
exploration assets in Guyana are
coming into focus for 2019.
“Guyana is a truly world class
investment opportunity with
multibillion barrels of additional
exploration potential,” Hess CEO,
John Hess, said. Esso Exploration and
Production Guyana Limited (EEPGL)
estimates that it will produce more
than 750,000 boe per day by 2025
from five or more floating production
storage and offloading (FPSO) units
offshore Guyana. The Liza Phase
1 development offshore Guyana is
expected to produce 120,000 boe
per day by early 2020, with Phase
2 expected to begin by mid-2022,
producing up to 220,000 boe per day.
The company’s third development,
Payara, is expected to begin in 2023.
O IL PRODUCT ION AND
GOVERNMENT REVENUE
The main direct effect of the oil
sector on the domestic economy will
be through fiscal revenue. Under the
revenue sharing agreement, 75 percent
of oil production is initially allocated
to cost recovery to ExxonMobil and
its partners. The remaining 25 percent
is considered profit oil and is shared
50-50 with the government. The
agreement sets a royalty of 2 percent
on gross earnings, which brings the
initial government share to 14.5
percent of total oil revenues.
The government share will
increase substantially once cost
recovery on the initial investment is
met (in the late 2020s), and most of
production consists of profit oil. As
a result, changes to oil prices have a
one-for-one impact on fiscal revenue
in the first years of production (but
lower oil prices would prolong the
cost recovery period). The breakeven
price for Liza Phase 2 is relatively low
at around $35 per barrel, so it would
take a major adverse price shock to
delay its development plans.
It is worth noting the considerable
upside potential as there are other
offshore blocks besides Stabroek,
and many companies have expressed
interest for the ultra-deep offshore
block.
Further, the new oil discoveries
for Guyana will present opportunities
and challenges. The discoveries will
provide Guyana with additional
revenues for growth-supportive
investment and social expenditure,
as well as financial buffers against
adverse shocks.
However, oil discoveries also
tend to make non-oil sectors less
competitive via the appreciation of the
real exchange rate (Dutch disease) and
can induce macroeconomic volatility
(van der Ploeg and Poelhekke 2009).
The experiences of natural resource
rich countries show that expenditure
decisions should be based on the
likely duration of the resource boom,
the expected income (subject to price
assumptions), extraction costs and the
time horizon during which exhaustible
resources are depleted.
However, Guyana must be cautious
as fiscal decisions should not be based
on optimistic assumptions about the
size and extent of its oil resource
booms. Hence, the authorities should
not rely on oil resource revenues alone
and try to diversify the economy.
Revenues from oil production and
rising public investment are expected
to increase growth to 13.3 percent on
average during 2018–23, while nonoil growth will remain at around 4.5
percent. The oil sector’s contribution
to GDP is projected to peak at around
42 percent in 2025. Oil will contribute
3.5 and 6 percent of GDP to revenue
in 2020 and 2021, respectively. That
share will increase substantially after
cost recovery is met. This will lead to
a narrowing of the central government
overall deficit, from 5.4 percent of
GDP in 2018 to a projected 0.2 percent
of GDP by 2023, before turning to an
overall surplus, underpinning a sharp
downward trajectory in debt levels.
Inflation is projected to increase
slightly, averaging 3.1 percent in the
medium term. The current account
will move to large surpluses after
2020, which will be partially offset
by deficits in the financial account
as repatriation of revenues from
cost recovery by ExxonMobil and its
partners is recorded as a divestment of
Foreign Direct Investment (FDI). Gross
international reserves will increase,
with reserve cover rising to 8 months
of imports by 2023.
EVOLUT ION OF GUYANA’S
MACROECONOM IC
COND IT ION
The government’s oil revenue is
expected to average 5.5 percent of
GDP in 2020-22 and 21 percent of
GDP in the long run, underpinning
the initial reduction in the overall
deficit as oil production starts, and
subsequent fiscal surpluses which will
be accumulated in a sovereign wealth
fund. Figure 2 shows the projection of
Guyana’s GDP over the short, medium
and long terms. In the short term, the
GDP is projected to grow on average
at 16.6% between the period of 2018
to 2023, on average by 2.2% from
2024 to 2038 during the medium-term
and on average by 5.1% from 2017 to
2028, for the long-term.
Moreover, there is a longrun relationship between three
macroeconomic variables; the real
GDP, the real government expenditure
and the real oil revenues. The longrun must have a positive relationship
between the real GDP, real
government expenditure and the real
oil revenues. These indicate that in the
long-run, the Guyanese economy can
escape the resource curse. Thus, the
government is an important institution
in the development process, and good
fiscal policy could play an important
role in ensuring that oil resources are
a blessing.
In general, oil revenue is beneficial
to economic growth, but could be
more effective if associated with fiscal
policy de-linking fiscal expenditures
from oil revenue to insulate the
economy from oil revenue volatility
(Mehrara 2008). Importantly, the
real expenditure will have a positive
impact on the real GDP and variations
in government expenditure are
generally derived by the changes in
the oil revenue. Thus, the transmission
channel where oil revenue affect GDP
is through government expenditure.
Hence, Guyana should control its
expenditure, manage oil revenue
instability and be more inductive for
economic growth and diversity.
The energy sector outlook
in Guyana is of considerable
contemporary importance, not only
for future domestic development.
Hence, the Guyanese economy will
become dependent on the oil sector
post-2020. The significance of oil
for the economy will stem from: its
role as a major source of government
revenue, oil exports contribution to
total exports over the period and as
a major share of national income is
FIGURE 1: OIL PRODUCTION AND
GOVERNMENT REVENUE
(Based on Liza Phase 1 and 2 (45 percent of
estimated recoverable resources)
Source: IMF Guyana Country Report 2018
FIGURE 2: REAL GDP GROWTH RATES
Source: IMF Guyana Country Report 2018
35th Edition Guyana Inc. 35
derived from oil production. The oil
sector is also expected to generate
substantive future revenue, essential
for the reconstruction of the economy,
its infrastructure and the attainment of
sustainable growth.
How effectively these will be
obtained will critically depend on
the implementation of sound policies
aimed at maximising the benefits
from current and future oil revenues.
Such policies need to focus upon
increasing productivity through
increased investment in infrastructure
(physical capital), human capital and
technology acquisition in the non-oil
output sector (Collier et al. 2009).
The benefits for the non-oil sector
arising from physical, human and
imported capital stock (technology)
accumulation induced by oil sector
revenue could be substantial in
terms of employment and growth
generation.
The country’s oil sector
development will potentially result
in an increase in private capital
stock, hence, private sector wealth,
real income, domestic physical
capital stock, human capital stock,
imported capital stock and non-oil
supply (and demand). These positive
impacts are obviously larger in the
fast and medium terms oil production
periods. However, the Dutch disease
consequences can be developed and
likely to be confined to the non-oil
trade balance during the adjustment
process towards long-run steady state.
That is, a development of the oil sector
also has the potential to deteriorate the
non-oil trade balance through a loss of
competitiveness from a real exchange
rate appreciation, and it is worse in the
case of the rapid oil production period
due to higher inflationary outcomes
with a fixed nominal exchange rate.
Nevertheless, despite the
possibility of a loss of competitiveness
of the non-oil tradable sector, non-oil
output supply increases throughout
the early periods of adjustment. This
is attributable to the fact that the
Dutch disease effect upon non-oil
output can be offset by government
development spending on physical,
human and imported capital stocks. In
the context of the Guyanese economy,
this confirms the crucial role that the
government, which will regulate and
manage the oil sector, must play in
enhancing the positive consequences
and/or minimising the adverse effects
of the oil sector development upon
the non-oil sector.
The government could improve
productivity and increase the
availability and type of capital
available for the non-oil tradable
sector, such as that for the
manufacturing and agricultural
sectors, by increasing or changing the
composition of government investment
in infrastructure, human capital
formation and technology acquisition
in these sectors (Brahmbhatt et al.
2010). This will eventually improve
their competitiveness.
Further, it will be the responsibility
of policymakers to identify where
such development spending is best
directed, which will require more
detailed analysis of key bottlenecks
and capacity constraints facing
the non-oil sector. Moreover, the
benefits for the non-oil sector arising
from public capital stock, human
capital stock and imported capital
stock accumulation induced by the
development of the oil sector could be
of substantial importance in terms of
employment and growth generation.
This emphasizes the importance of
bringing about a rapid growth of
the oil sector. An increase in nonoil output will possibly lead to an
increase in the demand for labour and
hence reduce unemployment. Thus,
the development of the oil sector will
impact the macro-economy, namely
through revenue effect, income effect,
spending or wealth effect, exchange
rate effect, current account effect and
technology effect.
The oil revenue will promote
long-run economic growth and
development.