Guyana – global oil’s new king of the heap
Chairman, Chief Analyst and author of The Edge
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Guyana is in a unique position as the world’s newest major oil producer. Other oil- and gas-dependent producers are contemplating the threat posed by the energy transition to their economy. Guyana’s oil, only just being commercialised, promises to transform the nation’s wealth. How can the South American country make the most of it? I delved deeper with our senior analysts Luiz Hayum (Latin America Upstream), Peter Martin (Economics), and Graham Kellas (Fiscal).
Guyana’s oil fields are prodigious. ExxonMobil and its partners, Hess and CNOOC Ltd, upgraded reserves on the golden Stabroek block by 25% earlier this year. Our analysis models almost 6 billion barrels of oil. First production was achieved in December 2019, only five years after the initial discovery. The phased development will lift output to over 1.1 million b/d by 2028, and Guyana will become just the 11th nation in oil’s history to reach the million b/d milestone.
These barrels are mostly light, meeting the market’s increasing need for relatively low-carbon-intensity liquids. They are also low cost – the breakeven of under US$30/bbl (NPV10) competes with the very best new projects, conventional or unconventional.
The giant oil fields will deliver untold riches to this nation of only 0.8 million people. Guyana will, as output builds, rise to be king of the heap. Production per capita will eclipse even that of the leading Middle East producers, Kuwait, UAE and Saudi Arabia.
The country’s economy will be transformed. Annual capital expenditure on the project will average US$4 billion a year this decade – the same as 2019 GDP. Much will be spent on production equipment outside Guyana, but considerable investment will flow into infrastructure onshore and offshore to support the growing oil industry.
Revenue from royalty and tax starts flowing this year and climbs progressively to an annual peak of US$13 billion by 2029 on our calculations. Annual tax income will average US$7 billion over the next 20 years – almost double 2019 GDP. After averaging 2.9% annually this century, Wood Mackenzie forecasts a 78% rise in 2020; adding more to GDP in one year than the economy has accumulated since 1960.
What to do with the money? The country’s general election this week reflects heightened tensions as to how the oil income should be managed – and whether Guyana is getting its ‘fair share’. The opposition party (PPP) initially threatened to renegotiate all oil contracts. As the election neared, it has adopted a more conciliatory line. But arguments over contract terms have raged since Liza was discovered and are unlikely to disappear, regardless of the election outcome.
The ruling coalition, led by the PNC, has had a majority of just one seat. Whichever party prevails at the ballot box, Vision 2040, published by the government last year, is a well-intentioned and constructive starting point for maximising the oil windfall’s benefits. It lays out three broad goals.
First, manage the natural resource wealth. The framework ranges from the economic to the environmental. For the former, it advocates firm fiscal policy and budget management, investment priorities and the creation of a sovereign wealth fund. For the latter, Vision 2040 flags the rights of indigenous peoples and of biodiversity – Guyana’s enormous and ancient rainforest is an important global carbon sequestration sink.
Second, support economic resilience. Diversification of industry, modernisation of public institutions and regulation, and the build-out of domestic infrastructure (roads, sea and air) are central. The environmental aspirations also include 100% renewables in electricity production, improved energy efficiency and lower carbon emissions.
Third, build human capital. Improved health care and education are the building blocks of sustained economic success.
It is still early days for Guyana’s oil and gas industry and revenue may, in time, be much greater than we suggest. There’s no sign that success with the drill bit is waning and there are plenty of exploration wells to be drilled. Our fiscal estimates also exclude 2 billion boe of discovered gas and condensate reserves for which there is no plan yet for commercialisation.
Guyana may well be the last new major oil-producing nation. What’s important now is that critical lessons are learned from those who have gone before. There’s a long list of developing countries, including some in Latin America, which have struck black gold and failed to make the most of it, suffering what economist Richard Auty called ‘the resource curse’.
The new government has a major challenge ahead, and a heavy responsibility to its people, to get it right.