Promises and Pitfalls of Oil

It is what we have waited to hear for decades – the announcement of a significant oil find in Guyana! The expectation is that before too long we will be reaping the long awaited benefits being enjoyed by other resource rich (oil dependent) countries. Conventional wisdom is that government coffers will be overflowing with money available for the poverty alleviation projects and infrastructure developments previously beyond the reach of available finances. These things are all possible … but will they happen?

A study of the Organisation of Petroleum Exporting Countries (OPEC) for the period 1965-1998 reflected an average decrease in their Gross National Product of 1.3% while other “less fortunate” developing countries (those with no oil) experienced growth of 2.2%. And two contrasting cases – one from the Netherlands and the other from Ghana – should suffice to prove that oil is no guarantee of economic well-being.

It is the Netherlands from which the term “Dutch disease” emanates, named for the hardships that that country experienced following the discovery of North Sea gas in 1959. More recently, Ghana has found, five years after shipping its first barrel of oil in 2010, that even a better governed African country is not immune from the disease. An article published in that country’s newspaper General News on Thursday July 30, 2015 was captioned Analysis: Ghana hit by oil curse. Between these two periods countries in Asia, Africa and South America have had their own woes to recite.

The plight of countries suffering from the resource curse is as instructive as the causes of their missteps are wide-ranging. Analysts point to poor planning, needless borrowing, wasteful splurging on useless high visibility projects, inadequate dysfunctional institutions, poor governance and last but not least corruption as the source of their woes. Embedded as many of these weaknesses are in Guyana’s history and culture, avoiding them when we join the ranks of oil producing countries will require great political will.

Some serious examination and planning at this stage are critical to make sure we are ready long before the first barrel of oil is extracted. We have not done very well with management of investors in our other natural resources. If results are the best indicator, we would be fooling ourselves into thinking that our legislative and regulatory capacity and our expertise in negotiating agreements for gold, timber and bauxite were adequate. Oil is a much more formidable proposition.

The PPP/C dismantled the Ministry of Natural Resources when it came to power in 1992 and then re-created it after winning the 2011 Elections. The APNU+AFC Government has returned the favour, illogically and inexplicably downgrading the Ministry of Natural Resources and the Environment to a Department of Natural Resources under an over-burdened Minister of State.

The oil industry is extremely competitive with serious companies having balance sheets that are much larger than Guyana’s GDP. Investors and their highly skilled negotiators go to great lengths to ensure the security of the massive capital investment which is essential to their success. For its part, Guyana must ensure that it receives a fair share of oil revenues and that the revenue generated is not disproportionately shared and that the industry does not operate at the expense of social dislocation, environmental degradation and sustainable development.

In the developed world as a result of some legal challenge or previously unexplored issue, it is not unusual to hear calls for modernisation of existing laws which have not kept pace with technological and social advances. Guyana will also see new technologies being utilised and new industries springing up to support big oil bringing rapid change and along with it challenges we have never even envisaged.

For instance what legislation currently in effect deals with the question of oil rigs and their monitoring or workers based on oil rigs? Is there regulatory infrastructure to address oil spills, gas flares and the effluent and waste discharges from oil drilling? We must be in a position to respond rather than react to these new elements being introduced into our midst and the only preparation is by anticipation and planning for the new world with which we will be faced. Much of our legislation needs overhaul in order to confront these situations and circumstances which were not anticipated when the laws were initially drafted and this must be a priority for our new Attorney General despite the burgeoning list of unresolved matters he has to address.

Even the most recent pieces of Petroleum legislation go way back to 1986 when President Desmond Hoyte brought in the Petroleum (Exploration and Production) Act and the Petroleum (Exploration and Production) Regulations. But despite the establishment of the Ministry of Natural Resources and the Environment in 2011, the Petroleum Division of the Guyana Geology and Mines Commission retained responsibility for negotiating petroleum contracts.

The Department of Natural Resources, the Geology and Mines Commission and the Environmental Protection Agency will require strong professional leadership and expertise to negotiate with the experts from the oil companies. Not only is it essential that they recruit highly trained, competent technical staff but they must also be able to advise on the legislative structures in place to support enforcement measures when necessary. Guyana needs to re-introduce a Ministry of Natural Resources.

Institutional strengthening alone however will not help pave the path to enduring prosperity and growth. How we manage the sudden windfall will have a lot to do with whether we end up in the scrap heap of also-rans or as a model for other future oil beneficiaries. Back in the seventies our Trinidad brethren with unbridled hubris were not afraid to trumpet to all who cared to listen that “oil doan spoil”. These days an appropriate rejoinder would be “but it does done.”

Many cocky oil countries have lots of unspoiled oil but the days of high flying prices and overflowing foreign currency reserves have come to a screeching halt. Oil prices have proven to be extremely volatile over time and this in addition to the fact that oil is a depletable resource should not elevate its status beyond that of a single leg in the development table. The current oil glut added to increases in shale oil investment and production has created severe angst and disruption in a number of countries that have placed all their developmental eggs in the oil barrel. Therein lies another lesson which we should take from the experience of those currently experiencing economic turmoil rather than taking that same oil slicked road that they have.

Oil comes in with a bang that threatens to steamroll all and sundry before it because of the vast sums associated with its projects. That is the danger that we must manage so that other parts of the economy remain intact and are not left in tatters because they are neglected like the proverbial stepchild. During the ramping up to the production stage US dollars are flowing because of the gargantuan capital investment required for any hope of a successful undertaking. This will result in the Guyana dollar gaining strength rapidly and almost certainly, inflationary pressures because of the significantly higher rewards labour will attract. This means that some of our other major industries, already facing the proposition of shrinking markets and unfettered global competition will find themselves in a deeper hole and even less competitive.

We can let this happen and place all our faith in big oil or take steps to strengthen those industries and ensure a diversified economy. Not an easy task by any means because of the vast resources that the oil industry will be plowing into its various projects and support activities, but one that must be embraced.

The Minister has announced the setting up of a Sovereign Welfare Fund. So far as gold and bauxite are concerned Guyana is already late in this kind of initiative. To catch up our country needs to give the creation of this Fund the highest priority. Sound investment of those funds will ensure that a portion of the revenues from all our non-renewable resources are set aside not so much for price stabilisation but for the benefit of those Guyanese who will come long after those resources have been fully exploited.

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