‘The coming oil bonanza’ and bad signals

Guyanese on social media were euphoric last week when it was announced that the country now has at least 4 billion barrels of recoverable reserves. This would imply a capacity to produce 750,000 barrels per day. OilNow reported Minister Trotman as being very optimistic and even carried the headline “The coming oil bonanza.” Members of the government and Mr Trotman have always implied that Guyana will make billions of US dollars through volume of production. I and others have argued that the percentage terms in the contract, the signing bonus and the uncertain cost structure are not in the country’s favour. Therefore, the big money is dependent on volume given the low percentages. The Minister notes that Guyana will make more money than it can spend in a lifetime. I am not so sure what that means since the issues of demand, time and volatility have to be taken into account.

The estimate of 4 billion barrels of proven reserves is still likely conservative; therefore, the minister might have a point even after accounting for demand, time and volatility. Guyana would likely realize at least 10 billion barrels of proven reserves and capacity to produce over one million barrels per day by the middle to late 2020s. Guyana is an important part of ExxonMobil’s long-term strategy that involves shifting production to the Western Hemisphere and shale in the United States. There is certainly a crucial geo-political dimension to this strategy as much as the economics of transportation cost. It appears like Guyana’s leaders made a bargain for America’s political support on the spurious border claim by Venezuela in exchange for large-scale production and an unfavourable contract. Exactly how this will play out when a right-wing government gets back into power in Venezuela is not yet certain. It might turn out one day that those percentages should have been higher…..