Introduction
As the above title suggests, today’s column indicates a substantive shift in focus away from the “infant state” of Guyana’s oil and gas sector (even though this still remains the case) towards its evolving profile in coming decades. In anticipation of this shift in analytical perspective, the columns immediately preceding today’s had deliberated on three crucial decisions or choices that the Authorities are expected to make before the end of the present decade. To recall, these choices, which were reviewed, are: 1) whether Guyana should join the Organization of Petroleum Exporting Countries; 2) whether the country should engage the crude oil market as a strategic “swing-producer”; or 3) whether to establish a National Oil Company.
To execute this shift in perspective, logic requires forward-looking analyses to be rooted in insights drawn from experiences with the 2020 general crisis. To be frank, I was expecting that the 2021 National Budget would have provided an authoritative review of the crisis experiences for the sector, particularly in light of the repetitive “noise and nonsense” circulating in the misinformed echo chambers inhabiting local print and social media. Failing this, I had hoped, minimally, the 2021 Budget would provide the added data required to facilitate a robust appraisal. Sadly, as matters remain, these data continue to be mostly reported by specialist international firms and agencies.
I cannot substitute for the Authorities. In the next few columns, I shall present serially, in no intended order of significance, a few insights gathered from my appraisal of the impacts of the 2020 crisis on Guyana’s nascent oil sector.
Insight 1: Severely Impeded Outcomes
The first insight is that the crisis has most decidedly adversely impacted economic and financial outcomes in the sector and consequently overall economic performance. This is most readily observed in the steep decline in the price for crude oil, as reported. The decline in the Brent crude price, from US$67 per barrel in December 2019, when Guyana’s first oil production began, to an average price for 2020 of US$42 per barrel basically encapsulates the impact of declining demand.
Alongside this, Guyana’s reduced supply of crude negatively impacted earnings. The 2021 National Budget reports an average 2020 output of 74,300 barrels per day, as against Exxon’s forecasted 120,000 barrels per day. This outcome has been largely dictated by two non- market considerations; namely, 1) mechanical start-up compression failures, and 2) regulatory hiccups and delays linked to approval for the Payara/Pacora field development plan, FDP.
The result has been significant reductions in projected export earnings from oil. The value of oil exports is clearly the product of its average selling price per barrel and the quantity of barrels sold [that is, price (P) x quantity (Q)]. We know P fell largely as a consequence of the 2020 crisis and its severe downward market pressure on the demand for oil. We also know Q fell as a consequence of the decline in oil demand, alongside other non -market considerations, like, for example, equipment failure. As would be expected, the fall in export income directly led to a decline in government revenues. This has been demonstrated in the Authorities being able to obtain only four of the five projected “million- barrel profit oil lifts” during 2020.
In previous columns, I have urged the proposition that, since all 2020 economic transactions or effects are likely to be captured in that year’s Gross Domestic Product, GDP, as annual national income accounting requires, then downward revisions to the growth rate projected before the year commences (that is in 2019) are likely to reflect adverse economic impacts of the unfolding 2020 crisis. Indeed, the further into 2020 an estimate is made, the greater is the likelihood of a downward revision; if not the magnitude of the reduction. The reason for the latter observation is that the course of the crisis along with its linked economic impacts is not uniquely related to time elapsed during the course of the year.
I had also pointed out earlier, downward revisions to Guyana’s 2020 real GDP growth rate by the IMF has been staggering. The revision from a projected rate of 86 percent in Q4 2019 (based on explosive petroleum expansion) to a revised downward rate of 8 percent in Q4 2020 is, by all accounts, remarkable evidence of the severe adverse impact of the crisis on the sector. The outcome is a projected fall in growth performance to a level less than one-tenth of what was originally expected.
However, a unique paradox or even contradiction is revealed because of 1) an IMF projected 8 percent growth rate for Guyana in 2020 and a 2021 National Budget calculation of 43 percent represent among the highest outcomes globally, 2) one of very few positive GDP growth rates obtaining worldwide, and 3) Guyana representing the only country in the Latin America and Caribbean to obtain positive growth. This will be addressed in the next insight.
Insight 2: World Class Potential
The second insight is that the paradox revealed above is best understood analytically, as a testimony to the truly world class potential of Guyana’s still very infant oil and gas sector. How else can one explain a crisis so severe in its first year of existence, 2020, which witnesses an IMF projection of its real GDP growth rate of over 85 percent lead to an outcome that is less than one-tenth of that year’s forecast and nonetheless end up being among the very best performers globally. Indeed, Guyana has been among a handful of economies with positive growth.
Conclusion
From the inception of this topic in my Sunday Stabroek columns, over four and a half years ago, September 2016, I have been strongly bullish on Guyana’s hydrocarbon, as well as renewable energy, potential. I have advanced this outlook in a number of publications and will offer here a brief summary of the indicators on which this outlook is based in next week’s column.
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