Guyana: From oil 'boom' to the risk of the 'resource curse

Guyana is, on paper, a huge success story: it is the country with the highest economic growth in the world, which this year will approach 40% of GDP. The finding of 'off-shore' oil fields in 2015 and the start of their exploitation in 2019 are bringing this country an unprecedented 'boom'. But Guyana, one of the poorest countries in the Americas, faces the 'resource curse': the risk of overdependence on a single source income and the prospect of a socio-economic imbalance resulting from the rapid and exclusive enrichment of a few elites.

The case of Guyana is quite unique, although it is a story that has been repeated many times before. Since the recent finding of important oil deposits off its coasts, Guyana is at a crossroads. Investing in the oil and gas industry will undoubtedly bring many benefits to this small South American country of just 815,000 inhabitants and high fees poverty, but there are serious risks that should be taken into account.

The exploitation of several wells in a large Guianese off-shore area (the Stabroek block) by an international consortium led by Exxon is producing 380,000 barrels of oil per day and is expected to reach 1.2 million barrels per day by 2027. This last figure exceeds the current production of Venezuela, a country that is precisely disputing the control of these waters, in a dormant conflict which now, as a result of the enrichment of the former British colony, the Venezuelan government in crisis is stirring up.

Positive effects: economic improvement

In the best case scenario, Guyana could manage its oil industry well and imitate successful producers such as the United States, Canada and Norway. It will probably not reach those levels, but the production and export of hydrocarbons will be an economic advantage, as Guyana is the fourth poorest country in the Western Hemisphere, surpassed only by Haiti, Suriname and Nicaragua. The beginning of the exploitation is already being revolutionary for the Guyanese economy, boosting GDP growth which, depending on the quantities extracted and the international price of crude oil, could be between 300% and 1000% by 2025, making it the economy with the highest per capita income in South America. Thus, with oil exploitation, since 2020 the increase in GDP has been in double digits (43.5% in 2020; 20.1% in 2021; 62.3% in 2022, and an estimated 38.4% in 2023), raising per capita GDP from US$6,950 in 2020 to US$20,560 in 2023, a figure that will undoubtedly multiply in the coming years.

In Guyana, half of the population lives below the poverty line and after the first years of oil extraction, the Guyanese economy is seeing the benefits. Export values have soared, making it possible for the import of goods to also increase at the same rate, without the risk of a trade deficit, making products previously unattainable or only imported in a short volume available to Guyanese society. In 2019 the item of petroleum, petroleum products and other related materials accounted for only 0.1% of the total value of Guyana's exports; in 2020 it accounted for 40% in 2020, and 70% in 2021.

Some companies have already come to Guyana, such as Exxon, which has invested $30 billion in Guyana, $450 million of which has gone to local suppliers, some to local charities and research initiatives, as well as having trained more than 3,000 Guyanese employees to work in the hydrocarbon industry. Increased foreign investment is expected to expand production in sectors such as agriculture, housing, health and transportation, and improve Guyana's electrical infrastructure.

The benefits are not only economic, Guyana will gain geopolitically with increased foreign interest, particularly from Brazil. Guyana currently has a major border dispute with Venezuela over the Essequibo region. Brazil has always maintained that it does not want conflict on the continent and has tried to maintain the 'status quo' and protect Guyana's borders. Currying favor with Brazilian oil companies and closer ties with Brazil in general would help Guyana preserve its territorial integrity in the face of an increasingly irredentist regime in Venezuela.

Negative effects: The 'resource curse'

It is likely, if not definite, that Guyana will suffer from the 'resource curse'. Guyana will suffer politically and perhaps also economically from its newly inaugurated oil extraction industry. For newly born oil producing countries to succeed, they need a transparent, non-corrupt and experienced government; Guyana's government has none of these traits. Guyana's political stability has declined in recent years as political parties vie for control of economic prosperity. Ethnic tensions have increased in the country, a factor that has led to major conflicts in other hydrocarbon producing countries. In addition, corruption is a major problem in Guyanese politics, as the two main parties have been accused of striking private deals with oil companies. Guyana is currently ranked issue 85 out of 180 countries in International Transparency's corruption index. These are not good indicators for the future of Guyanese democracy and will reduce the chances of further democratization.

Guyana is a country with little experience in the management of oil companies, its legislation is outdated and poorly equipped. The government has already signed unilateral contracts with oil companies, such as the one established with the aforementioned Exxon, for which Guyana would have lost more than US$55 billion in potential revenues according to some estimates. The inexperience of its negotiators and their inability to take advantage of their position have resulted in Guyana giving too much power and control to the oil and gas companies from the beginning. Exxon controls Guyana's environmental legislation, which now cannot be changed in a way that "disrupts or interferes" with Exxon's oil production. Its lack of experience and skilled labor have forced Guyana to seek advice and financial aid abroad, as well as to rely more on multinational companies. Fortunately, the government has made efforts to address this deficiency. It has sought financial aid from the IMF and the World Bank, as well as lawyers, consultants and energy strategists to improve its fiscal, legal and regulatory infrastructure. Guyana has also requested financial aid to Trinidad and Tobago for the development of ports, as it only has one, which is only 6 meters deep.

Economically, Guyana risks overspending its new revenues. Investment in the oil and gas industry will be extremely costly, especially the installation of a 200 km pipeline to pump gas onshore. In addition, Guyana will expose its economy to the volatile 'windfall profits'of the oil stock market. Guyana is investing in its economy to prepare it for such developments, and is consulting experts to alleviate any potential economic problems; however, its starting position is weak. This was initially warned by theWall Street Journalwith the headline "World's New Biggest finding Turns Guyana Upside Down", raising doubts that the Caribbean country is prepared for such a transition.

Lessons: from Trinidad and Tobago and for Suriname

Looking at its neighbors we can see some similarities and caveats. It has been pointed out that the T&T economy is in urgent need of transformation as the fossil fuel industry has become a 'sunset industry'. T&T's economy has been heavily focused on fossil fuels for the past hundred years and must now gradually replace them as its oilfields mature and dry up. Thus, crude oil production has halved over the last twenty years: in 2002 it was pumping 130,000 barrels per day; in 2022 it was 58,000. However, this has had slight negative effects on T&T's economy thanks to its large gas reserves, with an annual production of about 30 billion cubic meters. As such, T&T remains heavily dependent on its fossil fuel industry, exposing the country and the 'Dutch Disease', which the T&T economy has already survived twice. Guyana must be careful, therefore, not to become too dependent on oil extraction.

For its part, Suriname could follow in the footsteps of neighboring Guyana if the explorations carried out in 2020, also off-shore (precisely in the area contiguous to the Guyanese Stabroek block), prove to be exploitable. New information points to other findings by Exxon-Petronas, which already in 2020 located possible reserves, in principle less substantial than those of Guyana. In any case, in order to succeed, Suriname will have to reduce its levels of corruption and strengthen its institutions and its economy, which form a worse context than that of Guyana. To the extent that Guyana can learn how to carry out a management that can be assumed by a country of its characteristics, Suriname could copy some of these policies. From entrance, it should give importance to its position at the negotiating table with oil companies and strengthen its legislation on oil extraction and environmental protection before entering into such negotiations.

Conclusion

Guyana is inadequately prepared to manage its nascent oil exploitation in a balanced manner and will suffer from the 'resource curse' at one level or another. The government is aware of this and is trying to overcome the most disadvantageous situations. Oil will bring economic and social development to Guyana (although it remains to be seen how it affects inequality, given the high corruption of the ruling elites), but also political and economic instability.