Introduction
Today’s column has two aims. First, wrapping up my appraisal of the TIGI’s assertion that granting licences for 317 blocks, instead of 60 blocks, as the PSA requires, has had catastrophic domino consequences for Guyana’s emerging oil and gas sector. Second addressing Item 9 in the list of ten sample indicators/ markers/ datapoints used to reveal the current state of Guyana’s petroleum-driven economy.
The final sample, Item 10 [governance], will be addressed next week.
Original sin: domino effects
By “original sin” it is meant that the root cause of Guyana’s PSA intrinsic weaknesses lay in the disregard of the PSA’s requirement that licences should be limited to 60 blocks. The claim that Ministerial discretion can override this provision and allow for 317 blocks is not admitted. This outcome has had serious domino effects; for example, it has vitiated the requirements for: 1] ring fencing in the PSA; 2] diminished the cost recovery power of the PSA; 3] reduced the size of Government Take; 4] held up audits of Contractor’s expenses; 5] affected the relinquishment of licences
An example will suffice: Ring-fencing in a PSA is designed to limit the Contractor’s allocation of income and expenditure for profit sharing and tax payments. A ring-fence circumscribes the ability to consolidate income and expenditure across multiple fields. The ruling PSA shares profit oil between the Contractor and the government on a field-by-field basis. This seeks to ensure that government revenue from the contract area is calculated based on each field separately. However, this is undone as the PSA framework allows the Contractor to allocate cost oil to any field within the contract area.
It is common knowledge that this asymmetrical treatment of profit and cost oil is likely to benefit the Contractor holding multiple fields within the contract areas at the expense of delaying government revenue. Indeed the more the merrier!
Clearly, a contractor with multiple fields can significantly reduce the amount of profit oil to be shared from a producing field by allocating cost oil from various fields under development to the producing field.
To be sure this observation has a longer lineage than TIGI. In my February 2018 column I noted that “In the absence of ring-fencing contractors … are able to deduct exploration and development expenditures from each new project/well against income from those projects/wells already generating taxable income”. Further, it was stated that as petroleum areas mature, this discourages new investors entering the sector.
Parenthetically our global development partners have made similar observations including the IDB’s well-constructed appraisal released in August 2020.
Political economy features
Recognizing that most of the readership of this column is not versed in economics, I avoid theorizing and focus on a bullet point template, which highlights the salient features that characterize the ruling dynamic of the Guyana economy within which Guyana’s oil and gas sector is emerging and interacting:
• Starting at the global level it is useful to note that, the major international development agencies classify Guyana’s economic system functionally. Thus, the World Bank classifies it as Middle Income. Its per capita GDP is US$ 10,143 [2021]. The United Nations places it at a Medium ranking on its Human Development Index [HDI]. The HDI’s components are knowledge; a long and healthy life; and, standard of living. Pre-pandemic its HDI was 0.682 and ranking among member countries was 122. This was a gain of roughly 16 percent over the previous decade. This performance held true for the related inequality, gender, and multidimensional poverty adjusted HDIs
• At the regional level Guyana’s political economy is grounded in prioritizing cooperation among small developing states worldwide; for example, Alliance of Small Island [and coastal] States, AOSIS. In particular, and more contiguously located in terms of geography, culture, and history the integration of CARICOM is deemed to be its primary and necessary platform for interaction with the wider world. CARICOM’s four foundational pillars/goals are: economic integration; human and social development; foreign policy coordination; and, national security. Readers should bear in mind that, CARICOM is the world’s oldest surviving integration scheme.
• In the context of 1] the global and regional frame as depicted in the two bullet points above, and 2] the particular features added below. My best descriptor of Guyana’s political economy at this juncture [from First Oil to the early 2030s] is a petroleum-driven economy caught in a hyper “boom cycle:” The World Bank has offered the term a “boom cycle” as a descriptor of the economy’s performance in the next two years and into the middle period and beyond, going forward. The GDP growth rates for last year and projected for this year are 21.3 percent and 49.7 percent, respectively. As observed in a previous column, between the year of Guyana’s first oil, 2019, and 2030 the World Bank projects its GDP will more than treble in value! Of course, by then the share of the oil and gas sector in GDP will exceed 25 percent Further the per capita GDP will be around US$17,000- close to high income. Other development partners share this narrative. Thus, the Economic Commission for Latin America, ECLAC has offered a 2021 growth rate of 18.5 percent and projects higher this year
• There is general agreement among analysts that the following descriptors capture the leading features of Guyana’s economic system: 1] its relatively small size globally in terms of key variables, such as population, GDP and state capability; 2] pervasive income poverty and its flip side, marked inequality; 3] immense asymmetric openness in the global economic system as evident in such ratios as trade to national income, and foreign to domestic investment; 4] openness and trade-dependency are intertwined; and 5] with oil and gas as the new driver, (sector) paradoxically the economy overall is becoming more specialized and commodity based. This leads to more specific descriptors like primary, extractive and resource-based, which in turn amplify the asymmetries Guyana has to navigate in the global system and the space and platform that make CARICOM an imperative
Conclusion
Next week I wrap-up this discussion and turn to the final [tenth] sample marker indicator/datapoint illustrating the present condition of Guyana’s emerging oil and gas sector.
