Introduction
Last week’s column asserted that, National Budget 2024 did confirm Guyana’s key macro and micro economic performance indicators support the notion of a robust consolidation of its newly acquired status as the newest and fastest growing Petrostate in the Americas. Alongside this I posited that, there are signs of incipient challenges which might surface over the near to medium term. Among these challenges I had singled out seven for mention, in a purely random order, so as to provide a basis for mention and commentary in the columns immediately following.
For ease of communication going forward, I plan to address these concerns in varying levels of detail, the amount of which does not necessarily reflect on the importance of the topic. Further, I shall prioritize addressing the seven incipient concerns in the order listed below as it provides a convenient template for my presentations in the columns immediately following. To be sure, the concerns are listed here in the order of their intended treatment,
1.Risk to Petrostate standing
2 Strategic option 1, to join OPEC or not
3 Strategic option 2, to pursue/target swing producer/
trader status in global oil market
4. Food price behaviour in CPI
5.Population labour force growth
6. Wage rate growth
7. Choice of Exchange Rate and Monetary Regime
The remainder of this week’s column focuses on Item 1 above.
Prologue, risk and uncertainty
Shortly after Guyana’s First Oil and during its initial ramp-up period to available production capacity, I urged on readers that, Guyana’s oil and gas sector faced two existential threats. By existential I simply meant the literal existence of the oil and gas sector in Guyana. These two threats are 1] geo-political, Venezuela, 2] based on its offshore location, catastrophic ecosystem collapse.
More formally, however, the specialist literature advises that,
Existential Risks refer to a threat that has the potential to either cause the extinction of humanity or irreversibly destroy our future potential for flourishing. These risks include events, processes, or phenomena that can severely undermine the long-term survival, well-being, or development of humanity on a global scale.
Source Globia
This is a profoundly different conception of risk
As regards to eco-system collapse the focus has been on offshore incidents and oil spill disasters. However to grasp the concerns, I refer to here I must spend some time on the basic features of risk and uncertainty in energy analysis.
Risk and uncertainty
A standard Google search distinguishes risk and uncertainty as follows,
A risk may be taken or not, while uncertainty is a circumstance that must be faced by business owners and people in the financial world. Taking a risk may result in either a gain or a loss because the probable outcomes are known, while uncertainty comes with unknown probabilities.
At school we learn that risks are known unknowns and uncertainty represents unknown unknowns
Typically risk management, as covered in this column is the provenance of assessing risks and uncertainties and how they could affect Guyana’s oil and gas sector, and how to respond. The literature on risk management identifies four key process steps. These are
Risk identification.
Risk assessment.
Risk treatment.
4 Monitoring and reporting
Risk categories
The literature reveals a large number and variety of risk categories in use. For practical purposes these can be reduced to the following five
Strategic risk which Investopedia refers to as, the internal and external events that may make it difficult, or even impossible, for an organization to achieve their objectives and strategic goals. These risks can have severe consequences that impact organizations in the long term.
2 Operational risk refers to negative outcomes which accompany disruptions to regular day-to-day business operations in the oil and gas sector. These risks have a financial impact.
3 Financial risk refers to the odds of losing money and that a company’s cash flow will prove inadequate to meet its obligations. Credit risk, liquidity risk, asset-backed risk, foreign investment risk, equity risk, and currency risk are all common forms of financial risk. Indeed businesses use a number of financial risk ratios to assess a company’s prospects.
4 Regulatory and compliance risk refers to the crude oil producers and Government’s fulsome adherence to laws, regulations, guidelines and specifications relevant to the oil and gas sector. Violations of regulatory compliance result in legal penalties.
5 Reputational risk, according to Investopedia, refers to threats to the standing of businesses. This can result directly, as the result of the actions of the company, indirectly, due to employee actions, or tangentially, through other peripheral parties, venture or supplier.
In the oil and gas sector good governance practices, transparency, socially responsible and environmentally conscious policies are at a premium.
Conclusion
In today’s column I sought to make the case for a more deliberative treatment of risk and uncertainty when appraising Guyana’s oil and gas sector.
