Dear Editor,
In recent weeks, the Letters to the Editor section of SN has been the forum of a vigorous exchange on the 2016 PSA (production sharing agreement) with ExxonMobil. The crux of the matter, as the whole world knows by now, is that Guyana gave away so much in exchange for so little while the public had been kept in the dark. The disagreements now centre on the remedies to claw back value from this really bad deal, and to ensure a fair share of the resources from Stabroek block. The options, gleaned from the ongoing debate, may be outlined as follows:
1. Option 1: The 2016 agreement was a sellout, nothing can be done to amend it, unilateral action by Guyana will drive away foreign investors, so, in the circumstances, Guyana’s best option is to move on and develop local content; or
2. Option 2: Fiscal “stability of contract” presumes some degree of fairness (“full economic equilibrium” between the parties); however, the contract started out (prospectively) as a disequilibrium. Therefore, continue to press Guyana’s case for renegotiation in the court of public opinion.
In regards to Option 1, some writers have cited Venezuela’s nationalisation of its oil industry as an example of the dire economic consequences for Guyana if it pressures Exxon ─ applies duress ─ to prod Exxon to the table. This is only partly accurate in the Venezuelan context because it leaves out the antecedent fact that a small fraction of the Venezuelan population had been benefitting disproportionately from the oil wealth deriving from the operations of the IOCs (Chevron and ExxonMobil), whilst the rest of the population had been left out. Is there a lesson here for Guyana? Venezuela aside, contract renegotiation in the oil patch is not new: Wood Mackenzie Ltd (2008) reported more than 30 countries revised their petroleum contracts or petroleum fiscal systems since 1999 to increase their share of profits or government take. Did the IOCs start boycotting/ blacklisting those countries? Once there are profits to be made, oil capital will continue to flow to places where the risk-adjusted returns are attractive. That’s capitalism.
Can local content, linked to the offshore oil sector, make up for the imbalance? No, given the huge embedded inequity. However, theoretically, local content can boost domestic valued-added by substituting domestically produced goods for imported goods, and spur economic diversification. In practice, however, local content is easier said than done. First, Guyana lacks the requisite backward and forward linkages to industries that are upstream and downstream to offshore oil. Second, Guyana’s current workforce lacks the varied skills to substitute for foreign-based labour. Third, World Bank case studies show that countries that have used local content policy (LCP) to foster economic diversification have failed due to high political risk, poor institutions (e.g., regulatory framework, governance and oversight). LCP has not worked in Trinidad and Tobago as concentration in oil and gas has increased over time. Clearly, Guyana a newcomer, has its work cut out.
The inequity of the deal will remain like a festering open sore that will give Option 2 staying power for decades to come. Oil is expected to remain an important source of energy over the next quarter of a century (currently 30% share); hence, abandoning Option 2 leaves Guyana with no cards left to play. Meanwhile, Exxon’s strategy would be to extract as much oil out of Stabroek, leaving Guyana with depleted reserves. Strike the iron while it is hot. All those who are now arguing against Option 2 could well find themselves becoming ardent supporters in years to come.
Sincerely
Terence M. Yhip