Guyana's oil windfall
Guyana is not a country that is in the news often. I bet, many of you probably would not be able to find it on a world map. But my guess is we are going to hear a lot more about the country in coming years. The reason is that in 2015, Exxon found oil off the coast of this tiny South American country. The former British colony has just 800,000 inhabitants and an annual GDP of c. $6bn (about the same as Jersey and about twice the GDP of Guernsey). However, the Stabroek block, which was discovered in 2015 with an area of 26,806 sq km is one of the most prolific offshore potentials in the world. Exxon and Hess announced last week that they found two more discoveries in the field bringing the total number of discoveries to 12.
Exxon expects to start producing oil in the field in 2020, starting with an output of 120,000 bbl./day and ramping it up to 750,000 bbl./day and potentially 1 million bbl./day in 2025. That would put the oil output of Guyana roughly at the same level as Malaysia and Azerbaijan and potentially at a level higher than Libya.
What happens when such a small country finds such large wealth? First, the country gets ripped off. The contract that the government signed with Exxon as sole operator splits revenues from the oil production 50/50 between the country and Exxon. As a comparison, a split of 80/20 in favour of the country is a more common agreement.
Second, once the money starts flowing (i.e. next year), these countries start fighting for the spoils. Corruption isn’t unheard of in Guyana. In Transparency International's Corruption Perception Index 2018 the country is ranked 93 in the world, just ahead of Kosovo and Albania. On top of that the political system in the country is divided along ethnic lines with two major parties fighting for power. The People’s Progressive Party (PPP) is a far left-wing party affiliated with the International Meeting of Communist and Workers’ Parties. The PPP is primarily supported by the Indo-Guyanese population. The People’s National Congress (PNC), on the other hand, is supported by Afro-Guyanese and defines itself as socialist. From 1996 to 2015, the PPP was in power before the PNC started to control governemnt. The risk is that with the sudden oil wealth, whichever party is in power will provide benefits predominantly to their own ethnic group creating a fertile ground for a potential civil war.
Watching the development of Guyana over the next decade is going to be interesting, to say the least, as moneyed interests try to gain influence over a naïve and inexperienced political class.
Potential Guyana oil production in comparison
Source: Bloomberg, Fidante Capital.