When analysing Guyana’s production sharing agreements (PSAs), it is important not to be misled by statements comparing Guyana’s 2% royalty with higher royalties in other countries (set on average at about 10%-15%).
Oil and gas contracts are complex, comprising several different parameters, which only when considered all together produce a petroleum fiscal framework that can at least ‘partially’ be compared with other petroleum fiscal frameworks.
In other words, putting attention only on one single parameter is not very useful. As proof of that, for a prospective investor, each of the three main types of petroleum contracts ─ royalty and tax agreements, PSAs (the type present in Guyana), and service contracts ─ may all produce the same result if the underlying parameters are structured toward that goal.
Until ExxonMobil announced the Liza-1 oil discovery in May 2015, Guyana was a complete frontier area on the world’s oil and gas map. So, it is normal for a country that has ambitions to become a hydrocarbons producer, as Guyana was before 2015, to initially offer advantageous fiscal terms to prospective investors.
In fact, investing in a frontier area is geologically riskier than investing in areas where companies have already discovered some hydrocarbons. Consequently, now that Guyana is a real oil and gas province, it may advantageously modify the terms for the government because at the geological level the Guyanese offshore has been partially derisked for prospective investors.
However, unless there are exceptional circumstances, the modifications to the petroleum fiscal framework must occur only exclusively in relation to future contracts as the renegotiation of existing contracts may irrevocably deter future investments.
Modifying a petroleum fiscal framework in favor of the government as for future contracts is a natural evolution once a country has been geologically derisked, but it is always a complex procedure because a country must still maintain its attractiveness for prospective investors.
Guyana’s current discounted state take, the overall parameter that can partially be used for comparison with other countries, is quite in line with the state take of a country that is a new player in the oil and gas industry.
Trinidad and Tobago’s discounted state take is definitely higher, but the first successful oil well was drilled on Trinidad Island in the 1866, and the first oil export occurred in 1910.
Moreover, petroleum fiscal frameworks are never easy to implement as they have to last for decades, during which there are various oil cycles ─ consider that currently Alaska and Australia, two well-established oil and gas areas, are having some problems with the economic return from their petroleum fiscal frameworks. So, let’s give time to time in Guyana.
Guyana’s government is currently unprepared to manage the large oil revenue inflow that will occur in the coming years, and the only viable solution is to continue collaborating with international institutions and consultancies to implement best practices for revenue management in the extractive industries.
In 2020, the year Guyana will begin first oil production (approximately 34,000 barrels of oil equivalent per day (boed) ramping up to almost 400,000 boed in 2025), the International Monetary Fund (IMF) estimates that the country’s GDP will increase by 97% with the hydrocarbons-related component set at about US$3.43 billion.
Considering that Guyana is a poor country with a population of fewer than 800,000 and whose main economic activities have until now been agriculture, limited mining, and fishing, a conspicuous oil revenues inflow may put the country at risk of the Dutch Disease ─ the overdependence of a country’s economy on the extractive sector and the subsequent decline in the manufacturing and agriculture sectors as a result of the exchange rate appreciation.
To well manage the oil revenue inflow Guyana must use part of the revenues for infrastructural development according to Guyana’s absorptive capacity and for the repayment of the country’s external debt and then to sterilize the remaining part.
Guyana is establishing a sovereign wealth fund (SWF); however, it will be crucial that its implementation occur as soon as possible to sterilise Guyana’s economy from oil revenues.
The fund may well serve as a savings fund, preserving the wealth for the future generations, and as stabilisation fund reducing the impact of volatile revenues on the Guyanese economy. The SWF should invest in non-hydrocarbons-related assets and should refrain from financing capital expenditures or from being used as collateral for the government’s borrowing.
In particular, Guyana may follow the path of Trinidad and Tobago, which in 1999 announced the creation of the Interim Revenue Stabilisation Fund then transformed into a full savings and stabilisation fund in 2007 under the advice of the World Bank and the IMF. Trinidad and Tobago’s experience has been positive with the fund playing the role of a macroeconomic buffer against revenue volatility.
However, it is advisable that Guyana’s SWF be fully operating when the first oil revenue will start to flow into the government’s coffers to avoid possible deviation from transparency and to guarantee the correct utilisation of the revenues for the benefit of the Guyanese population.
