Oil Extraction in Guyana: An Entryway or Roadblock to Prosperity?
The Stena Carron drillship. Photo by Stabroek News.
Guyana, a poor nation on the northern coast of South America, is about to become the next oil giant. In 2015, the American oil firms ExxonMobil and Hess announced the discovery of oil resources in the Stabroek region off the coast of Guyana. Its wells are projected to produce 750,000 barrels a day by 2025, an output that would triple the size of Guyana’s economy. As a result of this groundbreaking discovery and the national wealth it portends, the Guyanese March 2020 election was watched closely by the international community. At the polls, President David Granger of the APNU/AFC, a predominantly Afro-Guyanese coalition, lost and refused to cede power to the People’s Progressive Party (PPP) candidate Mohamed Irfaan Ali, an Indo-Guyanese. After five months of dispute, recounts, and hostile politics, Ali was sworn into office on August 2nd. The new president is now faced with reconciling Guyana's impending oil windfall with the government's lack of experience in resource-management and the country's long history of ethnic strife.
The Oil Contract
ExxonMobil’s contract with Guyana is undeniably exploitative. The terms of the agreement beg the question: Is Guyana experienced enough in this industry to profit, or will it suffer a resource curse like its oil neighbour, Venezuela?
Exxon initiated exploration in Guyana in 2008, making its first discovery in 2015 in the Staebrok block. Since then, the oil giant has claimed seventeen more discoveries. Staebrok is expected to produce a whopping 8 billion barrels of oil, attracting interest from several prominent multinational oil companies. After a hurried discussion with Exxon, Raphael Trotman—Guyana’s Natural Resources Minister—signed a 40-year extraction contract in June of 2016. The deal was criticized by the anti-corruption group Global Witness for depriving Guyana of $55 billion in revenue over the life of the contract, when compared with deals in other countries. Guyana should be receiving $223 billion, but they will only see $168 billion. This deal exemplifies both a lack of expertise among Guyanese officials in negotiating with large corporate entities and ExxonMobil’s eagerness to exploit untapped regions of the globe.
Instead of waiting on results of the profitability of Staebrok and leveraging his position as the overseer of one of the world’s largest oil finds, Trotman settled for Exxon’s initial offer after being wined and dined by the oil giant at their Texas headquarters. OpenOil, an organization in Germany dedicated to the public-interest financial analysis of large oil and mining projects, advocated for President Ali to renegotiate the contract, suggesting that he raise the royalty rate to 10% from 2% and introduce a standard corporate income tax of 25%. The first step to economic prosperity and global respect for Guyana is ensuring that the small nation receives their fair share of revenue.
Racial Strife
President Ali’s vision for oil profits is not only important for economic development, but also to quell the decades-long history of racial strife and government corruption in the country. British colonization and exploitation of the slaves and laborers ignited the conflict between the Afro-Guyanese and Indo-Guyanese. The British slave trade lasted over two centuries, from 1620 through 1838. Because cheap labor was essential to sugar production for the empire, the British introduced another tactic: bringing 238,000 East Indians to Guyana as indentured servants. Once indentured servitude was abolished in 1920, Black and Indian communities were left vying for stable jobs. Members of the Afro-Guyanese population, many of whom were formerly enslaved or had enslaved descendants, saw the newly freed Indians as competition in the labor market, fueling ethnic strife for decades to come. The British capitalized on the conflict and continued to pit them against each other through land ownership and labor stigmatization. Africans were concentrated in the mining and service sectors, while East Indians occupied the sugar and rice industries.
Currently, East Indian descendants make up 39.8% of the population and African descendants make up 29.3%. There is no clear evidence that one race holds more wealth or social capital than the other, but every election season, both groups hold their breath as rumors of nepotism and added benefits for the President’s supporters percolate. Ralph Ramkarran, a veteran Guyanese politician who identifies as an independent on a multi-race platform, summarized the tense situation: Guyana is “basically two countries living under the same roof...You don’t have people who are trusted by both sides. There’s no Mandela here.” With such widespread mistrust and accusations of internal corruption, foreign investors are on high alert.
Government Corruption
President Ali is currently taking steps to quell fears of government corruption and prevent the mismanagement of billions of dollars. He will establish the Petroleum Commission of Guyana (PCG), which will be responsible for the transparent and autonomous management of Guyana’s petroleum resources,with the Guyana Revenue Authority (GRA) overseeing revenue collection. These measures serve as precautionary steps to reduce the probability of money laundering.
But in Guyana, corruption reaches all levels of government, from the police force to the presidency. This is a legacy of decades of corruption plaguing each administration since Guyana’s independence from Britain in 1966. Without a proper system of accountability for government officials, coupled with lackluster whistleblower protections, abuse of government contracts and funds are rampant. This is a cause for concern with the incoming oil revenue, because it will amount to the most money Guyana’s government has ever held.
The unfortunate trend of government corruption in the country has been closely tied to the manifestation of ethnic strife in politics since the rise of the two major parties, beginning with the People’s Progressive Party (PPP) in the late 1950s and the People’s National Congress (PNC) in the mid-1960s. The Indo-Guyanese aligned with President Jagan under the PPP, and the Afro-Guyanese population stood with President Forbes Burnham and the PNC. These ethnic divisions align to their respective parties to this day. Guyana is plagued by cultural pluralism, whereby each ethnic group, despite living amongst one another for a century, chooses to stand by those that share the same ethnicity. For Guyana, an integrated democratic system rooted in policy and social infrastructure is a pipe dream at its current stage. Unlike the United States for instance, the country’s political parties do not operate in an integrated political system with a pluralistic social structure, and do not possess a racially overlapping membership. As a result, elections are especially tumultuous: Most people equate a President of their ethnicity winning the election to securing rights and privileges for their own community. But, no matter what political party is in power, since gaining independence, the misuse of public funds and abuse of power has always plagued Guyana’s government.
President Ali must tread very carefully as he manages the influx of oil revenue. Any sense of government corruption—perceived or otherwise—could trigger grave protests, strikes, and, ultimately, increased interethnic tensions. His appointment of officials to oversee the varying bodies responsible for revenue management will play a major role in public perceptions of his presidency: Ali runs the risk of losing some of his Indo-Guyanese base should he put an Afro-Guyanese person in charge of oil revenues, but he is equally vulnerable to accusations of pro-Indian bias should he only hire Indo-Guyanese people. An ideal balance would maintain the confidence of the Indo-Guyanese while gaining trust from the Afro-Guyanese population. Francisco Monaldi, an oil and energy expert at Rice University’s Baker Institute for Public Policy highlights that “one of the worst circumstances you can have is a country polarized politically and ethically that is about to be awash in a huge amount of money.” Slight missteps could have dire consequences for Guyana’s delicate political, social, and economic stability.
The Path Forward
The Ali administration’s plan for managing the mineral windfall hinges on building sound revenue institutions and distributing oil wealth to local communities. The GRA will be collecting oil revenue and transferring it over to the Natural Resource Fund (NRF). Thus far, the account has received revenue and royalties exceeding $98 million. Ali is also renegotiating with Exxon to recommend that “oil and gas operators invest in local content as a part of their ongoing license to operate.” He envisions local businesses profiting from the presence of oil giants through providing catering, transportation, banking, and other services and is seeking to have this “local content” measure codified so that enriching local private businesses remains a priority in the next 40 years of operation. Exxon is already notorious in the country for the initial negotiations that saw Guyana lose out on $55 billion in revenue.
A compact for Exxon to use local goods could recuperate revenue and regain public trust, and it seems that they are well on their way. Exxon’s operations in 2020 have proven fruitful to the local economy thus far. Over $67 million was spent locally while over 600 Guyanese suppliers were used for services ranging from catering to engineering. ExxonMobil Guyana has confirmed that in addition to efforts connected to oil harnessing, it has “contributed more than $300,000 to education, women and community empowerment, and environmental sustainability programmes.”
In terms of protecting and distributing oil revenue, Ali agrees that “political overreach must be removed” from the fund itself and management of the sector, but besides the GRA and NRF, he has no concrete plans to address internal corruption in these institutions. The President’s top priority is developing local capacity, which could be good for race relations if both Afro and Indo-Guyanese people start seeing the fruits of their labor and work together to support each other's economic endeavors.
All of this sounds promising, but there is a glaring catch: $20 billion is owed to Guyana’s oil producer partners after the first five years of operation, foreboding disappointment for the Guyanese people, many of whom expect immediate prosperity. The Exxon contract requires Guyana “to reimburse 100% of all development costs before it can enjoy substantial future benefits.” As of now, the NRF directs one-half of annual oil revenues to the annual budget. The Institute for Energy Economics and Financial Analysis (IEEFA) indicates that this is too generous of a contribution and that Guyana needs additional regulation to prevent large scale infrastructure spending within the first five years of operation combined with stable contributions to the SWF. However, President Ali does not account for this practical concern in his vision for the future of Guyana. He promises rapid, tangible, and large scale economic growth. Yet if the country spends frivolously on infrastructure projects in the first five years of operation, they will drive the country into a deficit, creating a worse economic situation than before.
The onus is now on Ali to balance the dreams of every Guyanese, African and Indian, and maintain some form of frugality to pay off their oil producing partners. Guyana must invest in some forms of infrastructure so that the oil giants can safely operate, such as transportation, energy, water, health, oil processing bases, power plants, and so on. Ali cannot dive in headfirst with the education and healthcare initiatives that he promised during election season without running a deficit, yet failure to meet these promises could trigger accusations of corruption. Slow progress could fuel further resentment towards Indians in Guyana: President Ali is of Indian descent, as is much of his administration.
Guyana has the chance to capitalize on oil and escape the title as one of the poorest nations in the Western Hemisphere. Its future depends on the government’s ability to reckon with its past while building a sustainable future.
Aneesah Ayub is a senior in Columbia College studying political science and the special concentration in business management. She is passionate about law and economics and hopes to pursue a career exploring the intersection of these fields in the United States.
This article was submitted to CPR as a pitch. To write a response, or to submit a pitch of your own, we invite you to use the pitch form on our website.