At the conclusion of last week’s column, I had indicated the intention to wrap up in today’s column my discussion concerning the institutional architecture and governance in preparation for Guyana’s coming gas and oil industry. However, the feedback readers have offered since, suggests they are not altogether clear as to why there is a special need for attention to be paid to this consideration. They point out, correctly, that in order to be successful, every major productive economic activity would require an accommodating and specifically tailored institutional/governance environment. It is my responsibility therefore, to justify what is unique about oil and gas production in Guyana, in order to justify dedicated attention being paid to this. I will address this concern in today’s column, and postpone the promised wrap-up discussion until next week.
Readers would recall that, in the course of the ongoing series of columns on Guyana’s impending oil and gas industry (started September 4 last year), I had identified several unique characteristics of the sector. My argument is that, those unique characteristics drive the required configuration of its institutional architecture/ ecosystem. And, as demonstrated previously, prevailing global “best practices” reveal what is required so as to ensure resource-rich Guyana-type economies are able to avoid the pitfalls of the dreaded resource curse and the paradox of plenty. These pitfalls have already been discussed, where it was shown that the economic, societal, environmental, and geostrategic features of Guyana’s oil and gas operations will in all likelihood pose immense and diverse challenges/risks.
In what follows I identify the ten most prominent of these challenges/risks.
Risks (1-5)
The unique characteristics and their accompanying challenges/risks that were noted, include the following: First, oil and gas exploration in Guyana has already consumed a considerable time period, stretching over more than two decades and is still ongoing. Second, throughout this extended exploration period, risks have remained high as a result of geological uncertainty. And, this uncertainty has remained, despite significant technological improvements over the years. Third, Guyana’s oil and gas exploration profile, (especially its deep-water component in the Stabroek Block) has entailed huge initial capital investments. These have been well beyond the means of Guyana’s private sector and/or the government. Fourth, as experience has also revealed after Guyana’s resource ‘find’ there has followed an extended project development period. Indeed, presently, the earliest plausible date for commercial extraction is 2020.
Fifth, during the coming course of petroleum extraction, it is expected that the present decades-long trend of high volatility of oil prices in global markets, will continue. This circumstance, together with the traditionally high levels of unpredictability in the costs of delivering petroleum products to global markets, further adds to the challenges/risks.
Risks (6–10)
Sixth, oil and gas extraction also pose significant natural environment challenges/risks. Located off-shore, the risk of spillages and contamination of the marine and other related eco-systems (coastal, riverain) are significant. Such challenges/ risks raise insurance, regulation, monitoring, and compliance costs for meeting local, regional, and international laws and regulations.
Seventh, there are several societal challenges/risks unique to the sector. Of particular note, is the long tradition of corruption that has plagued small poor open and dependent economies. Guyana’s policy emphasis on membership of the EITI is clearly an institutional mechanism explicitly designed to preempt the embedding of this societal pathology in the operations of the oil and gas sector.
Eighth, there are other related societal challenges/risks, including those which centre on governance and equity in the use of the country’s oil and gas wealth. Since petroleum resources are, not only non-renewable, but are also limited and finite, there is need to ensure their benefits are shared with future generations. To achieve this requires the constant sustainable productive use of these benefits. And, this outcome can only be truly assured if the institutional architecture is designed to drive it.
Ninth, the likely economic structure of oil and gas operations in Guyana demands a state with sufficient capacity to obtain benefits in a structurally asymmetric industrial environment, given that, operations during the initial phase of petroleum extraction take place through well-established vertically integrated multinational corporations. It should be noted that this corporate structure creates barriers to the entry of new firms, thereby reducing the scope for competitive market processes providing solutions to economic impediments and inefficiencies. Recall also that these companies also possess deep technological capacity as well as intimate knowledge of the workings of the oil and gas industry.
Finally, challenges/risks also affect state regulation of the country’s economic affairs. The chief areas are: 1) determining the optimal rate of resource depletion, given their finite characteristics; 2) designing a desired fiscal regime for the extractive sector; 3) allocating resources efficiently between operational economic categories (consumption, savings and investment); functional economic categories (labour, capital, technology); as well as production sectors. It should be expected that, all regulation would be designed to yield sustainable growth and development, consistent with our obligations to the ‘Green State’ and the United Nations Sustainable Development Goals.
Conclusion
Enough has been indicated in this column, for readers to recognize that the unique features of the oil and gas natural resource extraction sector, place a high premium on providing a sufficiently complex ecosystem of governmental institutions and functions to generate efficient and fair outcomes.
As regards the latter, this is further complicated, because the sector is noted for its ability to generate supernormal profits as well as extraordinary economic rents. Because of such situations, ensuring acceptable societal outcomes will be neither easy nor straightforward.
Next week, I shall conclude this discussion of the oil and gas extractive industry and its required institutional environment.