It is almost impossible to open a paper these days without reading about “first oil”. There is talk of the ‘Dutch disease’ and a sovereign wealth trust fund. The World Bank is lending Guyana US$20M to write some laws and improve governance for the petroleum sector. The government glibly assures the population that oil will make them rich. The Minister of Finance boasts that Guyana will produce 1 million barrels of oil a day. Excitement reigns in Houston. Is all this real? Or is it a conjuring trick while the real action happens elsewhere?
On 3rd May, analysts at the prestigious Institute for Energy Economics and Financial Analysis in New York examined ExxonMobil’s first quarter results for 2019 and concluded that “ExxonMobil’s poor first-quarter earnings report revealed diminished profits, weak revenues, unproven cost reduction strategies, meagre asset sales and the need to borrow US$3 billion to make ends meet.” (emphasis added.) http://ieefa.org/ieefa-update-exxonmobils-drill-drill-drill-strategy-earns-a-d/ In that case, how will little Guyana, which has no clue about producing, refining or marketing oil succeed where a vastly experienced oil giant could not?
Even if the present economics of oil added up (and they clearly don’t) the urgent need to halt global warming means oil will cease to be viable within a few years. Fossil fuels (oil, gas and coal) emit greenhouse gases (GHG) which trap heat and have already raised the earth’s temperature by 1°C. In December 2015, sovereign states signed the Paris Agreement in an effort to hold the temperature rise well below 2°C. They agreed to cut GHG emissions, dealing a significant and irreversible blow to the oil industry. ‘First oil’ will increase Guyana’s GHG emissions. It is contrary to the Paris Agreement and probably illegal. It is also wholly self-defeating. Unless halted, global warming will acidify the Atlantic Ocean destroying Guyana’s rich fisheries. Rising sea-levels will wipe out the capital city and the country’s wealth which is concentrated along the coast.
The Huffington Post says “Forecasts suggest that only one quarter of remaining fossil fuel reserves can be burned if we are to keep to the Paris Climate Agreement and stop temperatures rising above 2°C. Leaving most of the world’s oil, gas and coal in the ground means carbon intensive assets may be grossly overpriced, and infrastructure built to extract the reserves may become useless (known as ‘stranded assets’). The last thing the world needs now is new oil from Guyana. In fact 2°C is not safe and ‘decarbonisation’ has to happen faster. The global economy has reached what Oxford economist Dieter Helm, calls “the endgame for fossil fuels”. And yet, Guyana still expects to sell its (meagre) share of production https://www.youtube.com/watch?v=5OaJzvQjr2U in this disappearing market and get vast wealth.
Oil that cannot be burned is a stranded fossil fuel asset that becomes worthless. Last year 43 oil companies went bankrupt in the USA alone. (Guyanese businesses hoping for oil money should make sure they get paid up-front.) The 2018 research paper, “Macro-economic impact of stranded fossil fuel assets” estimated that oil companies hold about US$1-4 trillion in stranded fossil fuel assets which they must write down. The Governor of the Bank of England wants it done in orderly fashion to avoid a “climate Minsky moment” – the sudden collapse of asset values as a result of climate change.
Not everybody is listening. On 24th October 2018, after three years of investigation, the Attorney-General of New York State issued a summons seeking redress for ““a longstanding fraudulent scheme by Exxon, one of the world’s largest oil and gas companies, to deceive investors …….Exxon provided false and misleading assurances that it is effectively managing the economic risks posed to its business by the increasingly stringent policies and regulations that it expects governments to adopt to address climate change……” (see The People of the State of New York by Barbara Underwood Attorney-General of New York v Exxon Mobil Corporation.) ExxonMobil has denied all of the allegations.
In effect the Attorney-General is saying that ExxonMobil told investors that it took into account the increased cost from climate change regulation when in fact it did not and as a result has underestimated its costs. The sums involved are huge. The summons states that ExxonMobil underestimated its costs by about US$25.5bn in the Alberta Oil Sands projects alone. US$25.5bn just happens to be the same amount that ExxonMobil raised through public offerings between 2014 and 2016. ExxonMobil is the company whose subsidiary (with partners) is entitled to deduct from Guyana’s oil production (after taking as much free oil as needed) all costs from operations in Guyana without any verification by government. Guyana was one of the examples cited in the summons. Any increase in costs means that it will be Guyana who loses out, not the overseas investors.
Oil production (particularly deep sea oil production) no longer makes economic sense. Last month Norway, whose vast wealth comes from oil, said no to drilling in its Lofoten Islands which are estimated to hold up to 3 billion barrels of oil. In contrast, according to the analysts of the first quarter results, ExxonMobil “continued its drill, drill, drill strategy and paid an increase in dividends, even as a gang of ugly financial facts slaughtered its business model.” Why is Guyana putting its faith in an obsolete and allegedly fraudulent business model?
The need to halt global warming combined with rapidly improving technology is increasing the scale and pace of decarbonisation in the global economy. Investors are taking trillions of dollars out of fossil fuels, spurred on by successful divestment campaigns. States are shifting to renewables. India is rolling out a vast programme for rooftop solar energy – a win-win situation of cheap electricity for its people and zero GHG emissions. Even Saudi Arabia, traditionally the world’s biggest oil producer, is investing US$1.51 billion in renewable energy, while China, with two of the biggest oil companies in the world, plans to spend US$260 billion on renewable energy by 2020 and create 13 million jobs.
Last month, in an open letter, global financial leaders warned that “If some companies and industries fail to adjust to this new world, they will fail to exist.” Is there a lesson also for sovereign states?
Could Guyana end up as a failed state for failing to embrace the brave new world of decarbonisation and chasing instead the fool’s gold of ‘first oil?’
Melinda Janki, May 19th, 2019