How Guyana can avoid the curse of oil

[dropcap]T[/dropcap]he hottest new prospect for the world’s oil industry is Guyana, a small, relatively poor, country on the north-eastern coast of Latin America. Over the past year, a series of discoveries by ExxonMobil have identified 3.2bn barrels of oil in the Stabroek block around 120 miles offshore. Given Exxon’s traditional caution, the actual reserves could well be significantly higher. Most of the remaining area off the coast of Guyana remains to be explored.

The discoveries in the Guyana Basin represent a triumph for the company at a time when few new reserves are being discovered anywhere in the world, and when most of the oil majors are struggling to replace their production year on year. But what does it mean for Guyana?

At one level, the discoveries, which should starting producing by 2020, according to Exxon, should bring investment, jobs and wealth. On the other hand, history suggests that oil can bring with it corruption, conflict and violence. My colleague at Kings College London, Leif Wenar, published a book two years ago entitled Blood and Oil. The tabloid title doesn’t quite match the serious, scholarly analysis of the text but it is undeniable that oil can bring trouble and it is all too easy to think of countries that have been damaged by its discovery.

Oil can fuel autocracy as in Saudi Arabia or Libya. The prize of oil money can create or fund civil wars and the arrival of international companies to develop the resources can create a mood of nationalistic resentment that leads to expropriation. Think of Mexico, Nigeria or Venezuela. At the very least, oil revenues that lead to a sudden increase in currency values can produce the so-called Dutch disease in which one sector destroys the terms of trade for all the rest.

Is there any way in which Guyana, where the population of 800,000 people live on just over US$8,000 a year mostly earnt from six commodities — sugar, gold, bauxite, shrimp, timber and rice — can escape these risks?

The answer is yes but it will take strong leadership within the country and the active support of Exxon as the main operator and investor.

The first, and most important step, for Guyana is to set the pace of development with a depletion policy. This should phase production over a long period, avoiding a gold rush and allowing local companies to build up their capabilities to enable them to win a share of any oil-related activity. That covers everything from the development of a new port, infrastructure, engineering support and all the other essential onshore services from food to accommodation for the oil workers. Done too quickly, the development of natural resources can easily become overwhelmingly dependent on expatriate labour.

The second issue is how to spend the money that oil will bring. The demands for immediate spending will be strong but should be resisted. It would be much better to devote a large proportion of the new money to the development of infrastructure. Guyana needs everything from roads to schools to ensure that the rest of the economy can continue to develop and that the local population does not become accustomed to the sort of rentier economy that has done so much damage in the Middle East.

Beyond that, the government of Guyana should establish a sovereign wealth fund so that a proportion of the revenue earned each year is put aside for the medium- and longer-term future. The oil, even assuming that many more discoveries will be made, will not last for forever. The most successful oil economies around the world such as Norway and Abu Dhabi are notable for having saved for the future. Guyana is not yet in the league of the leading oil producers but the lessons are still valid.

The third challenge is for the government to develop its own skills, not least in negotiation with the international companies. In the oil business, and many other parts of the energy sector, companies are highly skilled and all too capable of exploiting the weakness of inexperienced authorities. Guyana needs to bring in expertise and, more importantly, must develop its own capacity to manage the process of licensing, regulation and the taxation of its new oil sector.

The role of the international companies involved in this process is crucial.

Exxon is highly professional but in areas such as Guyana something more is needed. They and any other companies involved have to align their activity to local needs. They should be supporting a depletion policy and helping Guyana to develop its own capabilities.

Successful sustainable development is a matter of mutual advantage not a zero sum game. In too many areas, the companies have stood aside, obeying the letter of the law, but doing too little to limit the risks of the oil curse. The development of oil in Guyana will be very visible and the world will be watching.

The author is visiting professor and founding chair of the Kings Policy Institute, Kings College London.