‘Mark my words’
ECONOMIST Dr Damien King said Guyana could fall victim to the so-called ‘resource curse’ as it moves deeper in developing its oil and gas finds because it lacks strong institutions to prevent corruption.
The Guyanese Government has earned more than US$1.5 billion from oil sales and royalties since production of the fossil fuel started in that country in December 2019.
It also set up a sovereign wealth fund called the Natural Resource Fund to manage the proceeds with some helping to finance budgetary expenditure including a number of infrastructure projects now underway in the South American country.
However, King is convinced that political parties will soon start to squabble over the spoils to the detriment of the country.
“You mark my words, Guyana is going to go nowhere,” King told the Jamaica Observer, citing that the oil revenues could cause corruption to increase in the country and make it worse off than it was before accessing the wealth.
“It’s worth bearing in mind that very few countries in the world have grown from poverty to wealth, having done so on the basis of natural resources. Very, very few,” he continued, pointing out that oil-rich countries like “Venezuela is a basket case and Nigeria is a joke.”
“One of the reasons why there is this thing called a ‘resource curse’, why countries which have resources tend to do worse, is because not having resources forces a country to have good governance, because that’s the only way the Government and the elite can extract wealth. For them to extract wealth to run the Government, they have to create a wealth-creating environment,” he said using resource-poor Singapore and Switzerland as examples of countries which have become wealthy through good governance.
King continued by noting that in resource-poor countries, “The only way that the Government will have resources to function is to have an environment that creates the resources. When you have natural resources you don’t have to do that. [With natural resources] the Government then only becomes an institution to fight over the resources and extract it. And unless you have strong institutions to begin with, to put a constraint on the fight for spoils, it descends into corruption and violence because the spoils are so lucrative; it’s worth killing people to get into power. That’s what’s going to happen to Guyana because Guyana already has weak institutions.”
“It’s not even a radical view amongst political economists,” he continued.
King added that because of his fears of the resource curse, he prays that oil is not discovered in Jamaica.
“I would rue the day that Jamaica discovers oil for exactly that reason and Jamaica has stronger institutions than Guyana.”
Guyana has become the hottest oil area in the world since it started producing the fossil fuel in 2019 and even recorded growth of 57.8 per cent last year with projections that its economy will expand by 25.2 per cent this year and continue to expand by more than 20 per cent up to 2026.
The country is now trying to lure 10 companies to bid on its auction to help develop and extract additional fields with an estimated 25 billion barrels of oil and gas in place off its coast.
“We see this as big, transformative for our people,” Guyana’s Vice-President Bharrat Jagdeo was quoted as saying in a Reuters article earlier this month.
“This could help Guyana build up substantial fiscal and external buffers to absorb shocks while addressing infrastructure gaps and human development needs,” the International Monetary Fund noted in its review of that country’s economy late last year.
As the country invites bids for around 14 blocks of oil and gas, it is also reviewing how much the Government receives from oil revenues.
A consortium that includes oil majors Exxon Mobil, Hess Corporation and CNOOC operates the country’s most important area: the 6.6-million-acre (26,800-sq-km) Stabroek block, with more than 30 discoveries to date.
Each quarter the companies pay a 2.0 per cent royalty fee to the Government on revenue from oil produced in the block. They are allowed to devote 75 per cent of that revenue to paying their previous and ongoing exploration costs, and the remainder is split 50-50 between the companies and the State.
However, there have been complaints that the range of costs the companies can deduct before giving profits to the Government is unusually large, but ExxonMobil told Bloomberg, a US-based financial media entity, that the deal was consistent with agreements in other countries at such an early stage of oil exploration.
Still, the Guyanese Government is looking to renegotiate that deal after the previous Administration was kicked out of office in 2020 with citizens being dissatisfied with the terms of the agreement.
The proposed new rules will nearly double the Government’s take from oil production to 27.5 per cent of royalties and profit oil, plus a new 10 per cent corporate tax, compared to Exxon’s main contract.
The new agreement also will require producers provide more information to Guyana, and companies will be required to provide details of the production costs that are deducted before the oil revenue is split with the country.
The oil model also will set stricter terms for tendering and procurement, covering everything from production vessels to drilling suppliers. However, the terms will not affect Exxon’s Stabroek block.