Uncertainty hangs over Guyana's oil-driven potential

They did it again. The sixth discovery by Exxon Mobil and its partners in three years puts Guyana’s estimated reserves at 3.2 billion barrels of oil equivalent. Our sister company Wood Mackenzie ranks Guyana fifth globally for discoveries between 2015 and 2017. And with estimated reserves up 28% since striking oil this month, the country’s oil potential is beyond doubt.

Looking ahead, the main area of concern for investors is above ground risk, which may dampen the otherwise extremely positive outlook. Guyana is jumping into the deep end – with a population of just 773,000 and underdeveloped government institutions, the region’s fourth poorest country (in GDP per capita PPP terms) will face considerable hurdles to manage the newfound wealth effectively.

Is Guyana still a frontier market?

With first oil due in 2020, Guyana will transition from a frontier opportunity to established play over the coming decade. Its estimated reserves per capita will exceed those of oil-producing regional peers, bar Venezuela. By 2030, production could be 400,000 BPD, pumping US$300 million annually into government coffers. Therefore, the development and implementation of adequate legal and regulatory frameworks are a top priority to promote the industry while delivering key infrastructure and services to the population.

Effective sector development would spur economic activity - and diversification as complementary service industries benefit from higher spending in the domestic economy. This is why the development of a regulatory body and a specialised institute to train sector workers are key priorities for the Granger government. Both should be in place before the end of the current term in 2020.

Other acute challenges in Ganger’s path include the rise of political risks in the run-up to the general election; the government’s inexperience in dealing with oil cash flows; and Venezuela’s territorial claim, which overlaps with recent discoveries.

Black gold and the ballot box

Tribal divisions polarise politics, leaving little room for moderates. Whichever party wins, it will have unprecedented spending power, and will use it to reinforce its ethnic support base. Despite the rapid rise in the mixed-race population, ethnicity will remain the core driver of electoral results for the coming decade.

With a score of 9.31/10.00 in our Government Stability Index, Guyana is rated favourably. Our one-year Government Stability Index – Projection indicates that in 65.7% of cases the rating will remain unchanged. Even in the worst-case scenario, we expect risk to remain low in coming year.

The influx of oil revenues will make the 2020 vote a winner-takes-all situation, increasing the risk of social unrest and reducing government stability. Thus, in our three-year outlook there is an 85.5% chance of a score deterioration, with the highly unlikely worst-case scenario score of 7.04/10.00 downgrading Guyana to the medium risk category.

Some good news: both parties support foreign investment and a rise in resource nationalism is unlikely. Indeed, Exxon Mobil entered contract-sharing agreements with both dominant parties. Therefore, we would not expect the rise in government instability to translate into a marked deterioration of the business operating environment.

Institutions unprepared – but essential building on track

Guyana lacks institutions to handle the upcoming revenue cash flow. We expect the budgetary constraints that drive its high-risk score of 4.33/10.00 in our Government Effectiveness Index to affect hydrocarbon institutions once set up.

Lack of experience will also push up the risk of public blunders – as exhibited by the November 2017 scandal around Exxon Mobil’s USD18 million signing fee. The episode exposed the lack of transparency processes, which could fuel public perceptions of corruption in the sector. Windfall management failures and transparency concerns could push up civil unrest risks, particularly ahead of the election.

Granger recognises the government’s inexperience, and is seeking international guidance to build new tools. The establishment of a sovereign wealth fund (due this year), joining the EITI, and building a framework for financial diligence with Mexico’s support could reduce mismanagement risks. Nonetheless, significant delays in building the appropriate governance structures raise questions over Granger’s capacity to deliver on his promises.

Venezuela - noisy, unstable and desperate

An ongoing border dispute with neighbouring Venezuela keeps the geopolitical risk high; however, we believe an international resolution will be favourable to Guyana and reduce risks for operators. Venezuela claims ownership of Guyana’s western Essequibo region. After Exxon Mobil’s first discovery off the Essequibo coast, Venezuela rekindled its claim, resulting in trade spats and military exercises along the border.

The case is all but certain to go to the International Court of Justice (ICJ). We believe that Guyana will come out on top at the ICJ – it has the funding and international support needed to win the case. However, Venezuela is extremely unstable, and it sees the presence of Exxon Mobil as a threat to its sovereignty. Upping the rhetoric against Guyana and Exxon Mobil could be a used as a means of increasing political support at home.

Nevertheless, we do not see any risk of military conflict. The economic and political crises in Venezuela will keep the armed forces focused on maintaining a hold on power rather than embarking on a transnational conflict. Moreover, any move against Exxon Mobil could elicit a military response from the US navy which patrols the Caribbean and Atlantic waters.

Despite challenges, outlook is positive

We believe that Guyana is taking the correct steps towards mitigating the short and long-term challenges of its newfound oil wealth.

The 2020 election will be an important test of these processes.

The challenge beyond 2020 is for the next government to adhere to and further develop the country’s institutional capacity to manage this wealth, and to implement a balanced economic policy programme ensuring equitable development for the entire country, irrespective of ethnic divisions.