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July 3, 2017

Guyana needs effective management of petroleum revenue

As Exxon Mobil Corporation’s Liza project moves into the development phase, the challenge for the Guyanese government is to strengthen the regulatory framework and put in place a regime for management of petroleum revenues.

By Bettilyd Bettilyd

As Exxon Mobil Corporation’s Liza project moves into the development phase, the challenge for the Guyanese government is to strengthen the regulatory framework and put in place a regime for management of petroleum revenues.

Although Guyana’s fiscal regime has one of the lowest state takes in the region, a factor that has helped promote exploration, at a $50/barrel oil price the first phase of the Liza project is expected to contribute over $6bn dollars to the government budget. At its peak, annual revenue accruing to the state may near the value of Guyana’s total government revenue in 2016. With Exxon now reporting gross recoverable resources in the block of 2.0-2.5 billion barrels, oil and gas revenues may grow substantially with further developments.

While this windfall should be positive for Guyana, its long-term economic impact will depend significantly on government policy. Effective management of petroleum revenues will be crucial in order to avoid susceptibility to corruption and commodity price shocks.

While its April 2017 draft policy framework acknowledges that Guyanese capabilities in the sector are low and therefore only recommends a policy of preference for Guyanese contractors where capabilities already exist, it also notes a need for training and technology transfer, which could place financial burdens on operators.

The government is also exploring development of the downstream sector, which could provide a greater employment boost, but a recent study commissioned by the Ministry of Natural Resources found that a refinery project would likely prove uneconomic.

The change of most relevance to operators will likely be the government’s overhaul of the regulatory framework for upstream operations. The Petroleum Commission of Guyana Bill 2017 aims to establish the Petroleum Commission as a sole regulator of the oil and gas industry, taking over from the Geology and Mines Commission, which currently jointly regulates the petroleum and mining sectors in the country. The establishment of a dedicated regulator should be positive for the upstream sector, allowing for efficient governance, though this will depend on building the right competency within the institution.

However, a further review of petroleum legislation, including the model PSA , is also in progress. This could impose additional financial and regulatory burdens on upstream operators who obtain new licenses as the region is de-risked while development projects progress.

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