Can Oil Rescue Guyana from the Brink of Calamity?

Oil rig at Huntington Beach, California. Flickr/Creative Commons/Pete Markham

Not if Venezuela has anything to say about it.

Guyana is one of the poorest countries in the Western Hemisphere, with a small population of fewer than one million people. Most of its population hugs the Atlantic coast. Despite a wealth of natural resources, Guyana’s location on the relatively remote northeast shoulder of South America, political dysfunction until the 1990s, and a longstanding border dispute with neighboring Venezuela have left the country in challenged economic straits. The recent discovery of a large offshore track of oil could change this, but also opens the door to new tensions with Venezuela, and could make Guyana one of the Caribbean’s hot spots in 2017.

In early January two major oil companies, Exxon Mobil and Hess, announced that they had successfully drilled a deepwater exploration well that strongly suggests that the seafloor beneath Guyana’s coastal waters contains one of the largest oil and natural-gas discoveries in recent years. The offshore field, called Liza, has been under exploration for a number of years, but recent efforts indicate that the field could contain 1.4 billion barrels of oil mixed with natural gas. If so, this would be comparable with some of the largest fields drilled in South America. According to the New York Times’ Clifford Krauss, “Early rough estimates by experts of how much recoverable oil Guyana could have range to more than four billion barrels, which at today’s prices would be worth more than $200 billion.”

If all goes well, further tests confirm the size and scale of the field, and companies are able to move ahead with tapping the resource, Guyana could have an oil industry up and running by 2020. The discovery of oil would change Guyana in many ways.

The Guyanese economy has struggled through the postindependence period with an economy largely founded on agriculture and natural resources. Along these lines, the country is a producer and exporter of bauxite, gold, sugar, shrimp, timber and rice. This mix of goods has left the economy vulnerable to changing global prices and vulnerable to adverse weather. Moreover, much of Guyana’s economic development since independence in 1966 was mismanaged, following a strong statist approach that was hurt by corruption in government and starved of adequate funding. Infrastructure was and remains a major issue, including roads and port facilities.

Guyana’s economic development was also hurt by the buildup of a sizable debt load, which it ultimately could not repay. In the late 1990s and early 2000s, greater political stability, regular elections and a more focused approach to the economy, as well as external assistance, helped pull the Guyanese economy out of a lengthy period of stagnation. Key to this was Guyana joining the Caricom Single Market and Economy in 2006, which allowed it to broaden the country’s export base.

Equally important for Guyana was that it was given a break on its debt by the Inter-American Development Bank, which canceled the country’s debt of close to $470 million, equal to 21 percent of GDP. Other donors to Guyana did the same, which allowed the government to reduce the national debt from 183 percent in 2006 to 67 percent in 2015.

Despite the breaks in debt, a more coordinated approach to economic policymaking and a protracted degree of political stability, Guyana was hard hit by the downturn in commodity prices in 2014, which continued until 2016. The downturn in prices for most exports, in particular gold, which gave the economy an upside through much of the early 2010s, forced a new period of fiscal consolidation.

The oil discovery therefore comes at an important time for Guyana, and has massive implications for the country’s economic development. If handled well, it can boost the standard of living for Guyanese by infusing capital into infrastructure, providing funds for the authorities to create a more effective police force to deal with significant public-safety issues, and allow the government to upgrade the educational system. Regular electricity, working streetlights and sewage systems are all in the realm of possibility.

However, there is considerable work to be done to make Guyana’s dream of an oil-wealth future tangible. These include foreign capital and expertise to build pipelines and other support infrastructure, a better government grasp of what is required to make all of this work, and resolving tensions with Venezuela. Both Exxon Mobil and Hess have indicated their commitment to Guyana. Indeed, the latter is planning on spending roughly $475 million to develop the field in Guyana. The Guyanese government has also announced that it plans to build a $500 million petroleum processing and servicing center on Crab Island.

Venezuela is a potential problem, however. Thus far, oil companies have only explored two potential fields offshore (Liza and Payara) out of a total of twenty, in part due to overlapping claims by Venezuela. The overlapping claims date back to a border dispute between what was then British Guiana and Venezuela, in which the latter country claimed a huge tract of land known as Essequibo. That claim would have taken away roughly 40 percent of Guyana.