Troubled transition

5th October 2018

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Stephen Sprules-Wright

As Guyana embarks on the shift from agrarian to oil-rich economy, Steve Rowan and Leeza Pickering ponder whether it can avoid the pitfalls of the ‘resource curse’.

Guyana is a small, English-speaking country in South America, about the size of the UK but with only 1% of the population. Until recently, its economy has been agrarian – but that could soon change, thanks to the recent discovery of large, high-quality offshore oil reserves. By some estimates, these could produce up to 750,000 barrels per day by 2030. This is great news for a country with a small, low-income population and a parliamentary democracy. However, concern is increasing that Guyana will succumb to the ‘resource curse’ that has dogged so many nations over the years; signs of that path being followed are already starting to show.

Guyana has a history of corruption and mismanagement of resources; racial rather than issue-focused politics; lack of strategic planning; power and influence being limited to a few politicians and families; and weak governance and monitoring systems. Exacerbating this is the fact that the product-sharing agreements between the government and the oil firms are skewed in favour of the oil companies. These agreements include clauses that make Guyana liable for environmental clean-up costs in the event of a significant incident, and exempt oil companies from future legislative changes that might affect operations – such as more rigorous environmental standards.

There are environmental impacts for surrounding countries, too. Given that the main activity is more than 100 miles offshore, with currents and prevailing winds, a large release in that area could well affect the Caribbean, with catastrophic impacts on the environment and tourism industry and a huge clean-up bill. The Gulf of Mexico disaster has shown us that catastrophes are not prevented by companies being savvy about corporate social responsibility, or by hundreds of millions of dollars worth of technical equipment and experts.

Golden opportunities

The anticipated revenue from the oil production will provide a financial boost to a nation with a GDP of around $3bn (£2.3bn), primarily from agriculture, bauxite and gold. The government expects this revenue to be directed in seven areas, highlighted in Guyana’s Green State Development Strategy. Two of the areas are infrastructure development, and human development and wellbeing.

Around 90% of Guyana’s population lives in a low-lying 40km-wide coastal strip, which is at increasing risk of flooding. The area includes the capital, Georgetown, which already struggles to cope with rain deluges. The road infrastructure, welfare, medical, sanitation and education systems need investment, and port infrastructure is limited by port facilities and water depth. Few Guyanese people will see jobs and direct income opportunities from the offshore oil industry, but their lives should benefit indirectly if infrastructure, social and environmental conditions are improved.

There is also talk of bringing gas onshore; this could provide cheaper power than the country’s current banks of diesel turbines, which result in Guyana having some of the most expensive electricity in the region. This is crippling for the manufacturing industry, which has all but disappeared.

However, Guyana has year-round sunshine, a long shallow coastline over which the trade winds blow, hundreds of river systems flowing from highland to lowland areas and hundreds of thousands of tonnes a year of biomass from the agricultural industry. With a population of 700,000 people concentrated in the coastal zone, and an annual power demand of less than 400MW, Guyana is well placed to use renewable energy. Despite this, it has no hydroelectric plants, no windfarms, no biomass plants – other those used by the sugar refineries – and just a handful of solar projects.

There are private proposals afoot to build a small modular refinery in Linden, the country’s second largest town; this would provide cheaper fuel to the Guyanese people, who currently have to import their fuel at high cost. The plans include using some of Guyana’s own oil (up to 30,000 barrels per day) to alleviate high fuel costs in the short-to-medium term, reinvesting profits in a nationwide renewable energy grid. Cheaper energy would fuel economic growth and manufacturing industries.

“The priorities should be diversifying the economy from an early stage, and long-term sustainable planning”

Avoiding the risks

One threat that Guyana faces is the potential for tension between petroleum companies and local communities as more highly paid foreign workers come in. Such an influx could cause economic, social and cultural stress, as market prices rise to match this new income group and outpace the earnings of the local population.

Another risk is the temptation for Guyana to place all its development interests into its petroleum reserves while neglecting other industries and development sectors. The ability to plan and manage revenues effectively is limited, and an adverse tilt in market conditions can be devastating for a small country that has focused on oil alone.

Guyana has vast agricultural lands, bauxite, gold and diamond reserves, renewable energy opportunities and a low-cost but intelligent labour resource. It also provides an Atlantic gateway to northern Brazil, which has a much larger population, providing a shorter route to the Atlantic than through the Amazon. Furthermore, 85% of Guyana is untouched Amazon rainforest, providing a huge biodiversity and ecotourism resource. It would be a tragedy if this hydrocarbon windfall was not used to develop these other resources equitably and sustainably.

The combination of specialisation in the natural resource sector and neglect of other industrial sectors can cause long-term erosion in a country’s economic development. In the short term, the injection of foreign currency into the economy will spark growth and development – but in the long term, all the developments that would have been funded and maintained by the natural resource revenue, such as healthcare, education and infrastructure, will not be fully sustained unless other, sustainable industries are encouraged to grow alongside oil and gas.

The resource curse is not inevitable. Several countries have avoided it through economic diversification, investing in other sectors and having an equitable distribution of income. Such measures require a strong, mature political system and a socially inclusive culture.

Guyana is going to be an interesting place to work in over the coming years, with the environmental stakes being high. The government should welcome the petroleum industry, but remain aware that the risks are myriad. The pitfalls are avoidable if the will is there and if the government seeks strong advisory partners.

The priorities should be diversifying the economy from an early stage, and long-term sustainable planning. This will allow Guyana to meet the needs of its people, develop as a nation and ensure the production of this finite resource becomes a blessing rather than a curse.

Steve Rowan is managing director

Leeza Pickering is a consultant at Earth & Marine Environmental Consultants

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