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Transforming Guyana, Season II, Episode IX, Guyana’s New Wealth

by guyanabusinessjournal
written by guyanabusinessjournal
Unlock the potential of Guyana’s future with us!
Join the Guyana Business Journal (GBJ) & Caribbean Policy Consortium for an enlightening session on Guyana’s Fiscal Policy in the Oil & Gas Era. This pivotal webinar is part of the acclaimed Transforming Guyana Series on Wednesday, February 14, 2024, at 10:30 AM EST.
Why Attend?
Discover: Learn about the record US$5.496bn 2024 National Budget and its implications for Guyana’s economy.
Engage: Interact with a panel of distinguished experts who will share their insights on fiscal strategies for sustainable growth.
Network: Connect with industry leaders, economists, and policymakers shaping Guyana’s economic landscape.
Meet Our Panelists:
Collin Constantine: Assistant Professor and Fellow of Economics at Girton College, Cambridge.
Thomas Singh: Senior Lecturer in Economics at the University of Guyana.
Samuel Braithwaite: Lecturer in Economics at the University of the West Indies, Mona.
Justin Ram: Former Director of Economics at the Caribbean Development Bank.
Bright Simons: Founder and President of mPedigree, Honorary Vice President at the IMANI Center for Policy and Education.
Our Expert Moderators:
Terrence Blackman, GBJ
Anthony Bryan, CPC
Don’t let this chance slip by! Secure your spot now and join the conversation shaping Guyana’s trajectory in the era of oil and gas prosperity.
You can register here and share this opportunity with your network.
We look forward to welcoming you to a transformative experience.
Be well.
trb
The GBJ & CPC Team
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The Argyle Declaration and the Price of Peace with Venezuela

by guyanabusinessjournal
written by guyanabusinessjournal

The Argyle Declaration and the Price of Peace with Venezuela: Guyana’s Saving Grace may be the International Value of a Declaration and Article 2 of Guyana’s Constitution

By

Dr. Gary Best

For sixty years and counting, Venezuela has occupied Guyana’s sovereign half of Ankoko island along the Guyana -Venezuela border. This should be kept in mind as we navigate the Argyle Declaration.

Importantly, the Argyle Declaration recently forged between Guyana and Venezuela leaves much to be desired, except the saving grace of weak international recognition for declarations and the power of Article 2 of the Guyana Constitution, which protects the borders of Guyana from changes except by a national referendum.

Nowhere in the Geneva Agreement (GA) of 1966 – the international instrument that provides the steps towards solving a claim by Venezuela that the 1899 Arbitral Award is not valid – is there any mention of a territorial dispute between Guyana and Venezuela. What is mentioned in the GA is a border controversy between Guyana and Venezuela. And there is a distinct difference between these two terms which, unfortunately, are being used interchangeably by many.

The GA refers to the claim by Venezuela as a border controversy because the 1899 Arbitral Award delimiting the border between British Guiana and Venezuela is a full, final and perfect settlement. Similar to the sanctity of titles in law, a disputant would have to prove fraud to dispossess the holder of such title. That was, and still is the situation that Venezuela finds itself in. The border controversy is therefore linked to an allegation by Venezuela of fraud/collusion by and among some of the arbitrators. Of course, the doctrine that he who alleges must prove applies to Venezuela.

Importantly also, for sixty years and counting, Venezuela has not been able to provide any evidence of fraud/collusion under the various non-judicious mechanisms within the GA. Consequently, and in keeping with the GA, this matter is now before the International Court of Justice (ICJ) for final determination. And the only issue before the ICJ is the ‘validity’ of the 1899 Arbitral Award, and not any territorial dispute. Venezuela, on the other hand, for the past sixty years and counting has pressed Guyana to discuss, within the framework of the GA, a ‘territorial dispute’, which Guyana continuously rejected and never discussed. In fact, the GA does not permit any such discussions. Hence, Venezuela’s actions within its own body politic to frame this issue as a territorial dispute. Consequently, the territorial dispute, as alleged by Venezuela, is linked to its spurious claim to Guyana’s territory. This essential difference between these two terms is key to understanding any significance of the Argyle Declaration where Guyana travels on a border controversy track within the GA, while Venezuela travels on a territorial dispute track outside of the GA.

So, what did the Argyle Declaration achieve for Guyana? What did Guyana gain? The main argument, by some, seems to be ‘peace’ with Venezuela, but at what cost? Notably, President Ali went into the discussions with President Maduro after Guyana had secured key provisional measures against Venezuela from the ICJ, to wit, “… the Bolivarian Republic of Venezuela shall refrain from taking any action which would modify the situation that currently prevails in the territory in dispute, whereby the Co-operative Republic of Guyana administers and exercises control over that area”; and “Both Parties shall refrain from any action which might aggravate or extend the dispute before the Court or make it more difficult to resolve.”

Against this backdrop, the ICJ Provisional Measure 1 recognized Guyana’s sovereignty over the Essequibo territory, and the ICJ Provisional Measure 2 recognized, indirectly, Venezuela as the aggressor having regard to its actions to annex Essequibo, post its consultative referendum. Further, the ICJ Provisional Measure 2 is repeated in the Argyle Declaration as points 1, 3 & 6. And, as pointed out at the beginning of this article, Venezuela has been an aggressor state to Guyana since 1966 when it occupied the entire Ankoko island. Significantly, Provisional Measure 1 has not been repeated in the Argyle Declaration. This is a major loss for Guyana in that nowhere in the Argyle Declaration has President Maduro committed to walking back his actions that threaten to annex sovereign Essequibo.

It is also clear that President Ali did not discuss the border controversy, as promised, since nothing was presented by Venezuela during the Argyle discussions to support its claim of collusion/fraud in the Arbitral Award of 1899. However, President Ali discussed with Maduro its territorial dispute with Guyana. This is quite exceptional and contrary to all previous actions by Guyana in that it is the first time any Guyanese Head of State has held any official talks about a ‘territorial dispute’ with Venezuela, as per Point 9 of the AD. A Venezuelan position that had never received any acknowledgment from Guyana, sixty years and counting. The discussion of a ‘territorial dispute’ between Venezuela represents what Venezuela has always wanted – bilateral discussions on a territorial dispute with Guyana, outside of the GA.

So far, Guyana has gained nothing new. But it gets worse with Point 4 of the Argyle Declaration. Here, Guyana and Venezuela declared that only Guyana is committed to resolving the border controversy via the ICJ. This is not a gain for Guyana, since the controversy is already at the ICJ. However, under the second limb of Point 4 of the Argyle Declaration, Guyana and Venezuela noted Venezuela’s non recognition of the ICJ’s jurisdiction in the border controversy. Here, Venezuela is clearly saying that it will not accept the findings of the ICJ. Of course, Venezuela is quite aware that no territorial dispute with Guyana is before the ICJ. Importantly, this non recognition of the ICJ is one of the key outcomes in the recent Venezuelan referendum. Another adverse result for Guyana. Points 7&9 of the Argyle Declaration where Guyana and Venezuela declared agreement in establishing a joint commission to discuss mutually agreed matters and “implications for the territory in dispute” is averse to Guyana’s interests, since it accords with Venezuela’s pursuit of bilateral discussions over a territorial dispute with Guyana, outside of the GA.

The declaration at Point 1 of the Argyle Declaration about not using force re matters “consequential to any existing controversies” is a moot one. Firstly, only one controversy exists, and that is a border controversy. Secondly, it is before the ICJ for final outcome. Thirdly, there can be nothing consequential to this matter since it has not yet been finalized. Therefore, its inclusion is averse to Guyana and beneficial to Caricom. Cumulatively, I am of the view that Venezuela is attempting, with the help of Guyana and Caricom, to restart the non-judicious procedures of the Geneva process, which have expired due to the controversy being finalized by the ICJ.

The only possible outcome for Guyana, after a careful examination of the Argyle Declaration is a declaration by Venezuela to be ‘peaceful’ towards Guyana. But this too can be contentious. So weak is a declaration in international law that it is worth a brief examination. In that regard, it is trite law that declarations are not cited as sources of international law. Additionally, they are of no, or limited legal effect and non-binding, except for a deliberate intention by the parties for them to be so, under the doctrine of aequo et bono. So, who else benefited from the Argyle Declaration, besides Venezuela? The answer is Caricom. From all appearances, it appears that Caricom set the ground rules and brokered an agreement to remain in the good books of President Maduro at the expense of Guyana. Debt cancellation, promises of debt restructuring and joint economic ventures ruled the roost. A legitimate question that arises is whether the government of Guyana left the door open or was it opened it before?

Another legitimate question that arises is whether President Ali had a national mandate to go so far as to discuss and include ‘territorial dispute’ in the Argyle Declaration? Put differently, did President Ali in accordance with Guyana parliamentary approval to only discuss a border controversy, needed to check back with the citizens of Guyana before committing to a declaration that includes the words ‘territorial dispute’? Did he therefore exceed his authority?

The Argyle Declaration, for the above reasons, falls outside the Geneva Agreement which has led to the ICJ, and before it which stands Guyana and Venezuela. This declaration is a standalone and of much lesser value in international law. Though Guyana may have placed itself on a slippery slope, its saving grace may well be the low international law value given to declarations and the power of Article 2 of the Guyana Constitution to preserve the boundaries of Guyana.

 

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David Rutley, the British minister responsible for the Americas and the Caribbean, is set to become the first G7 minister to visit Guyana

by guyanabusinessjournal
written by guyanabusinessjournal

A UK minister will emphasize the British Government’s support for Guyana during his upcoming meeting with the country’s president. This meeting takes place amidst an ongoing and contentious dispute with Venezuela over a vast border region that is rich in oil and minerals.

David Rutley, the British minister responsible for the Americas and the Caribbean, is set to become the first G7 minister to visit Guyana since tensions escalated following a Venezuelan referendum concerning the Essequibo region.

During his visit, Mr. Rutley will hold discussions with Guyanese President Irfaan Ali and engage with senior government and military officials.

Notably, Guyana and Venezuela, led by President Nicolas Maduro, recently agreed to abstain from using threats or force against each other in this matter.

The longstanding border issue, which spans over a century, has raised concerns about the potential for military conflict. Venezuela asserts that the Essequibo region was part of its territory during the Spanish colonial period and contends that a 1966 Geneva agreement with Britain and the then-British Guiana (now Guyana) invalidated a border established in 1899 by international arbitrators.

Mr. Rutley stated, “I am in Guyana, a fellow Commonwealth member, to express the UK’s unwavering support for our Guyanese friends. The border dispute has been resolved for over 120 years, and the sovereignty of borders must be respected anywhere in the world.”

He further welcomed Venezuela’s recent commitment, made in St. Vincent, to refrain from using force and escalating the situation. Mr. Rutley affirmed that the UK would continue to collaborate with regional partners and international organizations to ensure the territorial integrity of Guyana is upheld.

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Exploring Guyana’s Game-Changing Gas to Energy Project

by guyanabusinessjournal
written by guyanabusinessjournal

Gas to Energy Project – the most transformational project in Guyana’s history

By Cristina Caus

December 18, 2023

 

The Gas-to-Energy project is an embodiment of Guyana’s mission to transform its historically underperforming economy, now one of the fastest growing, into a world-class and competitive environment. The GtE project represents one of the largest single-expenditure projects in the history of Guyana.

Planned as a 25-year joint venture between the Government of Guyana and ExxonMobil with a cost of approximately US$ 2 billion, the project is designed to supply natural gas from the Stabroek Block through a 12-inch diameter pipeline that will run 220km to the onshore Wales Development Zone on the West Bank of Demerara, connecting to a facility that is slated to encompass a 300 MW natural gas power plant and a natural gas liquids (NGL) plant. When completed, these two facilities will be capable of producing at least 4,000 barrels per day, including the fractionation of liquefied petroleum gas (LPG). The NGL processing plant will treat the gas to extract NGLs for commercial use, and the power plant will use the dry gas to generate electricity for domestic use. Later developments could include plants for producing ammonia and urea.

The Project is one of a kind and it consists of two phases:1.Pipeline installation coming at an estimated cost of US$1.3 billion. Exxon is going to manage the installation of the subsea pipeline on the seafloor to transport the natural gas from the Liza field to the onshore pipeline, with a minimum of 50 million standard cubic feet of gas per day capacity (mmscfd) and a maximum capacity of 130 mmscfd. and 2.The construction of the gas power plant and the integrated NGL plant, managed by the US-based partnership CH4/Lindsayca at a cost of approximately US$759 million. The project is expected to come online by the end of 2024.

In its anticipation, the Petroleum Management Programme under the Ministry of Natural Resource of Guyana, released the Gas Monetization Strategy which serves as a discussion paper for citizens and experts to share their opinions with the government on the project and the strategy to manage Guyana’s substantial gas resources.

Given the size, scope and cost of the project, some are skeptical and find it difficult to determine the feasibility of it; and there are aspects that need to be analyzed.

Is Guyana truly ready for a project of this scale?

Resource wise – yes. The Guyana-Suriname basin is known to contain large amounts of natural and associated gas as well as crude oil. Gas accounts for about 25% of the 11bn barrels of oil equivalent (boe) in recoverable reserves discovered at Stabroek. According to estimates, the proved gas reserves are at 17 trillion cubic feet (tcf). , The associated gas is currently used for pressure maintenance and enhanced oil recovery, but it is considered to be trapping a substantial quantity of oil, therefore limiting the oil exploration and production capabilities as well.

Infrastructure-wise Guyana hasn’t been ready for this sudden oil and gas turn of events to start with. The country was in a similar dilemma a few years ago when it started offshore operations. It didn’t have the adequate infrastructure, financial and workforce capability to embrace this sprouting industry and that’s where a leap of faith was required. Up to date, ExxonMobil and its contractors spent more than US$900 million with locals since the first discovery in 2015. By the end of 2022, the company and contractors employed over 5,000 Guyanese workers, representing more than 65 percent of the overall workforce in the local oil and gas industry.

With no experience or offshore infrastructure, Guyana just in four years managed to have acquired two FPSOs (at an approximate cost of about $1B each) actively operating in its deep waters, with one more expected to be delivered by the end of 2023 and three more targeted by the end of 2027. That’s a total of six floating production storage and offloading vessels, quite an impressive portfolio of assets for a beginner like Guyana, and a solid investment for a supermajor like Exxon. This agile responsiveness to its petroleum infrastructure and workforce needs integrated with foreign partnerships, investments and skills transfer is a harbinger of how Guyana can manage complex infrastructure projects, such as the Gas to Energy one and how competitive it can get on the global market.

The costly infrastructure investments if coupled with the right maintenance practices have a quite long lifespan, between 30-50 years for the Gas power plants and the NGL plants and an average of 50 years for the natural gas transmission pipelines; long enough to pay off the hundreds of millions of dollars it takes to build them and longer in comparison for example with the solar power plants that on average would last 25-30 years, wind farms that have an expected lifetime of around 20 years, while energy storage last roughly 10 years.

Financially wise – yes, but this requires caution. In the past two years the global events have been favoring the commodity prices therefore creating more oil revenues for the oil producing economies, including Guyana, who has pocketed about US$1.24 billion in revenue from oil sales and royalties annually since first oil production in 2019.

The key to economic stability for a country is a balanced wealth management and distribution strategy. Often happens that developing countries who get blessed with wealth from resources initiate generous spendings, expensive projects and acquisitions which mostly lead to exaggerated loans and burdening debts. That’s the case of many oil exporters, eight out the top 35 net oil exporters from 1979 to 2010 have defaulted on their debt during that period, some of them are Argentina, Sudan, Iran, Iraq, Russia, Mexico, Egypt.

While considering a project of this scale, it is important to pay attention to maintaining a good-debt-to GDP ratio. The relationship between abundant fossil fuel reserves and rising debt is no coincidence and many of the countries facing debt distress have significant oil and gas reserves. Many oil exporting economies get trapped in this vicious cycle where they benefit from increasing oil revenues which increases the value of their reserves and boosts their credit ratings, enabling them to get more loans, when the oil prices drop the debt is heavier pushing the economy to expand the fossil fuel sector more and rely more on the revenues it generates, which gets attractive for creditors but becomes a heavy burden for the economy, as it gets more indebted. As a rule of thumb, a good-debt-to- GDP ratio is usually under 60 percent. Guyana was at 27.80 percent in 2022, expected to reach 30.00 percent of GDP by the end of 2023. According to the IEEFA Guyana’s debt will skyrocket from US$621 million in 2023 to an overwhelming US$1.7 billion in 2027, primarily fueled by the Gas-to-Energy initiative. On the other hand, Guyana’s GDP is forecasted to see a tremendous growth as well, reaching US$ 29.94 billion by 2028, placing it somewhere in the 58% debt to GDP ratio.

The Oil & Gas Debt

Vicious Cycle

Figure: The relationship between abundant fossil fuel reserves and rising debt

If we are to do a quick math around the Gas to Energy project, the pipeline installation by Exxon will commit Guyana to pay annually for the next 20 years a fixed rate of US$55 million to Exxon, this amount is the amortized cost of US$1 billion for 20 years at a discount rate. The natural gas and the LNG plant facilities are to be financed by the government, for 2023 about $US 200 million were allocated from the budget while the other portion of approximately US$646 million is pending financial approval the government is seeking from EXIM.

The flip side of the coin is that currently about 90 percent of Guyana’s power generation capacity comes from heavy fuel oil. The GtE project would be saving about US $11 million that is used to pay for fuel every single month in addition to reducing electricity prices by an estimated 50 percent, which currently is at a rate of 15 US cents per kilowatt hour. Also, according to the Winston Brassington, Head of the Gas-to-Energy Task Force, it is estimated that the commercialization of the excess NGLs will earn Guyana about US$100 million per year, providing the revenues to meet the annual payments and make a profit.

We should also consider the potential revenues from branching out the GtE project as highlighted in the Gas Monetization Strategy. The production of fertilizers, such as ammonia, can contribute enormously to the diversification of the project and the economy. Natural gas is the primary feedstock for ammonia, the building block for all nitrogen fertilizers, and accounts for 70-90% of production costs. If we take a look at the fertilizer market, it is roughly increasing by 12 percent compared to the previous years and it is forecasted to surpass US$ 240 billion by 2030. Trinidad and Tobago can serve as a good example of how profitable it can become, as in 2021, T&T exported US$1.74 billion in ammonia, the most exported product in the country and placed the nation as the second largest exporter of ammonia in the world. The Russia- Ukraine war has destabilized the fertilizer market globally, as they both were large fertilizer producers, therefore creating an opportunity for newcomers as Guyana.

There has been constant discouragement addressed by some global organizations and individuals towards Guyanese pursuit of its fossil fuels resources from the beginning. The kind of” in the right place at the right time” opportunity isn’t presented every day and wouldn’t Guyana have taken the risk to invest in its oil exploration and production it would not become the fastest growing economy in the world in few years only blessing its citizens with a phenomenal GDP per capita growth from about US$6.950 in 2020 to $US 20.000 in 2022 with a forecasted 80.74 percent continuous increase to about US $37.000 by 2028.

Some are worried that this project will indebt the country for many years to come and some even claim, as the U.S. based Institute for Energy Economics and Financial Analysis (IEEFA), that the project is “unnecessary and financially unsustainable”,  advising that Guyana could use its oil profits for a reliable, low-cost rooftop solar solution that would save billions while providing low-carbon electricity to the entire country.

Renewable energy is indeed a good solution developed in parallel, however it is an intermittent variable power and it needs to be balanced with a stable and reliable source, such as the natural gas, which is a low-carbon energy source compared to current HFO being used. Moreover, renewable energy, as solar suggested by the IEEFA, would address a portion of country’s economic challenge, which is energy generation, however, would not create the other economic opportunities as some described earlier.

The massive economic growth in Guyana is creating a huge demand for energy supply and for serious investments in grid modernization, transmission lines and substations for integration. Nevertheless, the fact that Guyana has natural gas in abundance should be considered as a step towards diversification of its energy portfolio and energy security and transition plans, while combined with renewable energy projects. A healthy approach is required that considers economic expansion into new sectors, development of new projects, reliable partnerships and investments that align with country’s needs and global market demand in a sustainable and financially sound way.

Cristina Caus is an International Economist and Oil and Gas/Energy Consultant and Business Developer. She has a rich, over a decade experience in the oil & gas industry worldwide and holds a master’s degree in international business from FIU.

 

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IMF Executive Board Concludes 2023 Article IV Consultation with Guyana

by guyanabusinessjournal
written by guyanabusinessjournal

IMF Executive Board 2023 Article IV Consultation with Guyana

December 4, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Guyana and considered and endorsed the staff appraisal without a meeting.

The Guyanese economy has tripled in size since the start of oil extraction (end-2019), from one of the lowest GDP per capita in Latin America and the Caribbean in the early nineties. Oil production is ramping up rapidly, supporting the highest real GDP growth in the world in 2022 (62.3 percent). With the help of oil revenues, first transferred to the budget in 2022, the government has started investing heavily to address large development needs. Fundamentals remain strong and there are no signs of inflationary pressures or overheating as of yet.

Guyana’s oil reserves per capita are one of the highest in the world. Going forward, oil production will continue to expand rapidly as four new fields will come on stream by end-2028. Sustained real non-oil GDP growth is also expected, as the government continues to invest in human capital, lower energy costs, and build infrastructure, including for climate change adaptation. Real GDP is expected to continue to grow extremely fast in 2023 (38.4 percent) and on average of 20 percent per year during 2024-28.

Gross international reserves are expected to continue to accumulate and reserves coverage to strengthen. Substantial savings will accumulate in the Natural Resource Fund (NRF) in the medium-term. Annual transfers from the NRF to the budget according to the NRF Act will finance most of the increase in public capital spending to meet developmental needs.

These very favorable prospects are accompanied by balanced risks. On the upside, further oil discoveries would continue to improve Guyana’s long-term economic prospects and a construction boom would support higher short-term growth than projected. The main downside risks are overheating, leading to inflationary pressures and appreciation of the real exchange rate beyond the level implied by a balanced expansion of the economy. Other downside risks include highly volatile commodity prices and adverse climate shocks as well as governance concerns, which could negatively impact the economy.

Executive Board Assessment[2]

 

In concluding the 2023 Article IV consultation with Guyana, Executive Directors endorsed staff’s appraisal, as follows:

The Guyanese economy continues to experience record growth, supported by the government’s modernization plans and unparalleled oil and gas sector expansion. Guyana’s external position at end-2022 is assessed to be moderately stronger than the level implied by fundamentals and desired policies.Guyana’s debt-sustainability analysis (DSA) indicates that the risk of (overall and external) debt distress remains moderate, with debt dynamics improving significantly with incoming oil revenues.Overall real GDP growth is projected to grow 38.4 percent in 2023 and on average of 20 percent per year during 2024-28. Guyana’s very favorable medium-term growth prospects are accompanied by upside risks—key among them being further oil discoveries that would continue to improve growth prospects—and downside risks—inflationary pressures and the appreciation of the real exchange rate beyond the level implied by a balanced expansion of the economy. Adverse climate shocks, and volatile or lower than projected commodity prices, may also negatively impact the economy. The key challenges are managing large resource revenue inflows to ensure macro-economic stability and sustainability, while investing steadily in people, physical infrastructure, and institutions.

Given the medium-term risks of inflationary pressures and real exchange rate appreciation beyond the level implied by a balanced expansion of the economy, staff recommend a continued focus on maintaining macroeconomic stability through an appropriate policy mix. Staff assess the 2023 policy mix to be appropriate, with fiscal policy increasing public investment to address the large development needs, and broad money growing in line with non-oil GDP. Staff welcome maintaining debt sustainability and a balanced growth path through moderating fiscal impulses over the medium-term, while continuing to address development needs.

The authorities’ commitment to fiscal discipline is welcome and allows for a balanced growth path, with moderating fiscal impulses projected to achieve a zero overall fiscal balance by 2028. Gross international reserves and substantial saving in the National Resource Fund are expected to continue to accumulate in the medium-term.

Staff recommend adopting over the medium-term a comprehensive medium-term fiscal framework (MTFF). As a fiscal anchor, staff recommend setting a path for the non-oil primary balance (as a percent of non-oil GDP) consistent with the ceilings the withdrawals from the NRF of oil revenues which aim to ensure inter-generational equity. The MTFF should encompass further modernizing the public financial management framework, to contain a clear medium-term fiscal anchor, a transition path, and an operational target. Staff recommend periodic expenditure reviews to ensure macroeconomic stability and preserve competitiveness by setting the pace of public investment to take into account absorption and institutional capacity constraints of the economy.

Staff recommend continuing close monitoring of macroeconomic and financial indicators, tightening monetary policy stance, and using macroprudential tools as needed. In the medium term, staff recommends a review of the exchange rate framework to ensure that it best serves the economy.

Staff support the authorities’ efforts to maintain financial stability and recommend completing the implementation of the 2016 FSAP recommendations. Staff welcome BoG’s asset quality reviews, the progress in conducting stress tests exercises, and the authorities’ strategies to promote financial inclusion. Staff strongly support the authorities’ commitment to complete the implementation of the 2016 FSAP recommendations, including closely monitoring sectoral lending exposures, related party lending, banks’ ownership structure and increasing competition in the banking sector.

Staff commend the authorities’ progress in strengthening AML/CFT, governance, anti-corruption frameworks and support further advances in their effective implementation.

Staff commend the authorities’ progress to strengthen the management of oil wealth and its fiscal transparency and recommend addressing remaining gaps. In particular it is important to implement the recommendations of the 2019 Extractive Industries Transparency Initiative (EITI) reports, including in moving towards electronic disclosure and adequate follow-up.

Staff welcome the authorities’ climate efforts implemented through LCDS 2030, which maintains forest coverage and preserves sequestration rates, and aims to enhance nature conservation, by including biodiversity conservation, watershed management, and the ocean economy, and receive payments for these efforts.

https://www.imf.org/en/News/Articles/2023/12/01/pr23417-guyana-imf-exec-board-concludes-2023-art-iv-consult

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WRINKLES IN THE PETROVERSE

by guyanabusinessjournal
written by guyanabusinessjournal

 

WRINKLES IN THE PETROVERSE

by

Dr. Tulsi Dyal Singh

 

The Petroverse is showing wrinkles

crow’s feet around its eyes

furrows on its forehead

and fine lines on its face

that no amount of cosmetology

can hide from revelation.

 

And what happens in the Petroverse

echoes exponentially in Guyana

as it learns to tame the ropes

that pull from varying directions

at the idiosyncrasies of a market

that is always unpredictable.

 

A Major Shakeup in the Ownership

The landscape of Guyana’s nascent petroleum industry was significantly altered in October 2023 when Chevron Corp announced its intended purchase of Hess Corporation. Earlier in the month, it was altered too, though less directly, when ExxonMobil announced its acquisition of Pioneer Natural Resources. ExxonMobil and Hess together own 75 percent of the triumvirate which owns the mineral rights to Guyana’s Stabroek block. The Chinese company CNOOC owns the other 25 percent. ExxonMobil owns 45 percent and is the operator of the Stabroek Block.

 

These ownership changes point to changes in the priorities that buyers and sellers constantly monitor and respond to in the ongoing business of enhancing shareholder value and returns, in a fast moving and often unpredictable Petroverse. While Guyana is the sovereign owner of the Stabroek block,

the real decision makers are the major international oil corporations that have acquired the mineral rights, have the financial resources and the technical and technological expertise to bring the oil and gas to the surface, ready for monetization. Guyana is mostly a bystander while it receives its two percent royalty and guaranteed 12.5 percent profit share until the corporate investors have recovered their capital outlays.

 

John Hess, the Chief Executive Officer of Hess Corporation was the most vocal cheerleader of Guyana’s oil, as he promoted: the promises of Guyana’s bountiful oil reserves; the advantaged exploitation agreement they had obtained; the pliability of their counterparts in Guyana; the ease of securing environmental passes; contracting with deep water drillers at the bottom of a low-cost cycle; crunchy, porous rocks laden with high quality Brent oil; and one of the lowest breakeven costs in the oil industry. Hess’ stock price reached its highest point ever as the corporation’s profit soared. So, why did he sell, at this time, to Chevron?

 

Significance of the Sale

The sale of Hess to Chevron involves much more than its Guyana’s assets but several industry observers have cited its stake in Guyana’s Stabroek Block as the crown jewel of its treasury. While the high price and the healthy premium over that price are obvious factors to motivate a sale, are there other factors that could have loaded the dice?

 

Financial Demands of Carbon Capture, Removal and Storage

 

Fossil fuels have brought incalculable benefits to mankind in the last two centuries as they powered the machinery and technologies that shape our lives today. But their production and consumption also generated petro-toxins, the most damaging of which has been carbon dioxide in the atmosphere. It is now generally accepted, even by the major oil corporations which initially denied its deleterious effect on the environment, that carbon dioxide is in fact, a major cause of climate change; and that drastically reducing carbon dioxide in the atmosphere is an environmental, moral and existential priority.

That daunting task will require: reductions in the production and consumption of fossil fuels; accelerated development and utilization of alternative renewable sources of energy; capture of carbon dioxide at the sources of generation; active removal from the atmosphere; and long term storage of the captured and removed carbon dioxide underground, undersea, in seaweed farms or conversion into nontoxic or even better, into beneficial agents. This is a very expensive task and technically demanding.

In the Petroverse of the 2030’s and beyond, can stand-alone oil producers compete with the deep pocketed major oil companies who already have a head start and who have tight connections in Washington, DC and have access to taxpayers dollars under the guise of research, experimentation and development through tax abatements, incentives and grants? Chevron and ExxonMobil are much closer to the biggest trough than Hess! I believe that a strategic exit now, especially at the high end of the valuation graph was a formidable reason the sale.

Recoverable Reserves – ?

The exuberant announcements of increases in the recoverable reserves in the Stabroek Block, in the billions of barrels of oil equivalent, have gone silent. The last estimate was 11 billion barrels of oil equivalent, and it was made more than a year and a half ago, even though eight new finds have been revealed without any change in the estimated recoverable reserves. Why? Have the new discoveries not added significantly to the cumulative total? Or, have the new discoveries only replenished the oil that is currently being extracted as rapidly as possible? Or were the initial estimates too high? Or, is there a new corporate policy to limit or delay publication of this information? Surely, both buyer and seller know the answer, but whatever is the answer, was that a factor in this sale?

The Unfriendly Neighbor, Venezuela

Guyana’s neighbor to the west is Venezuela, the country with the largest petroleum reserves in the world. At over 300 billion barrels of recoverable reserves, it dwarfs Guyana’s current 11 billion barrels. Venezuela has a very active, ongoing and ominous boundary dispute with Guyana, claiming about two thirds of the land area of Guyana as its territory. This boundary was settled more than a century ago but has flared up intermittently by Venezuela, sometimes with belligerence. Venezuela has called a national referendum for December 2023, in Venezuela, to justify continuing its spurious claim. The result of the referendum is a foregone conclusion and will likely have the only effect of galvanizing Venezuelan jingoism.

There is an open case related to the boundary, currently before the International Court of Justice. It has been dragging on for several years, largely because of non-cooperation from Venezuela, an indication of the weakness of its case. More concerning, is the present build up of troops along the border. Venezuela with a population of over 28 million people has a vastly superior military establishment compared to Guyana which has a population of less than one million and a basic defense force. A sustained military operation would be grossly asymmetrical.

Venezuela and the major American international oil companies have had a contentious history over the last two decades. From producing a high of 3.7 million barrels of oil per day, its production is now less than one million barrels per day, largely because of its nationalization of American oil assets and the resulting sanctions imposed on Venezuela by the United States government. The sanctions and the resulting diminution in oil revenues have devastated the Venezuelan economy to the extent that more than seven millilon Venezuelans have departed the country. But on October 18, 2023, the US government temporarily suspended the sanctions that applied to oil and gas operations in Venezuela. Both Chevron and ExxonMobil had huge footprints in Venezuela. Chevron still has, through a special deal with Petroleos de Venezuela S.A. (PDVSA), the national oil company of Venezuela. Is this temporary lifting of the sanctions a precursor of a rapprochement between the United States and Venezuela and a harbinger of Chevron increasing its activities there and ExxonMobil’s return to Venezuela? Is that reason enough to have worried Hess? And possibly provide another reason to sell when the sailing’s good.

Will Chevron honor the existing Carbon Credit Contract between Hess and Guyana?

In late 2022, Guyana got verification of 33 million tons of sellable Carbon Credits for its rainforest carbon sink. Hess Corporation contracted to purchase US$750 million worth of it over ten years. In fact, John Hess, CEO of Hess Corp flew to Georgetown for the signing of the agreement amidst unrestrained local delight, and the first purchase, worth US$187 million, was consummated. A partial payment of US$75 million was to be paid to a special account in Guyana with the remainder to be paid over the following 18 months. This initial lot of 12.5 million tons was dubbed “legacy credits” since the were earned retrospectively, for the years 2016 to 2020, and the price was US$15 per ton. It was announced that Hess would continue to purchase 2.5 million tons per year for 2021 to 2025 at US$20 per ton; 2.5 million tons per year for the years 2026 to 2030 at US$25 per ton, making for a total transaction of US$750 million. There has not been much publicity about any further sales of Carbon Credits. But the bigger question is if Chevron will honor the remainder of the Hess Corp’s commitment to buy the remainder of credits described in the purchase agreement. At his weekly press conference on October 26, 2023, Vice President Bharrat Jagdeo announced that he was aware of the question and that he asked his staff to check with Hess and was told that Chevron will honor the contract.

The Future of Fossilenes

Despite the almost universal acceptance that fossil fuels, which I have grouped as “fossilenes”, are a potent cause of deleterious climate changes, they are still the most reliable, portable, accessible, energy dense and cheapest available form of energy available to most of the world. The development of renewable forms of energy such as wind, solar, tidal and others have not matched the urgency that is required for them to replace fossilenes on the scale and speed required to significantly lower carbon dioxide in the atmosphere. Just two years ago, it appeared that there was a massive effort to accelerate a rapid transition to renewable sources of energy but the war in Ukraine quickly stymied that and since then the world has fallen back to its most reliable and easily available sources, namely oil and gas. From a prediction of declining use of oil and gas over the next thirty years, some experts are projecting a gradual increase in the demand and use of fossilenes.

A World of Fossilenes paired with Carbon Capture, Removal and Sequestration

It appears to me that the model that the major oil companies have been targeting involves continuing to produce oil and gas while capturing as much of the carbon dioxide at emitting sources; and launch into a massive campaign to remove huge amounts of carbon dioxide already in the atmosphere. This is where huge amounts of money will be required. I see both the acquisition of Hess by Chevron and the acquisition of Pioneer by ExxonMobil as the preamble of the development of the Petroverse of the future.

Guyana’s place in the Petroverse

Guyana’s contribution to the world’s petroleum output is expected to be around 1.2 million barrels per day by 2027, or just over 1 percent, a significant number especially for a new producer with such a small population. Many financial analysts, in talking about the Hess/Chevron deal have described Guyana’s Stabroek Block as the crown jewel of Hess’ treasures. Even though Hess’ share of Guyana production accounted for less than 10 percent of Hess’ revenue in 2022, the prospects from rapidly increasing production there have encouraged some analysts to give much greater weight to Guyana’s contribution to the sale price of US$53 billion. Ranges vary from a quarter to three quarters!

A Hypothetical Value of the Stabroek Block

At a quarter, the value of Hess’ share of the Stabroek Block is US$13 billion. At three quarters, the value US$40 billion. At a half, the value is around US$27 billion. It is tempting then to impute a current value of the entire Stabroek block. Since Hess owns 30 percent of the Stabroek block, a range of US$50 billion at the low end to US$150 billion at the high end can be imputed. As always, this is about oil and gas. Who can predict the Petroverse?

 

About the Contributor

 

Dr. Tulsi Dyal Singh is a Guyanese-born American. He is a Past President of the board of trustees of the Permian Basin Petroleum Museum, Library, and Hall of Fame. He has degrees in Medicine from the University of the West Indies, a Masters degree in Health Care Administration from Trinity University, Texas; and is certified as a bank director from the Southwestern Graduate School of Banking in Texas. He has lived in Midland, Texas, for more than forty years.

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THE JOINT DECLARATION OF ARGYLE FOR DIALOGUE AND PEACE BETWEEN GUYANA AND VENEZUELA

by guyanabusinessjournal
written by guyanabusinessjournal

THE JOINT DECLARATION OF ARGYLE FOR DIALOGUE AND PEACE BETWEEN GUYANA AND VENEZUELA

On Thursday, December 14, 2023, in Argyle, Saint Vincent and the Grenadines, His Excellency Irfaan Ali, President of the Co-operative Republic of Guyana and His Excellency Nicolas Maduro, President of the Bolivarian Republic of Venezuela held discussions on matters consequential to the territory in dispute between their two countries.

These discussions were facilitated by the Prime Minister of Saint Vincent and the Grenadines and Pro-Tempore President of the Community of Latin American and Caribbean States (CELAC) Dr. The Honourable Ralph E. Gonsalves, and the Prime Minister of the Commonwealth of Dominica and Chairman of the Caribbean Community (CARICOM), the Honourable Roosevelt Skerrit. Prime Ministers Gonsalves and Skerrit, together with H.E. Mr. Celso Amorim, Special Adviser and Personal Envoy of H.E. Luiz Inácio Lula da Silva, President of the Federative Republic of Brazil, acted as principal Interlocutors. Also present were Honourable Prime Ministers of the Caribbean Community, namely: the Honourable Philip Davis, Prime Minister of The Bahamas; the Honourable Mia Amor Mottley, Prime Minister of Barbados; the Honourable Dickon Mitchell, Prime Minister of Grenada; the Honourable Philip J. Pierre, Prime Minister of Saint Lucia; Honourable Terrence Drew of Saint Kitts and Nevis and Dr. The Honourable Keith Rowley, Prime Minister of the Republic of Trinidad and Tobago.

Attending as Observers on behalf of His Excellency António Guterres, Secretary-General of the United Nations were Their Excellencies Earle Courtenay Rattray, Chef de Cabinet of the Office of the Secretary-General of the United Nations, and Miroslav Jenca, Under-Secretary-General of the United Nations Department of Political and Peacebuilding Affairs. In addition, His Excellency Alvaro Leyva Durán, Minister of Foreign Affairs of the Republic of Colombia and Mr. Gerardo Torres Zelaya, Vice-Minister of Foreign Affairs of the Republic of Honduras, in his capacity as CELAC Troika, also participated.

All parties attending the meeting at Argyle, Saint Vincent and the Grenadines reiterated their commitment to Latin America and the Caribbean remaining a Zone of Peace.

Guyana and Venezuela declared as follows:

  1. Agreed that Guyana and Venezuela, directly or indirectly, will not threaten or use force against one another in any circumstances, including those consequential to any existing controversies between the two States.
  2. Agreed that any controversies between the two States will be resolved in accordance with international law, including the Geneva Agreement dated February 17, 1966.
  3. Committed to the pursuance of good neighborliness, peaceful coexistence, and the unity of Latin America and the Caribbean.
  4. Noted Guyana’s assertion that it is committed to the process and procedures of the International Court of Justice for the resolution of the border controversy. Noted Venezuela’s assertion of its lack of consent and lack of recognition of the International Court of Justice and its jurisdiction in the border controversy.
  5. Agreed to continue dialogue on any other pending matters of mutual importance to the two countries.
  6. Agreed that both States will refrain, whether by words or deeds, from escalating any conflict or disagreement arising from any controversy between them. The two States will cooperate to avoid incidents on the ground conducive to tension between them. In the event of such an incident the two States will immediately communicate with one another, the Caribbean Community (CARICOM), the Community of Latin America and the Caribbean (CELAC), and the President of Brazil to contain, reverse and prevent its recurrence.
  7. Agreed to establish immediately a joint commission of the Foreign Ministers and technical persons from the two States to address matters as mutually agreed. An update from this joint commission will be submitted to the Presidents of Guyana and Venezuela within three months.
  8. Both States agreed that Prime Minister Ralph E. Gonsalves, the Pro-Tempore President of CELAC, Prime Minister Roosevelt Skerrit, the incumbent CARICOM Chairman, and President Luiz Inacio Lula da Silva of Brazil will remain seized of the matter as Interlocutors and the UN Secretary-General, Antonio Guterres as Observer, with the ongoing concurrence of Presidents Irfaan Ali and Nicolas Maduro. For the avoidance of doubt, Prime Minister Gonsalves’ role will continue even after Saint Vincent and the Grenadines ceases to be the Pro-Tempore President of CELAC, within the framework of the CELAC Troika plus one; and Prime Minister Skerrit’s role will continue as a member of the CARICOM Bureau.
  9. Both States agreed to meet again in Brazil, within the next three months, or at another agreed time, to consider any matter with implications for the territory in dispute, including the above-mentioned update of the joint commission.
  10. We express our appreciation to Prime Ministers Gonsalves and Skerrit, to President Lula and his Personal Envoy Celso Amorim, to all other CARICOM Prime Ministers present, to the officials of the CARICOM Secretariat, to the CELAC Troika and to the Head of the CELAC PTP Secretariat in Saint Vincent and the Grenadines, His Excellency Dr. Douglas Slater, for their respective roles in making this meeting a success.
  11. We express our appreciation to the Government and people of Saint Vincent and the Grenadines for their kind facilitation and hospitality at this meeting.

Dated this 14th day of December, 2023.

 

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Lessons learned for Guyana Part 2 – the neighboring sister Suriname

by guyanabusinessjournal
written by guyanabusinessjournal

Lessons learned for Guyana Part 2 – the neighboring sister Suriname

By

Cristina Caus

December 11, 2023

Bonded by a resemblant fate, Suriname and Guyana are more than just neighbors divided by the Courantyne River. Once one territory, they lived a similar experience while separated and colonized by the British and Dutch empires.

With more than a history of European colonization in common, these neighbors enjoy abundant natural resources, ranking among the top countries in the world by percentage of tropical rainforest as land mass, and are united by the Guyana – Suriname basin (GSB). The basin lies along the continental shelf of Guyana and Suriname and is estimated to contain around 13 billion barrels of undiscovered oil and 30 trillion cubic feet of undiscovered natural gas reserves, the world’s next offshore drilling hot spot.

As these two countries embark on the exciting journey of exploring their petroleum potential, the Guyana–Suriname Basin can represent either the rising of two Petro powers in the region in the years to come or the catastrophic fall into the obscurity of corruption and poverty.

Unlike Guyana, whose offshore exploration activity started in 2015 with its first crude oil production in 2019, Suriname’s first oil discoveries date back to the 1960s. In 1980 a wholly state-owned company was established – Staatsolie, and in 1982, the first commercial onshore oil production in the Tambaredjo oil field was initiated. As of 2021, Suriname’s proven crude oil reserves amounted to 89 million barrels, one of the lowest proved reserves in Latin America and the Caribbean, producing 6.14 million barrels from its 3 onshore fields in 2022. Even though Suriname’s oil reserves and production are lower than the regional giants such as Venezuela, Brazil, and Mexico, this small Caribbean nation leads by resources and production of gold. As a matter of fact, Suriname is among the world’s top gold producers, in rate of production relative to area, ranking 10th globally.

The country has a long history in mining, long before oil production. In 1916, the Aluminum Company of America (Alcoa) began mining bauxite in the then Dutch colony of Surinam, which over time became the country’s main export. Suriname’s economy is dominated by the extractive industries with exports of crude oil and gold accounting for approximately 85 percent and 27 percent of government revenues.

So, how did it happen for this resource-rich country to be labeled as one of the poorest countries in Latin America?

It wasn’t all dull for Suriname. Suriname had its resource wealth momentum from 2000 to 2014, similar in a way to Guyana’s now. The rise in international commodity prices resulted in a strong economic expansion for the country, 65% gain in GDP per capita, according to the Inter-American Development Bank. This made the country one of the fastest-growing economies in the LAC region with GDP per capita rising to nearly US$9,472 and a decline in poverty rates. The economy expanded from a little under US$1 billion in 2000 to US$ 5 billion in 2014.

However, these boom years were when the seed for the crisis was planted. In 2016 when the global oil prices dropped, so did the exports and the public revenues, and Suriname’s economy entered a free fall. This was topped with the announcement that Alcoa, the major aluminum company with over 100 years of operations in Suriname was ending its activity in the country. In 2016, Suriname’s GDP plummeted to 2008 levels and its dollar lost more than 46% value by the end of that year.

Currently, about 70 percent of the country’s population lives below the poverty line and is struggling with an inflation rate that has risen 60 percent since 2021. The economic collapse is so severe that Suriname defaulted three times on its sovereign debt and is currently following a range of economic reforms and austerity measures, part of the US$688 million deal President Santokhi negotiated with IMF.

For Suriname, the natural resource blessing turned out to be more of a curse in disguise so far and this is what Guyana should pay close attention to while enjoying its oil euphoria.

Avoiding a state-dominant economy pitfall. As the common saying goes “Fish stinks from the head”, that’s exactly what has been going on in Suriname for decades.

The business around gold mining and oil production in Suriname resembles in many ways the other Guyana’s neighbor, Venezuela. To the point that Suriname has gained an international reputation as a cocaine transit route to Europe such as highlighted in the 2007 report of the United States Department of State Bureau for International Narcotics and Law Enforcement Affairs, an illegal gold mining hub, and a well-rooted kleptocratic state. The bitter aftertaste is the result of a tumultuous on-and-off ruling for 40 years of Desiré “Dési” Bouterse, Suriname’s then-most powerful person “convicted drug trafficker, alleged murderer and two-time president” who adopted deficient public policies, allowed corruption to flourish and mismanaged the economy which led Suriname’s gross domestic product to plunge by 16 percent, the worst decline in South America after Venezuela.

The early formation of state-owned companies and nationalization of extractive sectors of a country is usually a poor decision as it blocks foreign innovation, development, investments to make the sector competitive enough on the international stage. Also, when prematurely happening, as the formation of Staatsolie in Suriname, it tempts the government to control the wealth generated by the extractive sector to serve their own interests rather than its citizens, creating a perfect environment for corruption, nepotism and state-organized crime. The state-dominant economy trend can be noticed across the entire economy in Suriname, as according to the Inter-American Development Bank, as of 2015, there were 144 registered state-owned enterprises, with 60 % workforce employed in the public sector.

The important lesson for Guyana, which has been applied very well so far, is holding back from forming a national oil company yet. By doing so, the Guyanese government has been promoting more transparency in its oil extraction and production affairs on one hand, while on the other hand it has been able to attract more investments, know-how and expertise from the oil supermajors and gain access to a global market. Guyana has ten state-owned companies, which compete with the private sector for market share, opportunities and credit; therefore, government’s role now is critical around reforming and boosting the private sector environment by promoting investment, employment, financial support and technology development.

Going back to Suriname’s story, the gold sector remains up to today the main source of employment in the nation. Based on unofficial estimates, it employs about 70,000 non-registered miners, most are Brazilian immigrants called garimpeiros. It is estimated that at least 20,000 other workers are in mining-related jobs, such as hotels and bars or as sex workers in communities close to mines.

According to official data, in 2021 only,  Suriname exported US$2.26 billion in Gold, making it the 32nd largest exporter of Gold in the world.

Even though mining has been the backbone of Suriname’s economy for decades, the revenue generated hasn’t been used to lift this country out of poverty long-term, neither to educate the next generations and diversify its economy into other sectors, nor to create a better-regulated legal and business environment. The GDP in Suriname dropped to US$5,858 per capita in 2022 compared to the worldwide GDP per capita of about $US 12,607 and Guyana’s GDP per capita of US$ 18,199.

Despite the size and importance of this sector, Suriname does not have adequate legal, environmental and social frameworks for small-scale gold mining, which is the country’s main economic sector, producing about two-thirds of the nation’s gold. The mining department of the Ministry of Natural Resources has no systems or budgets for geological research or engineering work. This unregulated business environment has created the perfect conditions for transnational criminal activities, which benefit from relatively porous borders, stretched government resources (related to a lengthy economic crisis) and corruption.

IMF back in its 2017 report observed that Suriname had no institutional arrangements to save resources during its boom for future price corrections and its advice on strengthening the policy framework hasn’t been really taken into consideration. Even though Guyana is ahead of the game, by having established a Sovereign Wealth Fund in 2019 with an amount of $US 1.67 billion accumulated by April 2023, the challenge remains how to create sufficient transparency to avoid mismanagement of this wealth.

Indeed, what happened in Suriname is a classic example of a resource curse or paradox of plenty linked directly to the government corruption plague, – giant red flags for the Guyanese to look out for. The lack of the simultaneous development of transparency reforms and strong institutions based on the rule of law in the nations that are growing their extractions-based industry can be the combination of guaranteed failure and poverty.

Since the recent oil discoveries in the Guyana- Suriname Basin and Guyana’s colossal oil boom and skyrocketing economic growth, Suriname is impatiently watching this mouthwatering opportunity that is presented to them as well. With TotalEnergies and Apache offshore oil discoveries in Block 58, Suriname became more optimistic about its future hoping that this windfall would bounce them back out of the deep poverty its own leaders brought them into. Seems like the social unrest and economic chaos have dimmed a bit the oil exciting news around their deepwater discoveries causing some delays and caution for investors with the first offshore oil production being expected to be sometime in 2027.

Would this time around be different for Suriname?

We shall wait and see, but in in the meantime Suriname can do some watch and learn too from the Guyanese oil strategy in the past several years.

Cristina Caus is an International Economist and Oil and Gas/Energy Consultant and Business Developer. She has a rich, over a decade experience in the oil & gas industry worldwide and holds a master’s degree in international business from FIU.

 

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Decoding Power Plays: Game Theory can unlock the Guyana-Venezuela Essequibo Controversy

by guyanabusinessjournal
written by guyanabusinessjournal

Using the Lens of Game Theory to Analyze the Guyana-Venezuela Essequibo Controversy

by

Dr. Terrence Blackman

Introduction

The Guyana-Venezuela Essequibo controversy, a significant border controversy between the South American nations of Guyana and Venezuela, has garnered international attention. In the intricate world of international relations and diplomacy, understanding the strategic interactions between these countries is daunting. Game theory, a branch of mathematics that explores how rational decision-makers strategize when their choices affect one another, can provide valuable insights into the strategies, incentives, and potential outcomes of the Guyana-Venezuela conflict over the oil-rich Essequibo region. See below the reflections of Prof. Ivelaw Lloyd Griffith on the December 3rd, 2023, passage of Venezuela’s Essequibo Referendum.

1. Players and Strategies

Identifying the key players and their available strategies is paramount in any diplomatic negotiations or military actions. Guyana and Venezuela are the primary players in the Essequibo controversy. Their strategies encompass a wide range of options, including international arbitration, economic sanctions, and public relations. Each decision has consequences that affect not only their own interests but also the entire region’s stability.

2. Payoffs

At the heart of game theory lie the payoffs, representing the outcomes or benefits associated with different strategies. In this context, payoffs for both Guyana and Venezuela are multifaceted. They include territorial control over the Essequibo region, international reputation, economic gains or losses, and regional stability. These payoffs are often interlinked, making the decision-making process intricate and challenging.

3. Nash Equilibrium

A central concept in game theory, the Nash Equilibrium, is a scenario where no player is incentivized to unilaterally change their strategy, given the strategies others choose. In the Essequibo controversy, a Nash Equilibrium would imply a stable situation where Guyana and Venezuela find it in their best interest not to escalate the conflict further. Achieving such equilibrium could pave the way for a peaceful border dispute resolution.

4. Iterated Games

The Essequibo controversy is not a one-time event but a series of ongoing interactions. Game theory’s framework allows us to consider iterated games, where players learn from past interactions and adjust their strategies accordingly. This long-term perspective is vital in understanding the evolving dynamics of the Guyana-Venezuela conflict.

5. Mixed Strategies

Game theory recognizes players may adopt mixed strategies, choosing strategies with specific probabilities. For instance, a country might employ diplomatic negotiations and military posturing as part of its mixed strategy. These probabilistic choices add an element of unpredictability to the game, especially in the context of the Guyana-Venezuela border tensions.

6. Zero-Sum vs. Non-Zero-Sum Game

The Essequibo controversy is a non-zero-sum game, where outcomes are not strictly binary, resulting in a gain for one country and an equal loss for the other. Instead, both Guyana and Venezuela can potentially benefit from a peaceful resolution, underscoring the importance of cooperation in this South American border controversy.

7. Sequential Moves

Game theory can model scenarios where one player makes a move, and the other responds, reflecting the sequential nature of diplomatic interactions. Analyzing sequential moves helps predict the dynamics of negotiations and escalations in the Guyana-Venezuela controversy.

8. Bargaining Theory

The conflict can be analyzed using bargaining theory, a subset of game theory that explores how two parties reach an agreement. Factors such as willingness to compromise, relative bargaining strengths, and reservation points (minimum acceptable outcomes) are pivotal in shaping negotiation strategies in the Essequibo controversy.

9. Escalation vs. De-escalation

Game theory can assess the risks of escalation (military conflict) versus de-escalation (diplomatic negotiations) and the strategies each country might employ to avoid escalation while pursuing its objectives. Understanding these dynamics is crucial for preventing a potential catastrophe in the Guyana-Venezuela border region.

10. International Actors

Finally, the application of game theory can be broadened to encompass international actors beyond Guyana and Venezuela. The actions, alliances, or diplomatic interventions of neighboring countries, superpowers, and international organizations may significantly alter the game’s dynamics.

The utilization of mathematical game theory in the context of the Guyana-Venezuela Essequibo controversy presents a systematic and analytical method for comprehending the strategic interactions between these two nations. This approach aids in pinpointing potential equilibrium points, forecasting outcomes, and evaluating the incentives and risks tied to various strategies. However, it’s crucial to recognize that real-world conflicts, influenced by historical context, public sentiment, and geopolitical considerations, are incredibly complex. Thus, while game theory offers a crucial framework, it forms just one part of the intricate puzzle of international diplomacy and territorial controversies.

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Guyana and the Gulf States

by guyanabusinessjournal
written by guyanabusinessjournal

Guyana and the Gulf States – Fostering Mutual Interest

By

Scott B. MacDonald

In May 2023, Guyana’s President Irfaan Ali made an official visit to Qatar, several thousand miles away in the Persian Gulf, and opened his country’s first embassy in Doha.  Points of discussion encompassed potential collaboration in the areas of energy, food, infrastructure, and aviation. During the same month, Guyana and Saudi Arabia signed a Memorandum of Understanding (MOU) regarding Saudi Arabian investment in development projects in Guyana. There has also been discussion of Saudi or United Arab Emirates (UAE) money going into offshore oil development or Qatari assistance in developing Guyana’s natural gas industry.

The Guyanese-Gulf States relationship is slowly gaining traction, reflected by the increased number of visits since 2020 by high-ranking Guyanese officials and their Qatari, Saudi and UAE counterparts as well as a series of MOUs covering everything from aviation and cybersecurity to trade and investment. Although the depth of the Gulf States-Guyanese relations should not be overstated, it has momentum and could play a larger role in the development of Guyana’s oil and gas industry as well as the Southern Caribbean Energy Matrix.

 

The Ali government has made it clear that Qatar, Saudi Arabia and the UAE are the nations Guyana will be using as its role models for effective oil and gas management.. The debate over the management of Guyana’s oil and gas wealth is driven by a deep concern over the commodity curse (also referred to as the Dutch disease) in which hydrocarbon production launches a scramble among elites to secure shares of the profits rather than invest in the construction of roads, power plants, factories, agricultural production capacity and education. Other aspects of the commodity curses include economic mismanagement and corruption, most evident in countries like Angola, Nigeria and Venezuela.

 

The attraction of using the Gulf States countries as role models is due to five factors. The first is that the Gulf States faced similar development challenges in making their transition from economically underdeveloped countries into affluent societies. Before oil and gas, the three countries were generally considered of marginal economic importance. Despite challenges, the development of the hydrocarbon industry, especially from the 1970s on, accompanied by prudent policy decisions (such as the creation of sovereign wealth funds or SWFs) resulted in long-term sustainable economic expansion. This, in turn, resulted in substantial improvements in the standard of living for most citizens in the three countries.

 

Today, Qatar, Saudi Arabia and the UAE have some of the highest per capita incomes in the world. Considering that Guyana started as one of the poorer countries in the Americas and is now becoming one of the most dynamically expanding economies in the world, many of the issues earlier faced by the three Gulf States have resonance. Certainly, the experiences of the Gulf State SWFs also factored into the creation of the Caribbean country’s SWF, the Guyana Natural Resource Fund, which reached $1.4 billion at the end of January 2023.

 

The second factor is that the Gulf States are aggressively looking over the horizon at a post-hydrocarbon future, which is driving diversification. In Saudi Arabia, the $600 billion sovereign wealth fund, the Public Investment Fund, has been purchasing sports teams and electric vehicle makers and other assets as it moves to accumulate $2 trillion in assets by 2030, all part of the government’s Vision 2030 plan. Its major objectives are to stimulate inward investment, access new technologies, and develop local industries.

 

The UAE has also launched its own diversification plan to reduce reliance on oil and transform its economy into one based on knowledge and technology. Considering the global push to zero carbon, this is certainly a major issue for Guyana. A major difference, of course, is that Guyana making the transition from an agricultural/mining economy to a petrostate to a post-petrostate economy in a much more compact period, which enhances the value of looking at the Qatari, Saudi and UAE experiences.

 

The third factor is that Guyana, like the Gulf States, must deal with large foreign multinational energy companies as well as larger, more powerful neighboring countries, some of them potentially hostile. Today, Qatar, Saudi Arabia, and the UAE work for regional integration through the Gulf Cooperation Council (which also includes Bahrain, Kuwait and Oman) and have become important international actors with their own spheres of influence within the Middle East, Horn of Africa, and Western Asia. The rising Guyanese petrostate shares many of the same challenges with how to work within regional bodies, in this case the Caribbean Community (CARICOM), the development of the Southern Caribbean Energy Matrix which includes Suriname and Trinidad and Tobago, and the on again-off again hostility of Venezuela which claims a large portion of the country. Guyana also must contend with other geopolitical issues, one of the most significant being the U.S.-China New Cold War.

 

The fourth factor is diversification. The wider the platform of investors, the less dependent Guyana is on any partner or groups of partners. While this may appear to target ExxonMobil (the country’s largest corporate player), such a policy would reduce the risk of potential dominance of corporates from other countries, such as China. Guyana’s much-awaited auction of 14 more offshore exploration blocks is likely to be a positive sign in this department. Major companies including Shell, Petrobras and Chevron have already expressed interest.

 

The fifth factor that helps deepen the Guyanese-Gulf State relationship is a shared Islamic identity. Although Guyana’s Muslim population is smaller than its Christian and Hindu counterparts, the country has used the Islamic card to enter the Islamic Development Bank (joined in 2016) and this has probably helped smooth relations with the three Gulf States, especially considering that President Ali is Muslim.

 

In November 2022, OilNow made the following statement: “If all goes well, Guyana’s move to deepen its Middle Eastern connections will be recorded as one of its most powerful and transformative foreign policy plays.” While this statement was regarded as being over-optimistic and simplistic by some, the trend of a deepening relationship is gaining momentum and the future could see a greater Gulf State advisory and investment role in Guyana.

 

 

 

Scott B. MacDonald is the Chief Economist at Smith’s Research and Gradings, a founding member of the Caribbean Policy Consortium and a research fellow at Global Americans. His most recent book is “The new Cold War, China and the Caribbean”.

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