Guyana prepares for influx of investment offshore

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Guyana prepares for influx of investment offshore

If managed well, the growth of a competitive hydrocarbons sector could generate unprecedented levels of development across the Guyanaian economy.

The parade of hotels along the seafront in Guyana’s capital, Georgetown is doing a brisk trade these days.  Previously sleepy cafes and dining rooms are now the setting for frenetic deal making as decision-makers from Europe and North America mix with Guyanese attorneys, entrepreneurs and officials from the Ministry of Natural Resources.

Guyana’s prominence in the international hydrocarbons market has risen considerably in the past year. ExxonMobil’s announcement in May 2015 that it had discovered an estimated 700 hundred million barrels of oil offshore Guyana launched a tide of interest from oil majors, wildcatters and service companies, all of whom descended on Georgetown.

ExxonMobil’s discovery in the offshore Stabroek block has been followed by a raft of new agreements signed by the Guyanese government and interested companies. Repsol, active in Guyana since 2012, has renewed its interest in the offshore Kanuku block and has applied for a new exploration license for an ultra-deepwater block. In early 2016 UK-based Tullow Oil was granted a 60 percent operating interest in Orinduik, an offshore block adjacent to Stabroek. Canadian oil and gas company CGX Energy holds three exploration licenses and other oil and gas firms have signed new farm-in agreements with oil majors offshore.

Interest from outside Guyana has so far been met with enthusiasm from within the country. Publicly and privately, Guyanese President David Granger and Minister of Natural Resources Raphael Trotman are of the same mind in affirming the country’s commitment to the growth of its nascent hydrocarbons sector.  Both have pledged support for new legislation and better governance for an extractive sector that was previously limited to mining for gold, diamonds and bauxite in the Guyanese Amazon. Similarly, officials in the extractive sector’s oversight body - the Guyana Geology and Mines Commision - are in the process of finalizing new production-sharing and royalty arrangements while the country’s recently-passed 2016 budget includes allocations for new oil and gas equipment

Developmental Challenges

Every silver lining has a cloud though, and like other frontier markets, Guyana faces a set of challenges that could derail the country’s ability to convert its burgeoning hydrocarbons sector into meaningful development. One of the more immediate is a lack of physical infrastructure. Before 2014 Guyana had no proven, commercially viable hydrocarbons reserves.  It’s no surprise then that the country’s only commercial port -- the Port of Georgetown -- is ill-equipped to handle anything more substantial than a small cruise ship.

Everyone agrees that a bigger and better port is needed.  The question is where to develop it. Some insist that Georgetown is the most apt. Others say that Berbice, a comparatively undeveloped region in Eastern Guyana, is more suitable for development (it has less  sedimentation and a new port could be purpose built for oil and gas tankers).  Onlookers  are hoping that the Guyanese will make a decision one way or the other soon.

Compounding the lack of physical infrastructure is a chronic shortage of human capital. Guyana’s state-controlled education system is one of the weakest in the Caribbean and lacks an established petroleum engineering curriculum. While the country does graduate a meaningful number of engineers, local employment prospects are such that Guyana has long suffered from brain drain.

Here too, the country’s leadership is trying to make amends, and has spoken publicly in support of an initiative to create opportunities for Guyanese engineers and technocrats.  But it takes time and money to build a skilled domestic workforce, and although officials in the country’s Ministry of Natural Resources and the Environment anticipate that offshore production could begin as soon as 2018, they warn that laying the educational foundations for meaningful domestic employment in the oil and gas sector could take closer to a decade.

In the shorter term, foreign investors face more prosaic challenges further down the food chain: how many freight forwarders have the capabilities to handle complex cargoes? How do the local customs clearance brokers run their businesses? Which visa agent can you trust to uphold North American or European standards of conduct?  The historically small market for these services in Guyana and, at least until now, the absence of demanding foreign investors means that not every Guyanese provider active has a firm grasp of what anti-corruption compliance really means.  No doubt they soon will, but for the moment, some foreign investors are struggling to make informed choices about the best local counterparties to hire.

Political risk

Infrastructure, human capital and counterparty challenges are not the only threats looming on the horizon. The discovery of oil rekindled an ages old border dispute with neighboring Venezuela. Shortly after ExxonMobil made its discovery, the impoverished Venezuelan government revived a 100-year-old claim to significant portions of territory west of the Essequibo river in Western Guyana.

If Venezuela’s claims were to be taken seriously, Guyana might stand to lose around 40 percent of its territory and the entirety of its recently proven oil and gas reserves. Fortunately, few believe the claims have much merit, and ever fewer are prepared to stand publicly in support of a Venezuelan land grab. The likelihood that Venezuela would take military action to protect its claims is also limited. But any more skirmishes like the one in 2013 which led to the seizure of an Anadarko vessel may give investors pause for thought.

Moving forward

There is no doubt that the new discoveries will have a significant impact on the Guyanese economic landscape in the foreseeable future. If managed well, the growth of a competitive hydrocarbons sector could generate unprecedented levels of development across a country that badly needs it.  The country’s leadership deserves credit for genuinely trying to address concerns and for the investor confidence it has built in the process. But to maximize Guyana’s potential, decision makers will have to work fast to develop local talent and invest in infrastructure.  Behind the scenes, they should also harness diplomatic support to protects their lucrative interests from prying Venezuelan eyes.

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This article was first published on the Oil & Gas News

Author: Eric Wheeler, Associate, Business Intelligence
Published: 24th May 2016
Categories: Company News