Guyana’s Infant Oil & Gas Sector

Policy Choices for the Next Decade – Swing Producer!

Introduction

Today’s column continues to examine the three key policy choices I identified as likely to face Guyana’s Authorities over the next decade. I justified why I believe it is not premature to be considering these issues now, prior to my assessment of the near-term setbacks to Guyana’s petroleum sector, occasioned by the 2020 general crisis. Arising from this task, I focus today on: 1) completing last week’s discussion of the first policy option; that is, whether Guyana should seek membership or not of the Organisation of Petroleum Exporting Countries (OPEC); and 2) ascertaining whether Guyana should aim at becoming a “swing producer” in the global crude oil market, as some international reporting is already suggesting.

OPEC Membership?

Thus far, I have identified three considerations that push back against Guyana’s membership in OPEC. These are: 1) the United States’ hostility to OPEC, as enshrined in the No Oil Producing and Exporting Cartels Act (NOPEC) in Congress; 2) the consideration that a US oil supermajor (ExxonMobil’s subsidiary) is presently the lead Operator producing Guyana’s crude; and, 3) the underdeveloped state of Guyana’s governance capability in its oil and gas sector.

To these I add a fourth consideration today. This has arisen from an address on the topic: should Guyana join OPEC? At a Lecture/Seminar on “Crude Oil Pricing” held at the University of Guyana (16 January 2020), Robert McNally, Founder of the Washington-based Rapidan Consulting Group (Energy), was the lead presenter. In that lecture, he strongly advised against Guyana’s membership in OPEC. His objection was based on the consideration that membership of OPEC, as indeed would be the case for membership of any supply cartel, carries with it the obligation to adjust supply (that is abide by quotas) as set by the cartel’s management, when it feels it has to defend the market price, share and/or clout of the cartel in the global marketplace. His advice is that Guyana’s development needs are too great for it to be considering supply quotas at any stage.

To my mind this holds true for the period up to, and until Guyana has achieved full ramp-up. Since full ramp-up is projected for the 2030s, this policy choice should not be final at this point in time. Having said this, I hasten to add that I am acutely aware that membership of OPEC, at whatever stage (before or after full rampup), involves outsourcing significant control of Guyana’s crude supply to the Cartel, in exchange for some price benefit. This warrants therefore, a serious cost-benefit appraisal prior to decision.

Other Signals

Two other signals in the international media need to be borne in mind. First, the international press is signaling that Guyana’s crude exports could be a significant disruptor of OPEC’s plans! This expectation should be taken on board now by the Authorities, Thus the Middle Eastern National Business has repeatedly drawn attention to the significant growth potential of non-OPEC+ oil production and its potential impact on OPEC’s efforts at supply management. In this regard, Guyana’s potential output since its First oil last December is routinely cited as an output to be kept under constant review.

Second, international reporting notes that Guyana is building non-petroleum based economic relations with OPEC. In this regard, the Government of Guyana (GoG) has recently signed a Framework Agreement with the OPEC Fund for International Development (OFID). The Agreement offers financing for loans to support micro, small and medium-enterprises and other projects in Guyana. Such relations are expected to build goodwill and thereby facilitate the favourable reception of Guyana as it seeks to negotiate its national relations with OPEC.

Second Policy Choice

With the above wrap-up of my consideration of Guyana’s membership of OPEC as the first of three key policy choices that will have to be made by the next decade, I turn to consider the second. That is whether Guyana should aspire to be a “swing producer” in the global marketplace for crude oil. This, like the first policy choice, has already attracted mention in international media reports on oil and energy, and, no doubt stems from expectations that during the 2030s Guyana could be producing at a 1 million plus barrels of oil equivalent per day (boe/d).

Swing Producer

Based on international reporting, several local readers have sought my views on what is meant by Guyana operating as a “swing producer” in the crude oil market. The term “swing producer” is derived from business economics. And, a good simple definition is provided by Wikipedia. That is: “a supplier (individual or close oligopolistic group of suppliers) of any commodity controlling its global deposits and possessing large spare production capacity”. Examples are given: Saudi Arabia, oil; Russia, potash fertilizer; and de Beers, diamonds.

As indicated, a swing producer can pursue two generic strategies. One of these is termed “normal”. This means it focuses on using its swing producer’s market power to stabilize the global market through, modifying price swings and fluctuations. The other type is termed “punitive”. That is, the swing producer uses its market power “to grab and extend its market share”.

In practice the term swing producer has been rather loosely applied to petroleum markets. Thus the literature shows mention of such producers as varied as the “United States shale producers; OPEC as a group; Russia; Venezuela; and Iraq, Iran, Saudi Arabia, separately. More recently countries such as Brazil and Guyana have been added. Clearly all these producers are indeed large players for the types of crude in wide global demand. Their supply functions are elastic and low cost, allowing for “low cost” shifts in production and distribution of supplies on a world scale. Such features in their supply functions favour their ability to perform as either a normal or punitive swing producer.

Recommendation

Although well respected oil and energy analysts have projected Guyana’s offshore deepwater deposits, as a likely “swing producer”, Guyana’s oil and gas sector is too much in its infancy for any serious evaluation of this profile. I believe however, this is a testament of the extent to which Guyana’s petroleum’s world class potential has grasped international attention.

Conclusion

Next week I’ll deal with the third key policy choice for the next decade. That is — should Guyana establish a National Oil Company?