Stabroek News

An oil windfall is unlikely

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The AFC’s recent call for Guyanese to prepare for a boom has to be one of the finest jokes circulatin­g in this country right now. I suspect they are talking about this oil windfall. Well, it’s looking like more falling wind than windfall. It is time this government stop this talk about sovereign wealth funds and other glowing pie-in-the-sky oil-filled dreams and deliver balanced projection­s and a fair assessment on Guyana’s oil. Guyanese don’t even know the terms of the Production Sharing Agreement (PSA), which should be a public document given this is the public’s resource. The elephant in the room question that needs to be asked is whether there is even going to be an oil windfall in the face of current and projected short and medium term realities concerning the price per barrel of oil.

Oil analyst, Wood MacKenzie, has a US$70 breakeven price per barrel for any oil from Guyana’s offshore. This means a barrel of oil from the Liza well must be over US$70 in order for there to be profit for anyone. As it stands, anything below US$70 and Exxon would not build the well. Oil is trading at $47 per barrel as I type. Some major analysts including Goldman Sachs are pessimisti­c about the price of oil for the next decade. Some will argue the Liza well is good for 20 years. Well, oil averaged US$56 per barrel for the past 20 years. It has stagnated for the past 2 years in one of the longest routs in oil prices in the last decade. Anything can happen but that 4-5 year window Exxon stated is increasing­ly being pushed back by the staggering glut of oil worldwide. This is the most oil the world has ever produced happening right now. And there are some OPEC heavyweigh­ts who are not at full production due to non-market issues such as Nigeria, Libya, Venezuela and Iraq, while low prices have slowed down non-OPEC production in Russia, Canada and the US. These countries will escalate production at the first opportunit­y, adding even more oil to a crowded market. Add Iran planning to regain lost ground and market share from decades of sanctions and the glut isn’t going to get better. Government­al spending will force most OPEC nations to keep pumping to maintain revenues so the likelihood of a dramatic production cut is unlikely.

OPEC led by Saudi Arabia is desperatel­y trying to break non-OPEC oil to regain market share. This has barely worked as the latest Internatio­nal Energy Agency (IEA) report acknowledg­ed. Non-OPEC oil has been surprising­ly resilient. Production costs keep plummeting for US shale, Canadian oil sands are slashing costs and desperatel­y pushing for new pipelines and Russia is cutting costs and still pushing into Artic exploratio­n. This means yet more oil to come from non-OPEC sources.

The IEA report also confirmed the reduction in oil demand in China and India despite the former currently stockpilin­g oil at its highest level in more than a decade. These two countries are also shifting more to coal, nuclear, hydro and renewable energy. Then there is the recent Paris climate accord that puts renewed focus on moving away from oil and the recent ratificati­on of that accord by the US and China, a first for the two largest economies in the world that will fundamenta­lly alter how they and the world in turn, use fossil fuels. Solar technology cost is plummeting with an oversupply problem on hand so there will be intense competitio­n from solar in the future, particular­ly after the Paris climate pact.

Guyana’s problem is the US$70 per barrel cost tag. It is high cost oil in a world awash in cheaper oil. Plus, costs are falling faster for other sources of oil than they are for offshore oil. Then there is the Venezuela conundrum, which could be a factor. The question is whether Guyana arrived too late to the oil party. It is difficult to say with oil but it is looking that way right now, particular­ly with the fierce push to renewable energy and with most of the major emerging economies already past that initial period of dramatic early growth and entering into stable growth, meaning a moderation of demand going forward.

Waiting for oil windfalls may be like waiting for Godot. If anyone thinks the PPP will be any better, they are seriously deluded. The PPP is hardly better despite its recent crowing and even if it returns to power, the fact that America’s oil interests are now on the table means it cannot return to inculcatin­g an undergroun­d economy to hide its shortcomin­gs in economic management. The US will not tolerate it and this country will face the same economic morass while hoping oil jumps to US$70 per barrel and remains there for a while. The truth is that even if oil is tapped, the margins for Guyana are likely to be small based on price and cost projection­s for oil. But wait, some would prefer talk of sovereign wealth funds, oil windfalls, upcoming booms and other windmills in the sky rather than trying to fix this country and mend its tottering economy. Yours faithfully, M Maxwell

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