Left behind: Emerging oil and gas producers in a warming world

Published in Climate Policy journal and available to read for free thanks to Open Access.

Summary

The push for decarbonization is dampening resource prospects in nations with undeveloped oil and gas. It is critical to reduce greenhouse gas (GHG) emissions from the petroleum sector, but there are equity issues related to requiring a shift away from oil and gas before development gains are made, especially in countries that have contributed very little to historical emissions. We review the prospects for five emerging producers to produce oil and gas at the lowest emissions intensity while achieving their economic and environmental goals. We find they lack the required capacity for stringent emissions management and to manage transition risks. The low-carbon pathway presents its own challenges with plans that lack national specificity and offer no substitute to the fiscal potential of the petroleum sector, and a lack of supportive technical assistance and finance. A just transition (JT) approach in these countries will not be about reskilling as they move away from a petroleum dependent economy, but instead about engaging with citizens to break the mould of petroleum-led development expectations and defining the new pathway for development. These countries will require support for transition planning that ensures that any oil and gas production minimizes GHG emissions, and limits the risk of economic lock-in, to invest in broad-based benefits and in a credible shift to a low-carbon economy. Inadequate international support risks leaving some countries behind, or to essential changes being contested in the transition.

Key insights

  • Emerging producers are not yet dependent on the petroleum sector, and are broadly energy poor, climate vulnerable, lower income countries.
  • These countries hold high aspirations for the petroleum sector to address their development needs.
  • The growing consensus that there should be no new oil and gas projects creates perceptions by emerging producers of injustice around the transition and could result in change being contested or some countries being ‘left behind’.
  • A just transition approach for these countries will minimize the oil and gas resource curse and its economic lock in, to ensure the sector is developed with broad societal benefits that do not increase national emissions.

National seminar for Guyana “Managing Resources Post-Discovery”

Significant oil fields have recently been discovered in Guyana. Their development would likely result in government revenues that are large compared with public spending, other domestic revenues and the economy. Large petroleum revenues, if wisely managed, can contribute to sustainable economic development. However, if poorly managed,they can retard economic development and create a ‘resource curse’. More specifically, they can lead to a loss of economic competitiveness, volatile and inefficient public spending,and unsustainable consumption. This is the summary of a workshop, held in Georgetown on 21–22 June 2017, that examined how petroleum development might influence Guyana’s development trajectory as well as the various mechanisms of saving petroleum revenues and rules for spending them. The seminar was hosted by the Ministry of Finance and the Ministry of Natural Resources.

A summary of the workshop is available at the link below.

National seminar for Guyana, Good Governance: Preparing for First Oil

The Good Governance: Preparing for First Oil in Guyana seminar was held in Georgetown on the 17 and 18 November 2016. A high-level discussion on 17 November featured ministers, members of parliament, high-ranking civil servants, and civil society leaders. Following the significant oil discovery made offshore in Guyana, this seminar was designed to help policymakers prepare for first oil production; to review policy options (and the trade-offs involved in pursuing the various options); and to discuss what changes in laws and institutions would be required to best prepare for oil production. On 18 November, members of the legal and accountancy professions were invited to participate in a more focused training session on finance and the legal framework for the petroleum sector. Discussions on both days were enriched by participants from other emerging and established producer countries as well as oil industry representatives.

A summary of the National Seminar is available to download at the link below.

Large Oil Discovery Generates Hope, Challenges in Guyana

The Liza oil field discovered off Guyana’s coast in 2015 might be the world’s biggest oil discovery in the last two years. The discovery may ultimately produce 1.4 billion oil-equivalent barrels of crude. This could have a massive economic impact on a country currently ranking among the poorest in the Latin America and Caribbean region.

A link to the original article is available below.

Gushing Money, Staying Green

Guyana has long existed outside the world’s gaze. The South American country has seen its historic industries of sugar and bauxite suffer a slow and gradual decline, leading many Guyanese to go abroad in search of better opportunities. But the slumbering capital Georgetown, with its old wooden houses built on stilts and interlaced with canals designed to control sea water levels, is suddenly bustling.

Hotels are full, with businessmen and consultants rushing in to be a part of its good fortune, which began in 2015 when ExxonMobil and its partners first discovered oil offshore. Since then 12 further oil discoveries have been made, making Guyana an oil hotspot.

Guyana is expected to produce 750,000 barrels a day by 2025, on a par with Brazil, its huge neighbour to the south. But the transformation is better grasped in per capita terms – Guyana will produce almost one barrel of oil per person per day. That is three times more oil per capita than Saudi Arabia or the United Arab Emirates – though per capita revenues to the state are closer once the oil company’s costs and profits are deducted. The transformative nature of these discoveries for Guyana cannot be overstated.

Let us first take a step back and focus on the moment of the discovery for a new oil producer. This period is very intense, even in countries without such an exceptionally large windfall. Guyana can draw on the experience of other countries involved in the New Producers Group, a knowledge-sharing network for emerging oil and gas producers.

In these states, the oil sector is new and there are often only a handful of people in government with experience in the petroleum business. The pressure on these five or so individuals becomes overwhelming.

They – and soon the government more broadly – come under immense pressure from a number of sources: private sector consultants flock to government offices, lining up for opportunities; local job seekers get in touch hoping to find work in the oil sector; international donor agencies compete to be advisers and have their policy framework adopted; the public is also clamouring, asking how the discovery will transform their lives; and, of course, political opponents wait at each corner to challenge the soundness of any decision made.

There is also time pressure and the runup to first production – which might take anything from two to ten years –is the period during which the small team must draft and execute appropriate policies, laws and regulations to oversee the oil sector. This overwhelming pressure does not create the space for debates about big policy decisions. But this is just the time that a country wants to think about the direction in which it is heading, what kind of producer it wants to be, what it wants to do with its oil and gas and how it will spend the revenues.

Guyana was fortunate that President David Granger’s government came to power with a vision to guide the country’s development. It had set the course on green growth. Even after oil was discovered, it continued to develop its Green State Development Strategy. The goal is to ‘transition to a diversified green and inclusive economy, become a leading example of a Green State and serve as an inspiration to other countries in the region and worldwide’, according to the Guyana Department of Environment.

The strategy guides Guyana along a low-carbon pathway, with investments in ecotourism, renewable energy, emission caps and forest conservation, coupled with a concern for providing the Guyanese with a ‘better life’. But the big question is whether this vision sits well with the country becoming a leading oil exporter. No other country with oil reserves as large has pursued such an ecological vision.

So far the plan has held strong, most notably with the government’s decision not to bring the oil to shore for refining or other sorts of processing, and to use the export revenues to support renewables development and the diversification of the economy, as well as saving for the future through a sovereign wealth fund.

Investing revenues strategically is not as easy as it seems. The revenues are huge in relation to the national economy. Setting Guyana’s oil in context, its one-barrel-per- person-per-day target is many times greater than other emerging producers, such as Ghana, where the resource flows are only three barrels per person per year. The economy’s capacity to absorb revenues of this scale will be limited. The government can raise prosperity levels by investing in infrastructure, education and health but will need to contend with inflation. Expenditure will also need to grow incrementally, in line with the state’s administrative capacity to manage the spending.

There will inevitably be temptations to pursue a different course. Domestic pressure will mount to bring the oil ashore and to refine it in Guyana, making sure the country takes control of the industrial process and escapes the legacy of colonialism – British rule did little to develop the country. There will be calls for cheap oil and gas feedstocks to support Guyana’s industry and for subsidized fuel and power for consumers. In other words, there will be political pressure to benefit from the oil itself, not just the oil revenues.

But Guyana has the benefit of hindsight. It can see the experience of Gulf Arab producers, who created oil-intensive industries and introduced subsidies on petrol, power and water that created unsustainable patterns of domestic consumption. Subsidies and dependency on oil are very difficult to reverse, and they lock the country into a high-carbon economic model.

Guyana is starting its journey as an oil producer with information established producers did not have. The world’s energy usage is changing and oil is not forever. It is not yet known when oil demand will peak, but the industry agrees that it will peak. This means that Guyana must reap the benefits while it can, limit its dependence on oil, invest in diversification, create long-term wealth and save for the future.

Guyana is a unique test case of a new, major oil producer country guided by an environmental vision. It is in this sense emblematic of our changing world. As a developing nation, it wants to use its natural resources to invest in its future prosperity, but also avoid the mistakes of carbon lock-in made by others. This vision has great potential, if Guyana can stay the course.

Headwinds are already being felt. There will be elections by the end of the year which were triggered by a no-confidence motion. The opposition party, the People’s Progressive Party, has not yet taken a position on the high-level vision for Guyana, only calling for a critical review of oil contracts and institutions overseeing the sector, as well as a bigger push for local opportunities for Guyanese people and businesses to participate in the oil sector. The run-up to the elections will surely be the time to debate what kind of producer Guyana should become.

Contemplating Oil Prospects, Suriname and Guyana Look to Peers

The article reports on the New Producers Group annual meeting that was held in Suriname in 2017. At the meeting, government officials from Suriname and Guyana were keen to learn from the experiences of their peers in the other new oil hotspots. Suriname and Guyana find themselves at different points in their life cycles as prospective oil producers. Guyana has already made large discoveries, while Suriname is at a more speculative stage of offshore exploration. Institutionally, Suriname has developed a small but capable administrative and commercial body—Staatsolie—as a result of its years of small-scale production, while Guyana is just beginning to build its administrative architecture in response to the discovery. But the two countries face a similar set of issues. Both have small populations and small economies. Suriname’s GDP is USD 3.6 billion, placing it 158th in the world. Guyana, which has a population just shy of 800,000, has a GDP of $3.4 billion, placing it 159th. This means that significant oil production could have a massive impact on these economies. If managed correctly, successful oil projects could mean a major boost to the development agenda of either country. But the potential for negative distortions—including budget volatility and the disruption of other sectors—is high if risks are not managed effectively.

A link to the original article is available below.