Guyanas Sudden Riches [Episode 56]


Welcome Tamar Mony Denison. And I'm Peter Scheckter today. Let's talk about a country that only a few people can actually place on the map. Granada is the teeny English. Speaking country in South America that is seemingly on the verge of a massive. I mean massive change. And why are we talking about this? Unusual former British colony which considers itself part of the Caribbean has less than eight hundred thousand people in as borders with Brazil Surinam and Venezuela because Peter in two thousand fifteen Exxon Mobil discovered one of the largest oil and gas reserves in many decades. In what is now known as the lies oilfield in this oilfield is capable of producing over seven hundred million barrels a year. That's a million for each Giannis. So when production begins in earlier mid twenty twenty will become one of the top world producers of Petroleum and certainly one of the top in the Western Hemisphere likely generating an explosion of wealth and economic growth. Never seen before in this very small country in the question and what we're going to discuss today is can handle the wealth coming into way and how it can avoid the oil curse that has haunted other nations in similar situations ammonia while while this incredible find is put on the map as a serious world oil player. It's also one of the least prepared countries to really be able to accept them. And take advantage of this breakthrough. It's it's politically vulnerable with weak institutions. And even though multilateral player like the World Bank Have been in the to help prepare. I'm just not sure they're ready for the waterfall of money. That's GONNA come their way. They've got tons of work to do. And to be able to truly benefit. From this. Bonanza. The country needs to be reformed almost from the ground up. The list is endless. From Developing Environmental Regulations Reorganizing. Its financial system building appropriate infrastructure. Creating laws that can guarantee the honest management of this explosion of investors and cash flows in development coming. Its way so the question is can the country find a way for this boom to benefit the people of this country in a sustainable way and you know other countries have done it before in the developing world. I mean it's not breaking any major barriers. That haven't been done before but the big question is can Yana. I think a lot of it lies on the political climate which is pretty uncertain and Yana could be. As you've mentioned like many other countries before it cursed by its own riches. We talked about the resource curse and to dive deeper in that. We'll be joined in a few minutes by David Goldwyn. Who's the president of Golden Global Strategies? And he's a world renown energy expert whose published extensively about energy governance and also advised countries. And we will talk to David about the outlook for Guliani including his take on the appropriate role for government and for the private sector in these resource rich countries but first a little context to say this is a huge oil. Find is definitely an understatement. Peter and what's right is that some countries have done good stewardship of the rich is. The fact is a record. For COUNTRIES THAT ARE NOT DEVELOPED. Not Prepared is really really poor. Managing money dividing the responsibilities of the framework for administering. Ding resources Dividing up the responsibility between investors and the public sector executing plans for sustainable economic development. Those are all challenges that any developed country in its shoes will face and you know let alone a small poor country with an unsophisticated system. Michael Yon it's especially risky. You mentioned you mentioned politics. And so no. Iana has elections coming up. And they're already a whole ton of hot issues and has made some strides in anti corruption and transparency including publishing oil contract details and money laundering. Men Measures but challenges still huge. The the current government led by David Grainger of the APP New Party defeated the Pretty Corrupt People's Progressive Party which has held power for twenty three years but grainger now faced a no confidence vote last year and was forced to call new elections in March. Twenty twenty which is unbelievably exactly the time that the first oil check should do arrive in the mail and and you know what incredible timing and criticism for his party has been less about corruption but rather on how slow his reactions was on reforming the petroleum laws and building. Adequate regulatory frameworks so while one party was corrupt and maybe made decisions quickly. His party is less corrupt but they don't make decisions so it's it's a it's a tough situation in that country and to add to things and the potential success of John is oil and gas. Powerhouse is the fact that has a long border with Venezuela which is of course the global poster child for doing things wrong and governance of its oil resources especially recently. And there's already a border dispute between the two nations minute oh contested. Some of Janas oilfields and send gunboats to block ExxonMobil's explorations. There's a lot of noise there in the border and security challenges that are you know that Allah Venezuela's neighbors are facing are compounded in Guyana when there's incoming streams of cash that are going to that are expected short the goalies are understandably overjoyed with their soon to be riches but Mooney. This can go both ways. Either government gets its act together takes advice for multilateral organizations who've seen similar scenarios before and continues to work on transparency and on tackling corruption or the country could become the next victim of corruption resentment and instability. Add to help us. Analyze these scenarios were joined by David Goldwyn President of Golden Strategies? Llc and a recognized thought leader Educator and policy innovator in energy security and extractive industries transparency. For years I've said today that he's my energy guru David served as the US State Department's Special Envoy and Coordinator for International Energy where he conceived and developed the shale gas initiative and the energy governance and Capacity Initiative. He previously served as Assistant Secretary of Energy for international affairs and his National Security Deputy to US ambassador of the United Nations Bill. Richardson importantly he advised. Statoil. Norway's National Energy Company now known as Ecuador one of the world's most successful and transparent stewards of Energy David is published everywhere on topics related to energy security and transparency. David welcome to Ultramar to let it to be here. So can you just start David but a teeny country? But it's about to be the newest petro state but I mean it's actually going to. It's more than just a state. If a little petro giant so can you just give us a sense of like the size of the find and just? How big is it really? And what gives a context here so in absolute terms So far Diana's had fourteen discoveries and their reserves are estimated at about six billion barrels so in terms of absolute quantities. That wouldn't crack the top twenty of oil producers. Venezuela has three hundred billion barrels but on a per capita basis. It's enormous because on has eight hundred thousand people. Today they have the per capita income of Tonga but by twenty twenty four. They'll have the per capita income of Brazil. So it's a big deal and frankly they're just at the front end of the The exploration phase the other the other metric took keep an eye on is money. So they're gonNA have one hundred twenty thousand barrels of production. Probably starting in March. They're going to get about three hundred million dollars a year but by two thousand twenty four when production ramps up to about six hundred thousand barrels. A day it's going to be five billion a year. That's a big jump so absolute terms. You know it's a very significant. Probably the biggest find that the industry has had in years. But what's really matters is what it means for Guyana. It seems like it's vulnerable David. A country that the poor former colony with kind of weak government. It can either thrive or collapse under this massive oil hurricane. What does the homework that we have to do? In this short short time to prepare when for when the world checks really start pouring in Muni hit on really the you know the the key risk there and I would say guy on a really is a country At risk on the positive side. They have done a lot of their homework. in fact Peter mentioned earlier and Energy Governance Program. I started the State Department. Nine years ago Guyana was one of the first countries we identified so they've had eight years of advice on revenue management and resource management from the State Department enormous. Help from the World Bank fee International Monetary Fund the Inter American Development. Bank N. G. R. I The you know the Natural Resource Institute so they've gotten a lot of advice thought about having a sovereign wealth fund. They thought about a public accountability board. They've thought about an petroleum law but they have lymph implemented it yet and that's really the challenge they've they they have established the sovereign wealth fund but not staffed at one house has passed the petroleum bill but it hasn't become law. They have a public accountability board. But they haven't staffed and I'm sympathetic because it's a small country. It's a very thin bench in the government and so there aren't a lot of people but the problem. Is You know the money will come. Probably not enormous amounts in March. But it's starting to come fast and they haven't implemented yet and And that's the real risk. There are elections coming up which the government had to reluctantly call exactly or just about the time in twenty twenty when the oil money is going to be pouring in. How do you protect government like this from corruption? And then what is your assessment of the current government would seems to have implemented transparency programs and is pretty high marks for Not being corrupt but also very low marks for being very not ineffective. Yes you've you've you've really hit that hit the nail on the head. I let me start with the with the government mean present. Grainger himself is David. Grainger is Is a person of very high integrity and known to be honest? Guyana ranks thirty seven on a scale of one hundred for corruption under Transparency International's rankings. So the you know the and honest government that has been slow to make decisions and it's also been an inclusive government Guyana has sort of an Afro Guyanese and Indo Guyanese population. The Indo Guyanese ran the government for many many years there accusations of corruption but they also weren't very inclusive this government has been very inclusive But but also slow to make decisions so the way you prevent corruption you know in in these kinds of countries is through institutions Mexico's reform Recently as an example of how you do it you have disclosure of contracts disclosure of revenues. You publish where. The money goes You have You decide in advance. What's GonNa go into a savings fund and what's going to go into the budget you do? Things like Joined the extractive Industries Transparency Initiative which has done and you have public accountability. So that's those those are the. That's the skeleton of what you do. But then you have to populate all of those institutions with people and you have to have a free press that will hold them to account and you have to have informed and empowered citizens so again with with Diana. They you know they've they've got the framework on paper of a system that would provide accountability. But they haven't implemented it yet. I don't want to be a pessimist but I mean you. You've spoken about the thin bench that they have. I mean how does a country with so many few people with a suffered a brain drain over time the Diaspora is really a lot of the educated. Greenies have left. How does a country then run such a complicated system? Well you do it in phases. I think I you have to get the money. You have to pay public officials well so that people want to work for the government. You have to welcome back. You're you're ex-pats an appeal to their patriotism to participate in the government You have to have education and training programs As early as you can to teach people how to be effective bureaucrats but I think the lesson of Pot Swan and it's early days and other countries that you're probably going to outsource you're probably GONNA go to Third Party organizations to come in and help you run accounting to help you run finance. You're going to get external advisors and that can provide some frictions because the farmers getting paid more than than the locals and that's never very popular but generally what you have to do. Is You have to procure that expertise while you build your own and if you don't then the risk is that You make bad decisions and that money early. I know you've thought a lot about the the next question. I'm GonNa ask you because we've talked so far about the role of the government and the question now is what's the role of the foreign investor and in the case of Yana. Exxon really has been the main company that has done a lot of the oil exploration and his team found. These Has FOUND NEW DEPOSITS. So I guess. What's the role of a Mega Company? Like Exxon in really trying to help the country be more responsible with its oil revenues. Well there's been a lot of thought. A lot of study about the role of foreign investors should be in countries. And it's very tempting for governments to go to them. You know to build infrastructure and to do things because they're organized they do project management. They've got skills. But my own view is that's a mistake that the number one thing that companies need to do is to produce what they're supposed to do they're supposed to strike a fair bargain with the country so that when prices are low. They don't leave when prices are high. The company the country rather benefits as well as the as the company I think companies really need to for the most part. Stay in their lane. You can. There's this concept of shared value. You can share value for example if you're going to build an airport because you have to bring your own material and it should be available to everyone if you're going to build telecommunications and Electricity Ben you can expand that you should expand that to the neighborhood but when they make their social investments and I think Exxon is actually doing this in in Guyana. Do things like build a vocational school. Which will train people who you will hire but who can also get jobs elsewhere But when countries start to learn lean on these companies to do other things like in Iraq to build the water system. It's a risk if the company doesn't you haven't had an auction or a bid. Did you get a fair price is being it's being are? How do you pay for it? You pay for the call cost. Oil Company is paying itself. Then when you actually get to doing that. The countries like where's the money? Oh were paying for the electricity system you had US fill the so. It's risky for the country. It's risky for the company. And this is a place where I think. It's the responsibility of supporting governments and international financial institutions to help the country. Figure out how to get its infrastructure and let the company do what it was brought in for which is to make the money. Let me ask you a multisided question. Which is a little bit like tell us which countries have really done this well which countries have taken immense oil resources and both use them for social good you know kept in a the famous Rainy Day Fund for the Future. I mean which countries have done. Well I know that Norway the you know a company that country in a company that you advise is the gold standard but so you can tell us why. It's the gold standard but I'm also interested in what developing nations have. Well sure we'll let. Let's broaden that out a little bit excuse me. Let's broaden that out a little bit For countries that have produced resources. So you could look at cheaper with. Copper Canada with oil Botswana with diamonds and other minerals and those are all countries which have done well with their resources but some of those like Norway and some essentially were someone industrialized countries to begin with so they had an educated workforce. They were used to running. An industry. Botswana was different Botswana. Didn't have that experience and they had a tribal culture which respected property rights which was very inclusive and they had enlightened leadership ahead of the country the time that they discovered all this wealth All of the wealth was in his province and he established a system which shared it with the whole country. And I think the enlightened governance is probably the single factor that makes the biggest difference the two other big baskets are macroeconomic management and political management so on academic management the resource curses essentially the overvaluation of the exchange rate and basically atrophy of all the other industries which employ people including agriculture. So actually the study by the that said for every ten percent increase in oil. Share country suffered seven percent decrease in growth decreasing growth despite that. It's on blue and so the lessons there are. Don't spend all the money. So a fiscal rule says a certain amount of money will go into the budget and the rest will go into a fund that fund could be for future generations. It could be for pensions. It could be for infrastructure it could be just for a future generation but that's that's job. One Accountability is job to anti corruption. Is Job three and if you do that in. Guyana is actually doing this. They're going to three hundred million. They're going to get in their first year. One hundred million is going into the budget. Two hundred million is going to go into this into this fund So that can keep you from destroying all the other employment Generating Industries but the other part is the political part. That's harder because there's this concept of the rent here state which is that. The government owns the resource. A foreign party pays the government. So you the taxpayer anymore. You're even have taxpayers and the temptation is to give everyone everything for free and so the government doesn't need the citizens anymore it's another source of income and so that's where you get this tilt to autocracy or sometimes to finding wars with your your neighbors and where you get the corruption because the government is where all the money is everybody what he wants to be in the government and get their share beating that hard. It's Norway has done that. Essentially by by by making the money doesn't stay in the government or at least it's putting it in the in the fund but but that really takes leaders who are committed to growing the country And that's a little bit rare and I think that's that's GonNa make the biggest difference for Guyana. There's been there's been some experimentation at the World Bank's with some NGOs but the Green Africa on basically countries that have these sudden resources simply handing over certain amounts of cash to every citizen in the country in the citizen decide. How best to spend that money? Is that something that you feel is is a workable solution. In general for these suddenly rich countries I think a direct transfer is part of the solution of course in our own country we have Alaska which has an Alaskan citizens have gotten a direct payment for years. I think in a in a developing country. Some of the money needs to go four development. You have to build an education system. You have to build it electricity system transportation if you don't invest in the bones of an economy you can't diversify but if you give some of that money to citizens than you deal with the accountability piece the IMF did a study on this in Iraq. Which is where they thought it would be a great way to do it. But part of the problem was they'd actually didn't have a system to either make those payments or to collect the taxes back so I think it's probably a little bit of each. You mentioned the neighborhood. Borders Brazil's any numb and finish waylon and this last country has basically created a border dispute about the oil. How do you think we can handle being in a busy oil neighborhood and still managed to thrive well? Today it has a lot of friends So I think by my sort of respecting international arbitration in inertial resolution of that dispute. They have the rule of law and their sides with US investors and now probably seven or eight other sisters from other countries They have a lot of supporters and the fact that Venezuela essentially is not really competent to you know to conduct a you know our naval a naval battle with its neighbor But they have created some friction. So I think there's a lot of forces arrayed to support Guyana and a lot. Better have their eyes on Venezuela right now so I think they're going to be fine but it is you know it is a source of friction I think the you know the the temptation you know time is going on and becomes wealthy When you start to see migration issues or other issues put pressure on the country. Many people have said that this new finding and this new very thriving on is going to change the face of the oil the world of oil in the Western Hemisphere. What does the structure of the worldwide oil market? Look like to you in a few years in my view Guyana find is not a market moving event. We have you know. I think the honor with the global consumption is today. It's sort of somewhere around ninety million barrels a day so it's an enormous market and even if it produces six hundred thousand barrels a day which puts the category of sort of Ecuador or something. It's probably replacing declines in other areas or countries that we have under sanctions. So it's a very important step in the diversification of the oil market to have a new producer But it's not not a market moving event. Just John I maybe a regional moving event it is. I mean it's enormous for Guyana. Because they really do have the opportunity. Five billion a year in a country of of eight hundred thousand to completely transform the country and to and they have a national development plan. It's it's a they. Call it the Green State Development Plan. So they're looking at sustainable forestry and agriculture and eco-tourism and building so it could be tremendous. It's huge for them and it will be important for for the neighborhood. I I also. I was speaking to a Brazilian friend the other day. Who told me that? Raimo than most northern state of Brazil is off the grid in Brazil. It's not connected to the national witted polls in from Berlin which is about a thousand five hundred kilometers away but Georgetown is only six hundred kilometers away and so they're the Brazilians are super interested in what's happening in Indiana. Because they think they can pull in `electricity and and perhaps even a pipeline. And you know that's a possibility and the you know the the steps that have to be taken for that to happen. Guyana needs to have a power purchase agreement. They need to have a plant. They need to have bill transmission. They need to go through an awful lot of territory in order to You know to put that transmission and and those are the things where you're going to need enlightened leadership because who owns that land. Do they want that transmission line? Do they want that? Pipeline deserve credit worthy customer on the other side of it and those are all things which governments have to work out with their own citizens with their neighbors. And that's where you look at all the things that Guyana has to do over the next few years and it's a big lift and they WANNA do it. I think absolutely they have the talent to do it not yet. Do they have the will to do it? Let's see what happens in the next election. Let me just pull right from there and before you leave ask you. What's your vision for five ten years down the road? I mean what do you? What would you hope to see happen? Let's see let's put. Let's put some numbers on the timeframe so in five years they're going to start to get those five billion dollar a year checks in ten years they will have had twenty five billion so my hope for Guyana is that point. They've got national electricity grid. They have roads. They have schools and universities to train people on Annoyed Petroleum Management but forestry management That they have had five to eight years of world class support and advice that they have Citizens you know ex-pats who've come back home to take leadership roles into and to join things and they they have become the model of South America. But what I think will happen. I think the next five years will be bumpy. The money will not have arrived. The ramp up will be slow And there'll be another political cycle so whoever is in power now will not necessarily. Who's going to be in power? When the five billion dollar a year check arrives And then we'll we'll see you know we've talked a lot about about Norway but Norway has a model of you know six or seven different institutions one for safety one for management one for policy. They've got a lot of people. Kiana is GonNa need a is going to have. I think essentially a small tight team of people making decisions in a timely way. They're not there yet if they can do that. I think there'll be a big success if not in five years or ten years and I hope this is not the case. We'll be talking about how hard it is for countries with resource wealth to turn that into into real prosperity. David Goodwin thank you for sitting down with US. Today on Ultramar pleasure. Thanks for having me listening to David. I'm encouraged in the beginning. I was thinking John was like destined for failure and corruption and just political upheaval but really. They've been preparing longer than I expected. Nine years of preparation of building the regulatory framework. It looks like they're not as you know in a state of improvisation as I had previously thought when he I'm glad that you were the optimist for once yacht. I'm always an optimist. I'm with definitely not an optimist on this issue. I mean they've been as for exactly the same reasons. David said that they've been at this for ten years. They don't have you know they've got some basic outlines of what a law might look like whoever is going to run the regulatory agencies. Not only doesn't that staff. They don't have offices. I mean the thing looks like it's so behind schedule and I you know. I think he elegantly said that is going to be a bumpy ride. And I think it's it will be many many years before Yana gets. Its Act in shape. You know my my worry is much more about Venezuela and its effects on Guadiana. I mean I you know it's been happening. For centuries and centuries when countries are in dire problems that go seek a foreign intervention in a foreign war to galvanize the population and this is almost too good to be true. Well the finding is too good to be true and it certainly tricky but I do believe that. The fact that the Venezuela issue elevates into the international kind of Serena makes people pay attention and makes institutions pay attention and help them build the groundwork the truth is and this is where I do agree with you until the cash comes flowing. Nobody's dog going to really know how preparing Leon earliest wrote. And I also suppose that you know who doesn't have the guts to go after a country where Exxon America's largest company has put in so much money so with that. Thank you for joining us today. We'll see you next time.

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