Chief Analyst at Wood MacKenzie, Simon Flowers, describes Venezuela’s economic peril as a “slow-moving car crash” and believes that it holds an incentive for Guyana to get it right when it comes to its own oil sector.
In one of his reports released today, Flowers premised this description on the fact that the Spanish speaking nation is facing one of the worst economic collapses, since the fall of the Soviet Union.
Given this state of affairs, Flowers contends that Guyana has enough incentive to get it right with oil and gas.
Speaking further on the Venezuelan crisis, Flowers noted that a decade ago, Venezuela was producing 2.6 million b/d (barrels of oil per day). Then, it was third in OPEC’s line of super producers.
The Chief Analyst noted however that Venezuela which once boasted of being the second wealthiest economy in South America is experiencing an economic collapse because the government allowed non-oil industries to vanish; and it borrowed heavily against rising oil revenues in the previous decade, fuelling social spending. Flowers noted that when oil prices fell in 2014, Venezuela had minimal savings and no other buffer. He said that the result has been a shortage of dollars to pay for imports of even basic goods, never mind repaying its international creditors or maintaining oil production.
But as the US sanctions announced January 28 bite, Flowers said only the worst lies ahead. He said that Wood MacKenzie estimates that Venezuela’s production will soon drop to less than one million barrels of oil per day.
With that vivid synopsis of Venezuela’s past and present in the oil industry, Flowers turned his attention to Guyana, Venezuela’s neighbour to the east.
Flowers commented that the plans of Stabroek Block operator ExxonMobil will transform Guyana’s economy.
He said, “Guyana’s GDP was US$3.7 billion in 2017, but will grow by multiples. Our analysis of the upstream project assumes total investment of over US$30 billion; plateauing at US$5 billion annually in the early 2020s as the known discoveries are developed; all perhaps matched by investment down the value chain onshore. Tax revenues kick in from the mid-2020s and build up quickly to more than US$10 billion a year.”
For such a small economy, the Chief Analyst said that the scale of development is staggering. Assuming oil production of 1 million b/d by 2030, Flowers said that Guyana’s output per person will be higher than any other major oil producer.
Therefore, Flowers suggested that Guyana invests a portion of its revenues in a Sovereign Wealth Fund; a move Guyana has already advanced towards. He stressed however that such Funds will a high degree of discipline. “It will be tempting to spend, spend, spend,” added Flowers.
The Chief Analyst added that another clear lesson Guyana can take from Venezuela is not to become too dependent on a single source of revenue. He said that building infrastructure and raising education standards will facilitate development of other sectors. He said, too, that local content and employment requirements for the oil industry can support this process.
In the end, Flowers said that it will be a delicate balancing act for Guyana, with the role of government being central to success in setting clear energy policy, establishing firm and independent regulation, and a stable fiscal policy.
“The fate of Venezuela is all the incentive needed to get this right,” Flowers concluded.
