– as the country becomes a new player in O&G industry, says economist

By Vishani Ragobeer

THE current global decline in the demand for oil, resulting in lower-than-usual oil prices, provides a “valuable lesson” for Guyana on the volatility of the oil industry which it has now become part of, according to Senior Trinidadian Economist, Dr. Roger Hosein.

On Monday afternoon, oil prices for West Texas Intermediate (WTI) crude collapsed to sub-zero prices, at minus $37.63 per barrel, for some futures contracts. These futures contracts are a legal agreement whereby assets (in this case, barrels of oil) are bought and sold at a predetermined price for some time in the future.

The contracts for the May delivery were due on April 21 (Tuesday), by which time the WTI prices rebounded to $1.10 per barrel; not an optimal price but at least, no longer sub-zero.

This current unprecedented dip in prices, however, is a current cause for concern in the interim. The dip was caused by a negative demand shock to the global industry resulting from the COVID-19 pandemic, which has caused a slowdown in productivity across the globe. Exacerbating this, for the specific WTI case, was that storage space for the oil has also been depleting; as demand is reduced, the oil still being produced needs to be stored. The recent collapse of the oil pact to limit oil production between two of the globe’s largest oil producers: Saudia Arabia and Russia, led to their oil flooding the global market, all but helping the situation as well.

It must be noted that the WTI crude price is a benchmark used for US oil prices, whereas the oil-producing nations in this part of the globe (that is, Trinidad and Tobago, Guyana and Suriname) use the Brent North Sea Crude, the international benchmark for oil prices. Brent crude was pegged at just above $26 per barrel, as of Tuesday midday.

Even so, Dr. Hosein explained that WTI and Brent crude prices tend to mirror each other and that the crash in oil prices would imminently have an impact on the three Caribbean oil-producing nations.

In December 2019, a mere few months ago, Guyana began oil production. In mid-February, Guyana was able to secure US $55M for the sale of its portion of the first lift of oil.

“The Guyanese economy would have started production based on a certain assumption of the price level and therefore, a certain type of revenue flow, and ExxonMobil (the operator for Guyana’s currently producing Stabroek Block) would have started production and planned investment based on a certain price level and planned capital outlays,” Dr. Hosein said. However, with the global market currently reshaping, these tenets are likely to change as well.

LIKELY ACTION

While he does not anticipate that ExxonMobil will stop production, the economist believes that the multinational company would be re-examining its capital injections (investments made to boost daily operations) into the Guyanese economy, especially if these low prices persist and are expected to be lower, for longer.

Already, Finance Minister, Winston Jordan, has disclosed his belief that Guyana will receive a significantly lower amount of revenue for the sale of its second lift of one million barrels of oil, which is due next month. Jordan, also an economist, said that Guyana would be lucky if it gets anything around US$20M for that sale. This figure is less than half of the US$55M recorded from the sale of the first million barrels.

The Inter-American Development Bank (IDB) also anticipates that Guyana will experience a 40 to 60 per cent decline in the estimated value of its oil exports, owed to the economic turmoil the global market is experiencing. This could translate to a 15 to 40 per cent decline in Guyana’s expected oil-related revenues, which was pegged at approximately US$230M.

‘VALUABLE LESSON’

Cognisant of these circumstances, Dr. Hosein posited, “It is a valuable lesson for Guyana coming right up front at this point in time when they have now started production: Oil is a very volatile market.”

If prices remain as had been projected, there will be a positive outlook for Guyana with attractive revenue flows. If not, the decline would significantly affect the country’s economic outlook- which, in prior months, projected that Guyana could become the wealthiest country in the world, on a per capita basis.

With buoyancy in the oil market not guaranteed, Dr. Hosein emphasised that this is why the establishment of the stabilisation fund, known as the Natural Resources Fund (NRF), before production, was essential. According to him, this fund would help to mitigate the effects of the industry’s volatility, by providing some degree of insulation for the Guyanese economy.

Unless there is a catastrophic resurgence of the novel coronavirus, the economist anticipates that by June/July, some economies will reduce the extent of their lockdown and demand would start to recover in other parts of the world, as productivity picks up again. Thus, both the demand for crude and the oil prices will eventually recover.