THE prominent role of national or state-owned oil companies in other countries has driven a rising tide of interest in the possibility of establishing one in Guyana. But a new report from the International Monetary Fund (IMF) has cautioned that there isn’t necessarily a strong case for Guyana to establish its own.
National oil and gas companies (NOCs), like Brazil’s Petrobras or Nigeria’s National Petroleum Corporation, are owned by governments themselves. They function with different degrees of autonomy in different nations, with some acting as a quasi-official arm of the government and others acting essentially as an independent company with a single shareholder.
NOCs are uncommon in developed, industrialized nations like Canada, Australia, the United States and the UK, but are still common throughout much of the globe.
While private, multinational companies like Exxon, Chevron and BP are well known, NOCs are responsible for more than three quarters of global oil production and control most of the world’s reserves. Many countries see NOCs as a way to hold a more direct stake in their resources by investing in the exploration and production process alongside or instead of private companies. NOCs can also give countries an important seat at the table during the decision-making process for industry activities.
But those benefits do come with risks.
As the IMF report noted, if Guyana’s government held a financial stake in the development through a NOC, it would also have to pay a substantial part of the development costs. As Guyana does not have the capital to do so at this time, it would need to borrow funds. If the government held a 20 per cent stake in Liza Phase 1, for instance, it would have had to put up around $1 billion US to cover its share of costs and then potentially wait years to recover those costs through production.
Instead, Exxon and the other oil companies took on 100 per cent of the risk as they explored and drilled for oil off the coast. If they had come up empty, they would not have had a chance to recoup their investment.
A Guyanese NOC would require the government to share in exploration costs without knowing if a well would pay off and risk billions in borrowed money to do so.
The IMF and other international groups also tend to be wary of NOCs because of their long association with corruption and politicization. Examples like Petrobras, Russia’s Gazprom and Nigeria’s National Petroleum Corporation show how easy it is for these companies to get tangled in nepotism, corruption and political interference. Many Guyanese commentators have emphasized this, drawing on the examples of Equatorial Guinea and Angola, where NOCs helped channel oil revenues directly to politicians.
While NOCs might gain countries a seat at the table, the IMF report explained that Guyana’s government already has this power due to the substantial regulatory authority of agencies like the Department of Energy.
In addition, NOCs must strike a careful balance when it comes to expertise. Similar to local content rules, countries have to consider whether they have the local knowledge and experience necessary to run the company.
Oil companies rely on enormous teams of highly sophisticated and experienced international staff. Without access to those experts, it can be hard for small NOCs to make smart investment decisions, and many struggle to get enough capital together to properly explore and develop difficult areas like the deep ocean.
If Guyana does decide that a NOC is the right move, the IMF recommended that it add an option to future production sharing agreements, allowing the government to take an investment stake up to a certain level—the IMF recommended 10 per cent to minimize risks. That way, the government could choose on a case-by-case basis whether or not to buy in with each future contract.
