THE announcement earlier this month that OPEC+, led by Saudi Arabia and Russia will enact major production cuts to stabilise prices has left many Guyanese asking an obvious question: Does it make sense for us to do the same?
The answer is a complex one and has as much to do with Guyana’s status as a new producer in the global oil market. Even as global oil prices remain at their lowest levels in decades, there are compelling reasons that a country might keep producing oil in low-price situations like today.
For new producers in particular, there is an emphasis on establishing a reliable track record of production to help cultivate a customer base. Guyana, as a very new producer, is still trying to establish itself in the market and form relationships with refiners and traders. Maintaining a steady flow of oil even in a down market is a signal to the rest of the industry that Guyana is a reliable supplier.
Oil producers also count on maintaining a certain share of the market in order to ensure that there is a reliable customer base for their product in the long term. Even Saudi Arabia, despite its production cuts, will be sharply discounting the price of its oil for customers in order to retain market share. Guyana is just now starting to build its market share and form connections with refineries who can buy our oil. It is also an opportunity to seize market share from other producers who may have had to halt production in these difficult times. Regardless of the price environment, a country will also usually continue to receive revenues from any production that takes place.
While it is unfortunate that revenues will be lower than expected, we must also consider that many countries are seeing their revenue streams dry up entirely. That’s a major reason why the International Monetary Fund is still forecasting that Guyana’s economy will grow more than 50 percent next year, even as most other economies shrink.
In Guyana’s case, continuing oil production provides more than just revenues. Thousands of Guyanese are employed in the oil and gas sector already and hundreds of businesses depend on it for their employees’ livelihoods.
Guyana and the Stabroek Consortium companies have invested heavily in developing the capacity of Guyanese businesses and workers to compete in the sector through training and programmes such as the Centre for Local Business Development. If production were suspended, many of those businesses and employees would suffer, and much of the work that has gone into building up Guyanese industry would be wasted. Businesses that supply the sector have to count on a certain level of continuity, especially smaller local companies that are just starting out and need to build steady revenues.
There is also an undeniable legal consideration in the decision to keep producing. Many contractors and suppliers for production operations have contracts that guarantee a certain level of demand or payment. Breaking those contracts by shutting down production would likely be extremely expensive.
As any factory owner or businessman knows, it can also be prohibitively expensive to bring operations back online after they have been shut off. Rehiring staff, establishing new agreements with suppliers and inspecting and restarting huge amounts of delicate machinery takes considerable time and money.
As industry magazine Oil Price recently noted, “Shutting down has its own costs, and could make restarting more difficult and expensive. For some oil fields, shutting down could cause permanent damage to reservoirs.” Robert Plummer, VP of investment research at energy analysis firm Wood Mackenzie, also echoed those sentiments to Reuters, “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.”
The reality is that many costs continue whether oil is being produced or not. Ships on the open ocean cannot go without fuel or crews, undersea systems can be dangerous if not properly maintained, critical systems must be monitored.
But as long as production continues, revenues can cover costs, even if profits are not high.
This is undoubtably one of the most difficult times the industry has faced in decades, but as analysts like to emphasize, nothing fundamental has changed. Guyana is rapidly becoming an important oil producer. Delaying that for a serious but ultimately temporary crisis might only put us in a worse position to push forward when the pandemic fades and demand rises again.