AS COVID-19 began to spread across the world in early 2020, global markets were sent into a tailspin. Crude oil prices hit some of their lowest levels in recent memory, pushing many oil companies to halt exploration, postpone development efforts indefinitely, or even declare bankruptcy. In Guyana, exploration and development continued in the Stabroek Block, but low oil prices led to lower-than-expected revenues from the crude lifts that followed first oil.
Even at lower oil prices in 2020, Guyana generated significant revenues from ongoing oil projects and added nearly US $200 million to its Natural Resources Fund while securing a record US $9 billion investment in the Payara project.
At long last, prices appear to be turning a corner. Since April 2020, crude oil prices have been steadily recovering and Brent crude oil now sits at over US $60 a barrel due to rising global demand. According to a study done last year by international analysts at Rystad Energy, at $60 per barrel, Guyana’s oil income would stand at about US $200 billion, compared to about $95 billion with prices sitting at $40 per barrel.
Price increases have such a disproportionate impact on revenues since production costs remain largely fixed no matter what the oil sells for—that means that any increase in price is mostly profit, of which the government gets 50 percent. Additionally, with vaccination rollout plans ramping up and COVID-19 cases falling in many countries, including Guyana, oil prices could rise further, which would support growth in emerging oil and gas markets like Guyana.
Rising demand coupled with long-term trends like decreasing global investment and short-term events like the extreme weather in Texas, which significantly disrupted oil and gas supply chains in the United States, could also benefit Guyana. If prices continue to rebound and approach $80 per barrel, oil income in Guyana could reach as much as $310 billion dollars according to Rystad Energy. While most analysts consider $80 unlikely in the medium to long term, it’s illustrative of just how big Guyana’s oil boom has the potential to be if steady investments lead to continued production growth.
In late 2020, ExxonMobil, the operator of the Stabroek Block, estimated that Guyana’s government could receive five to six lifts of oil in 2021. Each cargo of oil sold by the government in 2020 netted around $50 million US. But if prices continue to rebound, 2021 could already be a much more lucrative year for Guyana.
If current oil prices hold, Guyana can expect higher budgets that mean more opportunities for major programmes to improve the lives of Guyanese. Additional oil discoveries and projects are expected as operating companies continue to explore in more blocks offshore Guyana. The next projects in line for the Stabroek Block, Liza 2 and Payara, are each expected to produce up to 220,000 barrels of oil per day, almost double the current 120,000 barrels per day produced at Liza 1. Rystad Energy projects that government revenues could top $10 billion annually by the end of the decade due to increasing production levels.
As the globe continues to recover from COVID-19 and the energy sector continues to rebound, economic recovery can hopefully support sustainable growth and further development in Guyana. Higher government revenues can make highly ambitious goals on healthcare, education, and major infrastructure projects like the gas to power project attainable.
But while high oil prices are undeniably a boon for Guyana, it’s equally important that Guyana use any windfall from higher prices smartly. In just one year of production, Guyana has seen commodity prices go up and down, and it’s clear that neither is permanent. Saving money in a sovereign wealth fund and prioritising growth-boosting investments like infrastructure are critical to avoiding some of the traps that oil-rich governments often find themselves in. And with revenues multiplying with each new project that comes online, it’s important to learn these lessons quickly. Thankfully, it appears the government is conscious of these challenges and already aiming to meet them.