The government of President David Granger is expected to unveil a legal framework for the Guyana’s oil sector in the first half of this year, Raúl Gallegos writes below.

In January, oil giants ExxonMobil and Hess announced they had drilled a deepwater exploration well that strongly suggests the seafloor beneath Guyana’s coastal waters holds one of the largest oil and natural-gas discoveries in recent years. The recent find could double the initial 2015 discovery in the offshore Liza field to 1.4 billion barrels of oil mixed with natural gas. Oil companies have reportedly only explored two potential Guyanese offshore oil fields out of 20, in part due to overlapping claims with Venezuela related to a longstanding border dispute between the two countries. What is the outlook for Guyana’s oil and gas sector, and what has changed since the announcement of the Liza discovery nearly two years ago? How much of an obstacle has Venezuela been to developing Guyana’s oil and gas sector, as compared to other factors?

Riyad Insanally, Guyanese ambassador to the United States and permanent representative of Guyana to the OAS: “For decades, Venezuela has employed bully-boy tactics to discourage foreign corporations from partnering with Guyana to help develop the vast potential in our county of Essequibo, about two-thirds of the country’s land mass. Venezuelan economic aggression has stunted our growth as a nation. But now, Guyana is on the cusp of great change and, as ExxonMobil leads the charge in offshore exploration, in partnership with Hess and China National Offshore Oil Corporation, the future looks very promising indeed. Just to be clear: there are no ‘overlapping claims’ and no ‘border dispute.’ The waters where the recent discoveries have been made are indisputably Guyanese, and Guyana’s borders are recognized by the United Nations. What we have had to deal with, for more than 50 years, is the controversy arising from the Venezuelan contention that the ‘full, perfect and final settlement’ of the international Arbitral Award of 1899 is ‘null and void.’ In December, outgoing U.N. Secretary General Ban Ki-moon determined, following consultation with his successor, António Guterres, that the United Nations would facilitate one more year of dialogue between Guyana and Venezuela, with the aim of finding a peaceful solution to the controversy. If after the end of that period, no significant progress has been made, Guterres will refer the matter to the International Court of Justice. The government of Guyana has welcomed this decision and looks forward to settling the matter once and for all, in the interests of maintaining mutually respectful and friendly relations with our neighbor and of progress and development for all Guyanese. The promise of oil wealth will, of course, bring many other challenges. But we are confident that, with the assistance of our partners, the goodwill of the international community and through our own efforts to manage the socio-economic transformation to come, we can look forward to a new era of prosperity.”

Julie Wilson, research director for Global Exploration at Wood Mackenzie: “ExxonMobil’s 2015 Liza discovery opened a new frontier in Guyana, and more success has followed. Two out of three exploration wells struck oil—an outstanding success rate in any province. Appraisal work has swelled Liza from an initial resource estimate to 450 million barrels of oil equivalent to 1.2 billion boe. The partners are moving at a fast pace to approve construction of a floating production storage and offloading, or FPSO, vessel for the first phase of development. The second discovery, Payara, may be large enough for a second standalone development, and there is further upside in prospects that remain to be drilled. Currently the drilling logistics are run out of Trinidad and Tobago, but Guyana is working hard to establish a domestic base. This will be an important first step in nurturing a nascent local industry. Building local capability could be a long journey in a country with no previous experience, and patience will be required. The discoveries have significant gas volumes, possibly over 2 trillion cubic feet, which the country could use as a springboard for development of a domestic gas market, including gas-intensive industries. ExxonMobil has farmed into two blocks adjoining its giant Stabroek block to the north, where it can exert its control. While there are other operators that have drilled previous dry holes in the country—notably Repsol and CGX—they do not have any immediate plans to drill. In 2013 the Venezuelan Navy seized a ship conducting seismic for Anadarko in disputed waters close to the Venezuela-Guyana maritime border, but the chances of a repeat incident are unlikely. Venezuela’s current internal political and economic situation and regional isolation should be sufficient to deter the government from taking a more hawkish stance against Guyana. The government could try and drum up nationalist support by doing something similar, but it is unlikely to resonate with Venezuelans amid the current economic crisis. Finally China National Offshore Oil Corporation is a partner in the Liza consortium, and interfering with the operations would anger Venezuela’s largest benefactor: China.”

Anthony T. Bryan, professor at the Institute of International Relations at the University of the West Indies in St. Augustine, Trinidad: “After the first Liza discovery in 2015, ExxonMobil in mid-January 2017 discovered more oil in a new well, Payara-1, in the same Stabroek acreage as Liza-1 and Liza-2, but in a separate and unconnected reservoir to the Liza wells. Appraisal drilling in January of this year of a new Liza-3 field identified an additional high-quality and deeper reservoir below the original Liza field, estimated to contain between 100 million and 150 million barrels of oil equivalent. Stabroek is a large exploration province of 6.6 million acres. The current wells are estimated to contain more than 1.4 billion barrels of oil equivalent. These discoveries are huge for Guyana. Even the initial prospective oil production of over 200,000 barrels per day will have a significant effect on the nation’s fortunes. However, Stabroek is a prime greenfield area and more costly to develop than a similar piece of acreage off Trinidad. The full monetization of Guyana’s proven oil and gas reserves is probably between three and 10 years in the future. ExxonMobil does not anticipate Guyanese offshore commercial production before 2020. As a new hydrocarbon player, the country faces some practical challenges: it has to establish a state energy company, draft a regulatory framework including PSAs for hydrocarbon extraction, and plan for fiscal regimes, state participation, and environmental protection statutes. It is being assisted in these endeavors by abundantly available expertise from Trinidad and Tobago. There are also larger above-ground issues: management of the economic windfall, social and environmental concerns, and the claim by Venezuela of sovereignty over Guyana’s exclusive economic zone. Guyana has countered the threats from Venezuela by pursuing a judicial settlement at the level of the United Nations. Venezuelan pressure should not deter the international oil companies, nor put a damper on exploration in other parts of Guyana’s current exploration blocks.”

Raúl Gallegos, senior analyst for the Andean Region in Global Risk Analysis at Control Risks: “President David Granger has promised to create a welcoming business environment in Guyana for oil companies to explore and produce, but since the Liza discovery, the country still lacks a working legal framework for the oil sector. The government is expected to unveil the laws in the first half of 2017. Going by the pronouncements of the Granger government, these should be business-friendly and not too onerous regarding taxation and local-content rules. We are all keeping a close eye on these two fronts, but especially on local-content laws that force companies to hire locals and source services locally, because they can become a major bottleneck for the sector, especially if the country lacks trained personnel, services and an adequate infrastructure to become a top oil producer. A reasonable fiscal framework that does not scare away companies eager to invest in Guyana will also be key. Venezuela is not and will not become a stumbling block to the development of Guyana’s oil and gas sector. Venezuelan leaders will heighten the rhetoric as Guyana moves to produce crude offshore, but the country is unlikely to succeed in its claim on 40 percent of Guyana’s territory. If both countries fail to agree on a joint solution by the end of 2017, the United Nations will hand the dispute to the International Court of Justice which is likely to side with Guyana. Under President Donald Trump the United States will also likely side with the Caribbean nation against Venezuela.”

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