Troubled Wealth

The resource curse is when natural resources riches lead to less economic growth, less democracy, and worse development outcomes. One of the economic effects of the resource curse is the so-called Dutch disease, whereby focusing too much on the extraction and export of fossil fuels reduces the competitiveness of the rest of the country’s economy. One of the best case studies of the Dutch disease is oil-rich Venezuela. The predictions of Venezuelan oil minister Juan Pablo Pérez Alfonso in 1976 that “oil will bring us ruin” are now truer than ever. Corruption, mismanagement, government policies, low oil prices, and growing authoritarianism by Venezuelan President Nicolas Maduro, have led to one of the worst socioeconomic crises in history. In recent years Venezuela has experienced hyperinflation, growing hunger, disease, an unprecedented crimewave, and emigration of over 7.7 million of its citizens, just to name a few. 

Guyana’s growing oil wealth has put the country’s government and policies under the spotlight as some have cautioned that the country risks following in the footsteps of its neighbor. The country’s recent political instability and its long history of ethnic tensions are often brought up to support the “resource curse” narrative for the country.

Strong claims to electoral voter fraud during the 2020 Guyanese elections led to a recount just hours before David Granger, president from 2015 to 2020, was sworn in for a second term. The recount dragged on for months with countless legal challenges. Protests ensued and in August 2020, 5 months after the first elections, Irfaan Ali, South America’s first Muslim head of state, was sworn in as president of Guyana. The entire saga cast a negative light over the state of Guyana’s politics, which could resurface given the country’s history of ethnic tensions.

In fact, racial unrest between Guyanese of Indian (Indo-Guyanese) and African descent (Afro-Guyanese) has periodically affected the country since the 1960s. A veteran Guyanese politician, Ralph Ramkarran, described Guyana as “two countries living under the same roof”. The March 2020 election took on strong racial overtones. In fact, upon losing the elections, David Granger supported Afro-Guyanese protesters in September 2020. The killing of 3 teenagers that same month helped reignite racial violence between the two dominant ethnicities. 

Racism and politics in the country go hand in hand. Indo-Guyanese dominate business and agriculture while Afro-Guyanese form the majority of public sector and security jobs. When out of power, each of these two ethnicities has cited mistreatment from the other. The country’s long history of protests and violence can easily spill over and exacerbate political instability. During anti-government protests in June of 2022, which also had a racial-tone, President Ali claimed his life was being threatened.

Political and ethnical instability endanger Guyana’s newly found richness, as each group tries to get a bigger piece of the pie. 

Boundary Woes

Guyana’s border disputes with Venezuela and Suriname concern both land and maritime boundaries. Venezuela claims the entire Essequibo region, which currently makes-up two-thirds of the entire country of Guyana. It is administered by Guyana but Venezuela has not shied away from confrontation on the matter. This historical dispute, inherited from the colonial powers, goes back centuries and Venezuela’s claims were complicated by Guyana’s independence in 1966. In October 2023 Venezuela proposed a referendum on annexing Guyana Essequibo as its newly-formed 24^th state, leading Guyana to turn to the International Court of Justice to resolve the dispute. 

Guyana’s disputed borders with Suriname, its eastern neighbor, concern both land and sea but are not as highly contested as the Essequibo region. The main land issue is related to the New River Triangle, an uninhabited region of the Amazon, claimed by both countries but administered by Guyana. The maritime boundary between the two countries has also long been disputed, with some minor border clashes, but no resolution has yet been found. 

The discovery of oil off the coast of Guyana has complicated its relationship with its two neighbors. Venezuela’s assertive claims over two-thirds of the country are especially concerning for Guyana’s future.

Risky Business

Even though Guyana has benefited incredibly from its growing oil wealth which has allowed it to invest heavily in roads, hospitals, schools, and housing, the biggest risk for the country lies in the contracts that were negotiated between the government (led by David Granger at the time) and the oil companies back in 2016. 

These oil & gas production-sharing agreements were heavily criticized at the time as being too generous to Exxon. Calls for renegotiation continue to this day. But what are the biggest pain points of the deal?

1. Profit-sharing. Profits are split 50:50, but up to three-quarters of revenue first go to cover the oil consortium’s costs. In addition to all of this, Guyana pays the oil companies’ income and corporate tax from its share of the profits. 
2. Ring-fencing. The contracts negotiated do not have ring-fencing clauses, designed to separate the financial and operational aspects of different projects or assets. This means that revenues from oil sites can be used to recover costs for exploration across other sites in the block. This is highly unusual, as these clauses help manage and allocate risk and responsibilities among the involved parties in a fair and transparent manner.
3. De-commissioning. No de-commissioning clauses are present in the contracts. This means that in the future, when the country’s oil boom is over and the oil majors are looking to pack up and leave, the decommissioning costs of the infrastructure will fall entirely on Guyana’s shoulders. Although this is not unheard of, it does go against industry standards but raises significant risks for the country. 

Guyana is aware of the unfavorable terms and in fact is pushing for more favorable agreements in future deals, which include royalties of up to 10%, above the 2% signed with Exxon. Debates and controversies about the 2016 agreements continue to mount. Some argue that the clauses justify the high-risk, high-cost, and uncertainty related to deepwater projects. Others, though, push back on these by arguing that risks were much lower; by 2016 Exxon was already aware of the extent of the massive oil fields discovered. Some legal challenges from within Guyana against the oil majors are piling up in courts.

Conclusions

The acquisition by Chevron, driven by Hess’s assets in offshore Guyana, marks a significant milestone. The potential of Guyana’s oil output stands to benefit both Exxon and Chevron for decades to come. As Guyana strategically leverages its newfound wealth through initiatives like the sovereign wealth fund and local procurement laws, the nation is positioning itself for economic growth and infrastructure development. However, as Guyana embarks on this journey, it must navigate the inherent risks of managing growing revenues in the oil industry. Only time will reveal whether Guyana’s trajectory aligns more with the successful path of Norway or the challenges faced by Venezuela.