Daniele Liberatori

Daniele Liberatori

Associate Analyst

01/08/2018

01/08/2018

The Challenges of Off-shore Oil Extraction in Guyana

In late July, a consortium composed by the American hydrocarbons companies ExxonMobil, Hess Corporation and the Chinese Nexen Petroleum announced the results of its drilling exploration off the shores of Guyana. It was reported that the Stabroek field had an oil reserve 25% bigger than initially forecasted, containing approximately 4 billion barrels of oil. Overnight Guyana’s oil and gas industry could compete with those of Ecuador, an OPEC member and the fourth biggest crude oil producer of South America.

Although the actual exploitation of the Guyana oil and gas fields is likely to start only in late 2025, several security issues in the area should be addressed in this early stage, as to limit their possible disruptive impact on the future extraction activities. Such challenges of offshore oil extraction in Guyana cover three broad areas; government inefficiencies, tensions with the local population and Guyana’s security landscape.

There are several challenges facing the Oil and Gas industry in Guyana, specifically Stabroek oil field, including government inefficiencies, tensions with the local population and Guyana’s security landscape.

Location of Stabroek Oil Field

 

Government Inefficiencies

Since the discovery of significant oil reservoirs in 2015, the Guyanese government has been highly interested in seizing their economic value. Although Guyana is not new in the extractive field – with its experience in the gold mines management in the interior of the country – the offshore oil extraction in Guyana represents a new development for which the current public administration still has limited expertise. While on the one hand foreign firms have used this lack of specialized knowledge to obtain concessions from the government - regarded as very generous by some stakeholders - on the other hand, it proved to significantly slow down the decision and policy-making process.

In 2017 the Guyanese Parliament decided to establish a Petroleum Commission to deal with technical regulations regarding exploration, development and exploitation of petroleum production. This, however, created an additional decision-making layer over those of the Guyana Revenue.

Authority, the Ministries of Finance and Natural Resources, and the Bank of Guyana. All these actors are now entitled of partial claims on extraction regulations and royalties’ collections, without yet fully clear guidelines on the division of competencies among them. While on the longer-term expertise will be created and a more efficient administration organization will be developed, in the short and medium term the situation is different. This redundant system is likely to dissuade prospective investors and generate delays and contradicting policies, which will financially impact the offshore oil extraction operations in Guyana.

A way in which hydrocarbons firms can mitigate this risk is to actively engage both with the government and with the academic environment. On the institutional side, pressing the government to define competencies among different bodies and to draft clear regulations – as suggested by the International Monetary Fund in a report drafted in November 2017 – will allow for more clarity in the policy-making process, as well as less uncertainties for the firms. On the academic side, by partnering with local higher institutions will ensure a rapid development of know-how and expertise, which could then easily be incorporated into the policy-making bodies to increase their efficiency. Concurrently, such academic partnerships will also support companies in facing their second challenge; building an effective and cooperative relationship with the local population.

Tensions with the Population

Challenges facing the Oil and Gas Industry include public opinion towards the extraction projects as they are already strongly polarised

Guyana Significant Security Incidents in 2018

The second challenge that foreign firms will face when operating in the oil and gas industry of Guyana is the response of the local population. Public opinion towards the extractive projects is already strongly polarized between those supporting them as an opportunity to increase the country’s development, and those criticizing it for its environmental impact and the alleged inability of the central government to redistribute royalties among the population.

The offshore location of the fields mitigates the impact of public opinion on the extractive activities, but it may nevertheless lead to a build-up of tensions with local fishermen. Setting aside the environmental hazards of oil leakage on the local ecosystem, the drilling structures are likely to be impactful even during normal operations. Their lights are proved to attract fish in the area, while enhance vessels activity will scare them away from their usual environment, creating an imbalance of fishery resources distribution.

Additionally, the closure of the waters around the extractive structures – likely to happen – will directly impair the sustainability of fishing activities, enhancing grievances among the local population. In late April, a contentious between Guyanese and Surinamese fishermen led to numerous deadly high-sea attacks, with approximately 20 people killed throughout the feud. It is likely that the disruptive potential of drilling activities will prompt fishermen to aggressively target the projects to defend their interests, with prominent security risks for the extractive infrastructures and for the personnel working on the platforms.

This issue does not have an easy solution. An early engagement with local communities will be an effective way to address this challenge and to find mutually beneficial approaches. A possible path would be allowing fishing activities in the proximity of the platforms, while creating community programs to support the relocation of the fishing workforce in excess towards other on-land occupations. The growing potential of this threat should not be underestimated as its long-term security implications will very likely outweigh the costs of an early engagement.

The Security Landscape

Popular resentment and fishermen grievances constitute a threat to platforms workers when offshore, but the security environment of the country is challenging on land as well. Criminality levels in the major urban centres along the Guyanese coast are relevant, with over 110 security incidents reported since February. Even Georgetown richer suburbs, designed as security enclaves for wealthy families – featuring villas protected by electrified fences and widespread private security – are not immune from this issue.

In March armed men broke into the residence of Exxon Mobil local financial director, robbing him of valuables, cash and documents. In May a Canadian manager of Guyana Goldfield was stabbed to death inside his house, while in July five armed robbers were killed in a shootout with the police after they penetrated a private villa. The Guyanese capital recorded alone over 74% of the criminality incidents registered along the country’s urban centres.

Even Georgetown, the more wealthy suburbs are not immune to the criminality in Guyana

Georgetown Significant Security Incidents in 2018

A fly-in-fly-out policy may ensure higher security for the firms’ personnel, but it would negatively the local community perception of the firms, nurturing resentment towards them and their workers. To avoid such conflict, a long-term engagement of companies with the local administration will be fundamental. Lobbying for a strengthening of law enforcement system and of resources allocation to police patrolling through the city will improve the urban security environment, increasing workers’ security and improving companies’ reputation among the local population.

An Additional Challenge: Venezuela

While the three issues outlined above are the most relevant ones that new extractive companies operating in the area will face, there is a fourth challenge which – although less likely to materialize – could prove highly disruptive: the involvement of Venezuela. Currently, Venezuelan government contests the internationally-accepted sovereignty of Guyana over the territory stretching West of the Essequibo river. When in 2015 ExxonMobil signed exploration agreements for the Stabroek field – which mostly lays in the Exclusive Economic Zone of the contested Guyanese region – it did so unilaterally with Guyana, without involving Venezuela.

The involvement of Venezuela in the Oil and Gas territory of Guyana could prove to be an additional challenge to the country.

Venezuela Significant Security Incidents in 2018

It is now possible that Venezuela will attempt to tamper the new economic development projects both by increasing political pressure on Guyana and legally challenging the exploitation rights over the field. Such scenario would prove economically burdensome as it would dissuade further investments in the area hindering both for Guyanese and ExxonMobil long-term projects.

 

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