Are Guyana’s fiscal prospects hostage to bad oil deals?

As the Guyanese government seeks a financial boom following oil and gas discoveries, Financial Crime Digest has explored the wider conversation relating to the country’s capacity to manage the long-term financial and environmental implications of resource exploitation. A notable example of this is the 2016 petroleum contract between the Guyanese state and Esso Exploration and Production Guyana Ltd, ExxonMobil Corporation subsidiaries, Hong Kong-based CNOOC Nexen Petroleum Guyana Ltd, and Hess Guyana Exploration Ltd, a Hess Corporation subsidiary. The Government’s development vision highlights its focus on extractive production as a panacea for all ills, despite civil society calls to respect native peoples’ land rights. Furthermore, experts have warned about the disproportionate revenue division between the Guyanese state and the companies party to the 2016 contract, as well as “hidden liabilities” which the Guyanese people are expected to pay once oil wells are depleted. Meanwhile, multilateral institutions have demanded more efficiency and transparency in the extractive sector and the creation of a Sovereign Wealth Fund (SWF) as prerequisites for Guyana to maximise the benefits expected from oil and gas revenues.

Indigenous communities call for better regulation of the extractive industry

Local Guyanese media is monitoring government efforts to increase investment opportunities, particularly in how new projects in the oil and gas sector will impact Guyana’s natural habitats and be conducted in line with industry standards. While local reporting has closely followed progress in attracting foreign investors in the oil and gas sector, increasing attention is paid to exploring contract terms as companies began exploration and production operations, including in historical tribal lands.

Kiana Wilburg, senior journalist at the Guyanese news agency Kaieteur News, told Financial Crime Digest that the Guyanese public is concerned with both the potential environmental impact and achieving a “fair trade-off” between economic development and corporate responsibility.

“The civil society has demanded justice, transparency, and good corporate responsibility, especially in relation to the extractive industry, bringing the land back to its initial state after operations, and land claims”, she said.

Wilburg said that Guyana’s legislation in the oil and gas sector is outdated, with core deficiencies including the “lack of provisions establishing the necessity for authorities to organise bids for concessions rather than one-on-one discussions with the Government and the lack of penalties in case of environmental incidents”.

Stabroek News reported in April 2021 that on the Mazoa mountain, a peak in the Marudi mountain range, the Canadian gold mining company Guyana Goldstrike Inc, previously known as Romanex Guyana Exploration Inc, engaged in “unsafe mining practices” threatening the ecosystem. The aggressive mining operations resulted in contamination of fresh water supplies and depletion of fish and wildlife populations, as the Mazoa mountain crushes under the weight of heavy machinery searching for gold.

Despite existing legislation supporting native communities’ rights, recent challenges such as those faced by the Isseneru community have raised concerns that extractive sector operations present a significant threat. The Isseneru settlement of Akawai Amerindians, located near the banks of the Mazaruni river, has experienced pollution and mercury contamination at dangerous levels after mercury used in the gold and mining sector accumulated in the environment, including in fish.

As extractive operations intensified and expanded, local communities sought active support from non-governmental organisations in defending their land rights. On a local level, Article 5(1) of the 2006 Amerindian Act provides that any individual or entity planning to enter village lands requires permission from the Village Council.

A ruling pronounced by the Inter-American Court on Human Rights (IACHR) in favour of protecting the Isseneru indigenous community’s land rights still faces major implementation challenges, Stabroek News reported.

Laura George is the governance and rights coordinator at the Amerindian Peoples’ Association, whose objective is to defend Guyanese indigenous social and economic rights. She told Financial Crime Digest that the association has assisted the Isseneru community in preparing and presenting their case to the IACHR. Meanwhile, the ruling is not available for public consultation until the state publishes a response.

Transparency and fiscal management challenges evident in Guyana’s oil and gas sector

The country’s overall economic, administrative, and political governance framework is also under international institutions’ radar, given the far-reaching financial and environmental implications of emerging economic opportunities. A series of offshore oil discoveries and the start of drilling by Exxon at the Liza fields beginning in 2015 have launched Guyana to the top 20 list of largest oil and gas reserve holders worldwide.

The World Bank (WB) has published a list of areas which Guyana needs to address “to manage the expected resource windfall” to enable a more effective monitoring and control of public finances and accountability to deter corruption. This includes improving public and private institutions’ capabilities through enhanced fiscal management across the oil and gas sector.

The WB’s Petroleum Resources Governance and Management project in Guyana is designed to support the consolidation of legal and institutional frameworks and the strengthening of key institutions’ capacities to manage the oil and gas sector. An important project component aims to update the country’s regulatory framework for the governance and oversight of the oil and gas sector, in addition to consolidating stakeholder engagement and transparency.

Specific capacity building areas include support for the Government’s procurement, financial management, safeguards management, monitoring and evaluation capacity through the provision of technical advisory services, training, recruitment of instrumental staff, acquisition of goods, and operating costs. On the sectoral and institutional level, the WB assessment highlighted that “Guyana lacks the policy, legal and regulatory frameworks and institutional capacity needed to maximise the benefits from expected oil revenues and minimise downside risks associated with oil revenues and growth of the sector”.

Poor governance across the Guyanese public sector is also reflected by the insufficient disclosure of state-owned company boards’ structure and poor disclosure of public companies’ management, with most Guyanese state-owned companies falling under the direct control of top political entities.

One such example is the Guyana Energy Agency (GEA), a state agency managed by the Ministry of Public Infrastructure, whose tasks include advising the minister on measures required to “secure the efficient management of energy and the source of energy in the public interest”, developing a national energy policy, and monitoring the performance of the national energy sector. GEA discloses in its 2019 annual report that its founding act has been amended over the years to stimulate increased monitoring, better regulation, and improved enforcement in the energy sector. However, none of the agency’s executives or board members’ names and professional experience are disclosed on its website.

Another entity, the Hinterland Electrification Company Inc (HECI), began as a government body under the coordination of the Guyanese Prime Minister in 2004. To date, HECI remains part of the Guyanese Prime Minister’s Office, being incorporated in the National Industrial and Commercial Investments Ltd (NICIL), with the latter run as a private limited company under the Companies Act. NICIL is entirely controlled by the Guyanese government.

Hidden liabilities in Guyana’s foreign oil contract threaten national finances

Tom Sanzillo, director of Financial Analysis at the Institute for Energy Economics and Financial Analysis (IEEFA), spoke to Financial Crime Digest about the financial risks and environmental exploitation that Guyana incurs through its oil and gas dealings with foreign corporations.

Sanzillo said that as per the 2016 contract between Hong Kong-based CNOOC Nexen Petroleum Guyana Ltd, Hess Guyana Exploration Ltd, ExxonMobil subsidiaries Esso Exploration and Production Guyana Ltd, and the Guyanese state, “all of the costs incurred by the operator Exxon will be paid back by the extraction and sale of oil, and the Guyanese government will be obligated to pay 100 percent of all costs incurred over time”.

He added that Guyana’s profit is reduced by a formula, which “consists of annual instalments deducted from Guyana’s profits and paid to cover the estimated costs of decommissioning. A Guyanese finance minister said last year that they want to see the project move forward quickly because they know there may be a diminished demand in oil and gas in the future. Perhaps in ten years there will not be such a need for oil and gas”.

According to Sanzillo, the decommissioning of the oil wells will occur in 20 to 30 years when the wells are depleted, and its cost represents a significant risk for Guyana. He noted that while standard industry practice requires that the money be set aside in a trust fund, the contract does not include such obligations for the operator, Exxon. “The contract simply says that the operator is required to pay the decommissioning costs when they occur. A trust fund is a protective measure to protect Guyana and Exxon. Effectively, Exxon is given a substantial short-term gain and Guyana is put at risk”, Sanzillo pointed out.

The IEEFA financial analysis director said that for the Exxon exploration and extraction project in the Liza oil fields, the total cost that must be paid by Guyana is roughly $3.2 billion. “If you look at the whole landscape, beyond Liza, the amount is between $15-20 billion that companies would be given in annual instalments, but not held responsible for”, Sanzillo said. “The question, which no one will answer, is whether Guyana needs to pay for all the 19 wells before it ever receives their fair share of the profits. It seems that it will take a much longer period of time before the six to one ratio of revenue division is changed to a more advantageous share for Guyana”, he added.

Sanzillo further noted that “the lack of ring-fencing is another example of a loophole”. As in other transactions, the costs of the Liza project are covered from the revenue generated from the field. Under the 2016 contract, revenue from the Liza field must pay for the upfront costs of the Payara field, a newly discovered offshore oil site, and potentially also cover the upfront costs of other new fields. “Until those costs are paid off, Guyana does not receive a fair ratio of the profits”, he added.

Sanzillo told Financial Crime Digest that “for the first two years of the [2016] deal, Guyana has had to borrow money every year to keep the Government solvent”, while noting that if the oil price drops significantly, it will take even longer for the deal to pay off.

However, the Guyanese Ministry of Natural Resources rejected the IEEFA assessment of the 2016 agreement in a June 2022 press release. The ministry stated that “Guyana now has one of the lowest debts in the world and that the country’s capacity to repay has now been improved with the revenues being received from the oil and gas sector”.

The recommendation to create a trust fund or SWF was also made in the WB’s assessment, highlighting that Guyana has never established resource management and planning instruments. The country’s efforts to set up a SWF, including with support from the WB, led to the adoption of the Natural Resource Fund (NRF) Act 2021. This Act replaced the NRF Act 2019, which faced internal criticism that it was approved improperly, in the absence of one of the main political parties. The 2019 Act provides that the oil resources will be used to finance public investments and to stabilise public expenditures safeguarded in a SWF “for use by future generations”. Furthermore, it specifies the institutional formats to manage a trust fund, as they would require technical assistance for the Ministry of Finance and the Central Bank of Guyana.

As per the NRF 2021, a SWF was established, designed to “manage the natural resource wealth of Guyana for the present and future benefit of the people”. Key objectives of the fund include ensuring that significant shifts in natural resource revenues does not result in “volatile public spending”, securing a fair transfer of natural resource wealth across generations, and “using natural resource wealth to finance national development priorities including any initiative aimed at realising an inclusive green economy”.

The fund is managed separately from the reserves of the Bank of Guyana. In July, the Guyanese Finance Ministry announced that the Government conducted its second withdrawal from the NRF, amounting to $200 million, which brings the total amount withdrawn thus far to $400 million. The funds will reportedly be used to finance national development projects. However, the passage of the Act has recently been challenged by opposition head Christopher Jones and Trade Union representative Norris Witter at the High Court, with the hearing of the case being scheduled for 12 September.

Can Guyana deliver a sustainable growth agenda?

The WB’s assessment under its Petroleum Resources Governance and Management Project provides a blueprint that the Guyanese authorities should act upon to ensure a financially stable future for the country.

Nevertheless, international institutions have noted that “Guyana has not been very successful in transforming its natural resource wealth into productive capital or financing assets, despite international support” as a beneficiary of the WB’s Heavily Indebted Poor Countries (HIPC) initiative. The HIPC programme resulted in the “share of public and publicly-guaranteed external debt to GDP dropping from over 100 percent in 2002 to under 40 percent in 2007”.

Minister for Natural Resources Vickram Bharrat stated during a recent conference hosted by the Guyanese Geology and Mining Commission (GGMC) that “climate change and its impact is everybody’s business”. He pledged the Government’s commitment to the mining sector as one which brought “the highest revenue to the national gross domestic product before being overshadowed by oil and gas, given the significant revenues that [we] will earn from this sector”. Government support for the industry sector will include other incentives, the official mentioned.

Minister Bharrat highlighted that Guyana “needs to move towards production and processing”, as for too long the country has been exporting only raw materials. Furthermore, he cited “a drastic decrease in illegal mining and illegal logging”, while acknowledging that there is still a lot of work to be done to curb these illicit activities.

The Government’s vision for Guyana’s economic future thus places industrial production at the top of the public agenda, while the country boasts of its environmental credentials, such as having one of the lowest deforestation levels in the world. Its Low Carbon Development Strategy, generally regarded as a blueprint for the country’s transition towards a green future, is currently up for public consultation.

In 2009, Guyana received a $250 million pledge from the government of Norway to avoid deforestation. At the time, Guyana’s innovative role featured prominently in the discussion of climate finance and ways to create climate change-related financial vehicles. The payments were made based on reporting by the Guyanese government, which has since resisted further scrutiny from the WB as oil revenues climb.

Meanwhile, companies such as Exxon and Hess, whose subsidiaries are party to the 2016 contract with the Guyanese state, recently announced they are stepping up corporate social responsibility engagements in the Latin American country.

ExxonMobil Foundation launched in 2018 a $10 million education, research, sustainable management and conservation programme as an additional support to Guyana’s Green State Development Plan. According to Exxon, “initial grant money will fund a feasibility study driven by Conservation International, through its affiliate, Conservation International Guyana” to develop the programme”. At the time of publication, Conservation International Guyana has not responded to a request for comment.

In July Hess announced the establishment of a multi-year national healthcare initiative in cooperation with the Mount Sinai Health System. Mount Sinai is expected to advise and assist in developing high quality primary healthcare, in addition to improvements at the Georgetown Public Hospital Corporation. The work is jointly funded by the Hess Corp and Guyanese government.

Guyana’s unique exposure to short term financial risk mirrors another singular challenge facing the small country. Close to 80 percent of Guyana’s population lies in a low level coastal urban region. Additionally, Guyana’s sea line is rising six times faster than the global 20th century average. Without immediate financial investment in infrastructure mitigation and technological advancements, even significant short term financial gains from the oil and gas industry may be dwarfed by potential future damages – both economic and physical.

An inflow of Chinese investments raises corruption warnings

Guyana’s recent focus on industrial production also coincides with an increase in Chinese investments. Total Chinese-Latin American and Caribbean trade reportedly rose from nearly $18 billion in 2002 to around $449 billion in 2021, according to a US Congress Research Service report.

CNOOC International, the global division of Hong-Kong based energy group CNOOC Limited, lists operations in Guyana’s Stabroek Block as its core operations, with an estimated eight billion oil barrels as recoverable resources. According to CNOOC International, the company holds a 25 percent interest in the Stabroek block, while the Exxon affiliates Esso Exploration and Production Guyana Ltd are the operators, with a 45 percent interest, and Hess Guyana Ltd holds a 30 percent interest.

The rising Chinese investments in Guyana were highlighted during a recent investigation by Vice News, exploring the allegedly close relationship between Chinese businessman Su Zhi Rong, a long-time resident of Guyana, and Vice President Bharrat Jagdeo. Reportedly acting as an intermediary between the Guyanese government and companies interested in investing in Guyana, Su detailed the way business contracts with Guyanese authorities could be secured through the payment of a “processing fee”, which he explained represented bribes for himself and the vice president.

At the time of publication, the vice president’s office has not responded to Financial Crime Digest’s request for comment.

Meanwhile, Minister Vickram Bharrat stated during a 22 August event that “We know there is some amount of collusion, there are allegations of corruption but I do not have evidence of that so I cannot accuse anyone. Once we have evidence, we as a ministry can deal with that”.

Ann-Sofie Isaksson of the University of Gothenburg Research Institute of Industrial Economics told Financial Crime Digest that “according to their official rhetoric, China has a ‘win-win’ approach to development finance”, adding that the line between Chinese foreign aid and direct foreign investment is often blurred and that Chinese contractors often carry out work directly in countries receiving aid. “Considering that Chinese firms operating abroad have often been accused of having laxer attitudes about corruption and using corrupt practices to win contracts, this could fuel local corruption”.

As international institutions continue their push for enhanced fiscal management and institutional capacity, Guyana still faces challenges in implementing the recommendation to safeguard revenues attached to the exploitation of its oil and gas resources through a dedicated SWF. Furthermore, with the scale of capital flowing through Guyana’s economy at unprecedented rates, weaknesses in the system must be examined in the context of foreign investments.

Poor institutional capacity and regulatory deficiencies are also reflected in unfavourable terms in the 2016 petroleum contract, leaving Guyana responsible for the payment of all decommissioning costs and hidden liabilities. While the Government continues its policy of attracting further foreign investments, effective and transparent fiscal management remains paramount for avoiding further fraud and corruption allegations.

Concurrently, the Government’s focus on extractive industries to support its development goals must mitigate concerns that aggressive economic activities may irreversibly impact the environment and native communities. Navigating these decisions is integral to balancing the transformative opportunities that resource discovery affords with the myriad of associated environmental, social and governance risks.

Agnes Nicolescu, Junior Editor, Financial Crime Digest

Agnes.nicolescu@aperio-intelligence.com

Scott Travis, Head of ESG Services

Scott.travis@aperio-intelligence.com