Domino effects of the original sin of the PSA and its political economy framework

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Introduction

Today’s column has two purposes. First, to conclude my assessment of TIGI’s assertion that licensing 317 blocks, instead of 60 blocks as required by PSA, has had domino catastrophic consequences for the oil and gas sector emerging from Guyana. Second, address item 9 in the list of ten examples of indicators/markers/data points used to reveal the current state of Guyana’s oil-based economy.

The final sample, item 10 [governance]will be discussed next week.

Original Sin: Domino Effects

By “original sin” is meant that the root cause of the inherent weaknesses of Guyana’s PSA is failure to adhere to the PSA’s requirement that licenses be limited to 60 blocks. The allegation that the Minister’s discretion can override this provision and authorize 317 blocks is not accepted. This result had serious domino effects; for example, it vitiated the requirements regarding: 1]ring fencing in the PSA; 2]diminished the cost recovery power of the PSA; 3]reduced the size of Government Take; 4]delayed contractor expense audits; 5]have affected the waiver of licenses

One example will suffice: ring-fencing in a PSA is designed to limit the allocation of the entrepreneur’s income and expenses for profit sharing and tax payments. A fence circumscribes the ability to consolidate income and expenses across multiple areas. The ruling PSA shares the profit oil between the entrepreneur and the government, field by field. This is to ensure that the contract area government revenue is calculated based on each field separately. However, this is negated as the PSA framework allows the contractor to allocate cost oil to any field within the contract area.

It is common knowledge that this asymmetrical treatment of oil profit and cost is likely to benefit the contractor holding multiple fields in the contract areas to the detriment of delaying government revenue. Indeed, the more the merrier, the better!

Obviously, a contractor with multiple fields can significantly reduce the amount of profit oil to be shared from a production field by allocating cost oil from various fields under development to the production field.

To be sure, this sighting has a longer lineage than TIGI. In my February 2018 column, I noted that “in the absence of ring-fenced entrepreneurs…are able to deduct the exploration and development expenses of each new project/well from the revenues of those projects/wells generating already taxable income. Also, it has been stated that as oil areas mature, it discourages new investors from entering the sector.

Incidentally, our global development partners have made similar observations, including the well-constructed IDB assessment published in August 2020.

Characteristics of political economy

Recognizing that most readers of this column are not versed in economics, I avoid theorizing and focus on a bullet model, which highlights the salient features that characterize the prevailing dynamics of Guyana’s economy within which the Guyanese oil and gas sector is emerging and in interaction:

• At the global level, it is useful to note that the main international development agencies functionally classify Guyana’s economic system. Thus, the World Bank classifies it in the Middle Income category. Its GDP per capita is 10,143 USD [2021]. The United Nations places it at an average ranking on its Human Development Index [HDI]. The components of the HDI are knowledge; a long and healthy life; and, standard of living. Before the pandemic, its HDI was 0.682 and its rank among member countries was 122. This is a gain of about 16% from the previous decade. This performance was verified for the HDIs adjusted for inequality, gender and multidimensional poverty.

• At the regional level, Guyana’s political economy is based on prioritizing cooperation among small developing states around the world; for example, Alliance of Small Island [and coastal] United States, AOSIS. In particular, and more contiguously in terms of geography, culture and history, CARICOM integration is seen as its main and necessary platform for interaction with the rest of the world. The four fundamental pillars/objectives of CARICOM are: economic integration; human and social development; foreign policy coordination; and, national security. Readers should keep in mind that CARICOM is the oldest integration program in the world.

• In the context of 1]the global and regional framework as illustrated in the two bullet points above, and 2]the particular features added below. My best descriptor of the political economy of Guyana at this point [from First Oil to the early 2030s] is an oil-driven economy caught in a hyper “boom cycle”: the World Bank has proposed the term “boom cycle” as a descriptor of the performance of the economy over the next two years and in the intervening period and beyond, in the future. GDP growth rates for last year and projected for this year are 21.3% and 49.7% respectively. As observed in a previous column, between the year of Guyana’s first oil, 2019, and 2030, the World Bank predicts that its GDP will more than triple in value! Of course, by then, the share of the oil and gas sector in GDP will exceed 25%. In addition, GDP per capita will be around $17,000, close to high incomes. Other development partners share this story. Thus, the Economic Commission for Latin America, ECLAC proposed a growth rate of 18.5% in 2021 and higher projects this year

• Analysts generally agree that the following descriptors reflect the main characteristics of the Guyanese economic system: 1]its relatively small size on a global scale in terms of key variables such as population, GDP and the capacity of the economy; ‘State ; 2]widespread income poverty and its flip side, marked inequality; 3]a huge asymmetric openness in the global economic system, as evidenced by ratios such as trade to national income and foreign investment to domestic investment; 4]openness and trade dependence are closely linked; and 5]with oil and gas as a new driver, (sector) paradoxically, the economy as a whole becomes more specialized and commodity-based. This leads to more specific descriptors such as primary, extractive, and resource-based, which in turn amplify the asymmetries that Guyana must navigate in the global system and the space and platform that make CARICOM imperative. .

Conclusion

Next week I will conclude this discussion and move on to the finale [tenth] example indicator/data point illustrating the current state of Guyana’s emerging oil and gas sector.


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