Poorly managed O&G sector a recipe for economic, social troubles – World Bank warns

Jul 18, 2022 News

The hull of Guyana’s third FPSO, Prosperity arrives in Singapore. Guyana is expected to bring on a new FPSO every year.

Kaieteur News – Guyana has been a natural resources-dependent country for decades, but it never established resource management and planning tools such as a Sovereign Wealth Fund (SWF), the World Bank’s ‘Guyana Petroleum Resources Governance and Management Project’ document stated.

The Bank is urging a different trend in relation to the oil and gas industry as it warns that poor management of the sector often results in economic and social troubles for countries. Recent oil discoveries here have however prompted Guyana to pursue the establishment of a wealth fund which was passed into law last year under the Natural Resource Act of 2021.

The World Bank, the Institute of Petroleum, the University of Calgary and the Commonwealth Secretariat were among the partners and supporters that worked with the country on its initial document which was assented to under the David Granger –led administration. The Bill was passed on January 3, 2019 with minor amendments, and assented to on January 23, 2019, until the new government passed the new wealth fund act.

The Resource Fund is supposed to finance public investment, stabilize public expenditure and among other things, safeguard wealth for use by future generations. “The successful implementation of the arrangements specified in the Bill would allow Guyana to deal with the macroeconomic challenges of managing an increase in natural resource revenues (the so-called “Dutch disease” or “natural resource curse”),” the Bank said, since the law specifies the institutional arrangements to manage the resource fund.

Apart from the technical assistance that is required for both the Ministry of Finance and the Central Bank of Guyana for the implementation of the requirements, the World Bank also noted the need for institutional capacity building to ensure good oversight that allows maximum oil related funds to be generated. As such, the US$20M line of credit is still available to assist Guyana to improve its institutional capacity to oversee and manage the oil and gas sector; which according to the Bank is limited in the various relevant government ministries, commissions and other departments.

“There is a large capacity gap at administrative and technical levels responsible for the management and oversight of Guyana’s nascent O&G sector. This includes a shortage of O&G experts in the relevant ministries and departments,” the Bank noted. It related in its county context that at the time, the Geology and Mines Commission (GGMC), responsible for regulating the O&G sector in Guyana, had only eight people trained in O&G, a relatively small budget, and is being overwhelmed with the requirements of processing/interpreting increasing volumes of valuable petroleum data. Similarly, the Environmental Protection Agency (EPA) is beleaguered by the complex and outdated environmental licencing and permitting process and is limited by a mismatch between its actual human, financial, technical (equipment/laboratories) capacity and the broad mandate it has been assigned under the Environmental Protection Act.

As a new oil and gas producer, the Bank continued that Guyana lacks the policy, legal and regulatory frameworks and institutional capacity needed to maximize the benefits from expected oil revenues and minimise downside risks associated with oil revenues and growth of the sector. The O&G sector affects multiple layers of the economy, impacts the livelihoods of present and future generations, the environment and local communities. “If poorly managed, the development of O&G resources can be economically and socially costly for the country, failing to lead to sustainable economic growth, poverty reduction, and shared prosperity. Additionally, there are environmental and social risks – usually low frequency but high impact – associated with O&G production that requires effective and constant monitoring as well as significant investment in environmental damage prevention and response capacity, among others.” Notwithstanding, based on experience in resource-rich countries such as Australia, Canada, the United States, Chile, Botswana, several Gulf countries, Norway and others, the Bank said that positive impacts on overall poverty levels are achievable while mitigating risks, with good governance, investments in the quality and capacity of public and private institutions, investments in skills and technological capacities, efficient and transparent revenue collection and management, and sound macroeconomic and fiscal management policies.

These countries triggered growth as resource-based economies, but ultimately succeeded in achieving wider growth, economic diversification and poverty reduction through targeted interventions. “The Government of the Co-operative Republic of Guyana is keen to follow these examples, by investing in the strengthening of its institutions and building capacity to manage O&G resources,” the Bank suggested. It said that the main economic impact of the oil sector on Guyana is expected to take place through oil revenues, which offer an opportunity to expand public investment in both human and physical capital, lifting key constraints to inclusive growth.

Local stakeholders continue to question therefore the reasons for the World Bank US$20M line of credit remaining untapped by the current government while the country seemingly struggles to keep up with the runaway speed at which the oil industry is developing. Finance Minister Winston Jordan under whom the World Bank loan was secured has registered his concerns that while Guyana is pushing the envelope in record oil development speeds, it remains deficient in managing its affairs. He said the country is not on par with the pace at which the oil sector is developing leaving its finances in particular, at risk.