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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Political Battle Could Jeopardize World’s Most Spectacular Oil Boom

Amidst the torrent of news on the adverse impacts of COVID-19, recent developments in Guyana stand out as something of a countercurrent. In times when the entire world seems to be bracing for an impending economic catastrophe, Guyana is paralyzed by a political impasse that not only jeopardizes its spectacular oil surge but also seems to be taking its toll on the country’s reputation.

On March 2nd, Guyana held its long-awaited presidential elections – highly anticipated ones, as the next President would preside over mesmerizing GDP growth and a massive influx of oil money into the national treasury. More than a month later, the South American nation still does not know its new President and is still collectively pinning its hopes on the ballots being counted fair and square. Getting to know the results of the presidential elections will take further weeks if not months. This Friday the Guyanese Elections Commission has decided on a full recount of the votes cast, in chronological order from Region 01 to Region 10. This comes on the back of recurrent electoral fraud allegations, with the Electoral Commission (EC) first declaring the incumbent President APNU (A Partnership for National Unity) coalition winners, then Guyana’s High Court granted an injunction barring the EC from announcing the winner until all results are verified. Region 04 and the capital Georgetown in particular is the focal point of controversy – being by far the most populous region, it was here where the alleged one-seat majority of the incumbents materialized itself (33 seats for APNU, 32 to PPP). 

Needless to say, the Guyanese media are replete with stories of widespread voting fraud in the capital and it has become very difficult to grasp who will emerge in the end as the final winner of the hotly contested elections. The elections themselves took some time to organize – they should’ve been held in March 2019 after a no-confidence vote to Granger’s government, however have been delayed to the maximum extent possible. Fraudulent elections are no novelty for Guyana, a country that has long suffered from national chauvinism and omnipresent corruption – no surprise migration rates are among the highest in all of the Americas – often morphing into bloody skirmishes. This year’s elections already have one (Indo-Guyanese) victim and might have more if the vote recount does not clear all suspicions of misconduct. 

Related: The Only Logical End To The Oil War The International Monetary Fund (IMF) expected an 86% GDP growth in 2020, spearheaded by the incoming oil windfall. The first-ever Guyanese deepwater flagship project, Liza, was commissioned this Christmas and in many ways the ongoing Presidential election is a litmus test on how the population perceives the nation’s oil production. In a wonderfully odd twist of events, the opposition PPP party wants to revamp the way Guyana handles oil revenues, eliminating the sovereign wealth fund altogether (apparently it gives politicians way more control over money flows as it should) and pouring more money to the people directly instead. With a reputation as tarnished on corruption-related issues, it is difficult not to see the adverse consequences of such a move, however it most certainly has a much bigger appeal amongst the populace for whom infrastructure projects like building highways or bridges across the Essequibo River are of little to no interest. 

At the time of this writing, it seems that a return of the opposition backed by Guyana’s Indo-Guyanese populace is the most probable outcome. David Granger’s bid was significantly weakened by 3 main factors:

1. His own illness
The President underwent treatment for cancer in 2018-2019 and it was only in late 2019 that he declared the cancer in remission. At 74 years of age Granger might be perceived as less agile than his rival, the 39-year old Irfaan Ali who has already served as Minister of Housing and Minister of Tourism (having become a MP at the of 26).

2. The claim that he sold Guyana’s hydrocarbon bounty on the cheap
As the Stabroek Block terms and conditions were set before Guyana boasted any offshore discoveries, it might be perceived as quite business-friendly. The government takes in a 2% royalty and 50% of profit oil, which stands out in an overwhelmingly driller-fleecing Latin American government.

3. The immutable demographics and hard-to-shake sectarianism of Guyana
Guyana still votes based predominantly on race – roughly 30% of the population is Afro-Guyanese, whilst the Indo-Guyanese take up somewhere around 40%. 

In the meantime, as long as the Granger administration remains in place in the status of a caretaker government, oil majors present in Guyana can consider themselves relatively lucky. It is highly unlikely that Granger as caretaker would change anything in the country’s oil taxation regime or other upstream terms, hence the first months of Liza production need not be marred by political obstructionism. Moreover, many of previously agreed moves ought to be placed on the back burner – without a legally formed government, the adoption of long-mooted local content rules and the final bringing of regulatory norms in accordance with today’s upstream practices. 

Related: China's Plan To Capitalize On The Oil Price War

Source: author’s estimates.

Plunging oil prices have so far not impacted Liza production in the Stabroek Block, with lifting costs around $10 per barrel (the total breakeven cost of Liza-1 is around $35 per barrel) assumed to be enough to weather the adverse consequences. Yet any new project’s breakeven price level will be not lower than 35 USD per barrel – the Liza benchmark – and thus might be postponed until prices increase to an acceptable level. So far Liza (35° API and 0.51% Sulphur) has loaded two cargoes per month in February and March, priced within a $0-1 premium per barrel to Dated Brent FOB. It has to be noted that even though Guyana’s oil production from the 8Bbbls of offshore reserves it boasts is expected to reach 0.8-1mbpd by 2030, only Liza-1 and Liza-2 have so far been sanctioned. This leaves roughly 80% of current appraised discoveries in unsanctioned territory, which in the current uncertain environment is no good news for Guyana, not to speak of its elections’ travails.  

By Viktor Katona for Oilprice.com

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