Introduction
Following last week, today’s column continues to provide recommendations in regard to the three crucial key policy choices that I identify, which will be confronting the Government of Guyana, GoG, in the coming decade. Last week’s column has identified four considerations that push back strongly against favourable consideration of the first of these policy choices; that is Guyana’s membership or not of OPEC. The considerations listed were: 1) United States’ hostility to OPEC, as revealed in the introduction of the No Oil Producing and Exporting Cartels Act (NOPEC) in Congress; 2) the consideration that a US oil supermajor (ExxonMobil’s subsidiary) is presently the lead Operator producing Guyana’s crude; 3) the underdeveloped state of Guyana’s governance capability in its oil and gas sector; and, 4) supply controls and quotas that always accompany cartel membership.
I believe the above considerations hold true for the period up to the mid-2020s when Guyana will be expected to have achieved comfortably full ramp-up to the target output of 750,000 barrels of crude oil per day. This policy choice need not be made final at this stage, as time remains. However, having made this observation, I hasten to add that, I am acutely aware that membership of OPEC, at whatever stage (before or after full ramp-up), involves outsourcing significant control of Guyana’s crude supply to the Cartel, in exchange for some price benefit. This warrants, therefore, a serious cost-benefit appraisal prior to decision.
Related signals
To round off the discussion on the first choice I refer to two signals related to this matter that engages serious attention in the international media covering the global petroleum industry. To begin with, the international media are signaling that, going forward, Guyana’s crude oil exports could pose a significant disruptor of OPEC’s plans! This expectation should be taken on board immediately by the Authorities, As a case in point, the Middle Eastern, National Business, has been repeatedly drawing attention to the significant growth potential of non-OPEC+ oil production and its potential reverberations on OPEC’s efforts at supply management. In this regard, Guyana’s potential output since its First oil (December, 2019) is routinely cited as an output to be kept under constant review by OPEC.
Second, international reporting has been noting that Guyana is building non-petroleum based economic relations with OPEC. In this regard, the Government of Guyana has recently signed a Framework Agreement with the OPEC Fund for International Development (OFID). The Agreement offers financing for loans to support micro, small and medium-enterprises and other projects in Guyana. Such relations are expected to build goodwill and thereby facilitate the favourable reception of Guyana as it seeks to negotiate its national relations with OPEC.
Second policy choice
The observations made above wrap-up my evaluation of Guyana’s possible membership of OPEC, the first of three crucial policy choices that Guyana will have to make in the coming decade. I turn now to consider the second listed policy choice. That is, whether Guyana should aspire to profile its crude oil exports as a “swing oil producer” in the global marketplace for crude oil. Like the first policy choice, this option has already attracted mention in international media reports on oil and energy. And, there is little doubt this speaks to the high level of expectations that, during the 2030s, Guyana might well be producing significantly in excess of one million barrels of oil equivalent per day, boe/d.
Swing producer
Based on earlier comments and strong international reporting, several local readers have sought my views on the term, Guyana should operate as a “swing producer” of oil in the crude oil world market. The term “swing producer” is derived from business economics. And, a good simple definition is provided by Wikipedia, which categorizes it as: “a supplier (individual or close oligopolistic group of suppliers) of any commodity controlling its global deposits and possessing large spare production capacity”. Examples are provided as illustration: Saudi Arabia, oil; Russia, potash fertilizer; and de Beers, diamonds.
As further elaborated, a swing producer can pursue two generic strategies. One of these is termed “normal”. This means it focuses on using its swing producer’s market power to stabilize the global market through, modifying price swings and fluctuations. The other type is termed “punitive”. That is, the swing producer uses its market power “to grab and extend its market share”.
In practice the term swing producer has been rather loosely applied to petroleum markets. A careful reading of the literature shows it identifies swing producers as varied as 1) the “United States shale producers; 2) OPEC as a group; 3) Russia; 4) Venezuela; as well as Iraq, Iran, Saudi Arabia, separately. More recently countries such as Brazil and Guyana have been added.
Clearly all these producers are indeed large players for the types of crude in wide global demand. Their supply functions are elastic and low cost, allowing for “low cost” shifts in production and distribution of supplies on a world scale. Such features in their supply functions favour their ability to perform as either a normal or punitive swing producer.
Recommendation
Although well respected oil and energy analysts have projected Guyana’s offshore deepwater deposits as a likely “swing producer”, Guyana’s oil and gas sector is too much in its infancy for any serious evaluation of this profile. I believe, however, this is a testament of the extent to which Guyana’s petroleum’s world class potential has grasped international attention.
Conclusion
Next week I shall address the third and final strategic choice: the formation of a National Oil Company, NOC.
