The tiny Guyana is poised to gain big gains from Iran oil and growth strains

The U.S. and Israeli war against Iran had already pushed up oil prices, but the tiny Caribbean nation of nearly 1 million people will now reap an even bigger bonanza as the conflict reshapes global energy markets. The tiny Caribbean nation of nearly 1,000,000 people is now set to reap even more benefits as the war reshapes the global energy markets.

This war, which caused the biggest energy disruption in history, highlights 'the importance of countries like Guyana who offer political stability as well as geographically unrestricted oil access. The government is under pressure to use the billions in revenue from crude to boost the economy. "The world's seen too many energy booms which left behind depleted forests, ghost towns and bitter populations. Guyana won't be the story, said President Irfaan Ali in an address to Rice University Baker Institute last month.

The rapid development of an Exxon Mobil oil consortium that controls all of Guyana’s oil production has increased output to more than 900,000 barges per day in only seven years. This pace is unprecedented, as offshore projects typically take two times as long to produce just the first drop. According to World Bank statistics, Guyana's GDP quadrupled from 2019 to 2024 when the oil started flowing. Guyana, which was once one of the poorest nations in South America, is now a country whose growth has been fuelled by oil. In Georgetown's capital, construction of modern office buildings, hotels, and rows of single family homes that look like those in the suburbs of the United States are underway. Radio ads and billboards from Exxon and other petroleum companies remind people of the industry which has enabled the growth.

MORE MONEY, MORE PROBLEMS? The government must fortify its country to avoid an inherent pitfall, namely the economic cycle of rising and falling oil prices. Venezuela is a good example of how political dysfunction, and an over-reliance on oil revenue can cripple an economic system despite Guyana having some of the world's largest oil reserves. Guyana has a 2019 sovereign wealth fund that holds?all oil revenues, which allows it to access funds at a constant rate for development projects.

The 30% increase in crude prices since the beginning of the Iran War, late February, may further boost Guyana's revenue from oil. If oil prices remain at $100 per barrel for the remainder of the year and production levels stay the same, Guyana's oil revenue share could be $4.3 billion or 67% more than last year.

Guyana will also start to receive a much larger share of the oil production sooner than anticipated. Exxon takes 75% to recover its initial costs of exploration and development. Exxon said that the consortium may be able to recover its costs in the coming year. Exxon has said that the consortium could recover the costs this year.

Ali warned that it was important to manage expectations, since any windfall from higher oil prices will be offset by increased import costs of nearly all goods such as fuel and fertilizer.

In his Baker Institute speech, he explained that "this is the complexity in the messaging. When people see every day the headlines saying you are flush with cash, it creates a certain expectation."

Local infrastructure hasn't developed as quickly as the oil industry. Georgetown's streets are lined with open sewage drains and power outages are common.

A "CHANGED WORLD"

Guyana is located in the middle of a region which includes established oil and natural gas economies such as Venezuela, Trinidad and Tobago and Suriname. The region benefits from direct and unrestricted ocean access, without chokepoints like the Strait of Hormuz.

Guyana's low breakeven prices, which range from $25 to $35 per barrel, and its proximity to U.S. market that supports fossil fuel development further compound the long-term benefits, according to Tarron Khemraj. He is a professor of international studies and economics at New College of Florida who has studied Caribbean nations including Guyana.

The spot price for Guyana’s four crude grades, valued for their lighter to medium sweet qualities, has risen over the last three months. The Liza benchmark reached a high $120 per barrel on February 27, before the conflict began in the Middle East.

Experts believe that even if oil prices and traffic in the Strait of Hormuz return to prewar levels, Guyana's reputation as a geopolitically secure source of oil is likely to continue solidifying.

Khemraj stated that "the war may end in a month's time, but the world will have changed."

Even numbers that appear to show a boom could be misleading about the true state of the economy.

Guyana's GDP has grown by double-digit percentage each year since the oil industry began. However, this growth has been largely concentrated in its petroleum sector and not on a broader basis. According to data from the government, oil and gas services and other support services accounted more than 75% for the GDP of Guyana last year.

Share the Wealth

In order to ensure that more oil revenue trickles to the people, the government has also moved to expand the local content law. This was originally passed in the year 2021 and requires oil and gas companies to use Guyanese owned suppliers in certain areas such as food, janitorial or transportation.

In the regulation, petroleum companies are required to purchase a certain percentage (25%) of medical services, and 90% (90% in catering services) from Guyanese-owned businesses. Michael Munroe said that the government is looking at amending the regulation to include more service areas, and increasing the percentage requirements in some of those already there.

Businesses say that?expanding requirements will support more jobs and develop skilled labor.

Ayesha Wilburg is the founder and CEO of Georgetown's health clinic.

The rise in oil activity in Georgetown has led to an explosion of demand for private transport services, as residents travel by taxi.

Nazim Baksh said that Sean's Transportation Services has grown from 7 employees to 20. The company also upgraded their fleet, moving away from sedans and adding more SUVs.

However, there are still challenges, such as complaints from Guyanese entrepreneurs about fronting. The Guyana Energy Conference panelists in February admitted the problem where "foreign companies" use local entities, but still retain control over the business. Vanita Ally is the medical director and founder of Phoenix Clinicare in Guyanese owned medical center. She said that obtaining a certificate for oil companies to use their services hasn't resulted in much extra revenue. Inflation also increases her operating costs.

Ally stated that "international companies benefit a lot more (than local people) from the oil industry".

The cost of living is increasing for drivers, as it does in other countries. Guyana does not have a refinery, so it must import refined products such as gasoline and diesel.

At a March press conference, Alistair Routledge said, "In Guyana, a country which is now a producer and exporter, (higher prices for oil) can be positive, but that's not necessarily what the people feel and see every day, because it means energy prices are increasing."

"We acknowledge that this is a mixed benefit for the people of Guyana."

(source: Reuters)