Page 5 - LatAmOil Week 11 2020

LatAmOil COMMENTARY LatAmOil
 They have been effective, as Venezuelan oil out- put and revenues have dropped significantly over the last year.
Nevertheless, they have not been watertight. A few entities have continued to buy Venezuelan crude directly from blacklisted suppliers despite the risk of incurring penalties, and others have used middlemen such as Russia’s Rosneft to secure fuel.
Washington has tried to plug this gap by making two of Rosneft’s trading subsidiaries targets of the sanctions regime, but Caracas has continued to move some oil to market. (It has worked hard to keep at least some of its clients satisfied; PdVSA has tried strategies such as offering a 23% discount on crude, effectively selling it for a price of around $14 per barrel.)
Meanwhile, Maduro has retained his hold on power, even as his policy prescriptions have magnified the effects of the sanctions and have made the economy even worse. The country’s GDP has declined by more than 60% in the last five years, according to the International Mone- tary Fund (IMF).
More pain ahead
And there is likely to be more pain ahead. Fran- cisco J. Monaldi, an oil expert at Rice University in Houston, has noted that with the world econ- omy slowing down as a result of the coronavi- rus outbreak, Venezuela will receive less money from former citizens who live abroad but are still supporting family members in their home coun- try. Meanwhile, other factors such as the drop in oil prices are at work, he remarked.
“It’s a perfect storm,” Monaldi said in a Twit- ter post last week. Separately, he told Andres Oppenheimer, a journalist who works for CNN and the Miami Herald, that he expected Vene- zuela’s economy to shrink this year. The IMF has predicted that the South American state’s GDP will contract by 10% in 2020, but the number could end up being higher, he noted.
“In light of recent events, that 10% decline projection for Venezuela looks pretty optimis- tic,” he said.
If so, Venezuela is likely to experience more hardships this year. It may see more protests against the government, and it may see more people trying to leave the country as refugees.
Guyana
The story in neighbouring Guyana is quite dif- ferent. For one thing, Guyana is a new entry in the ranks of the world’s crude producers, and it has sold only a few cargoes of oil from the off- shore Liza field. It is not yet in a position to say exactly how oil revenues will (and will not) affect its political scene or its economy.
Moreover, it is still working to determine what sort of government structures it needs to establish to ensure that it can govern the oil industry and its resource base effectively. In other words, it is still in the early stage of the pro- cess of becoming an oil-producing and export- ing country.
Moving beyond this early stage may be
difficult, given that Guyanese voters are still waiting to learn the outcome of the elections that were held on March 2. Incumbent President David Granger has declared a victory, saying that he won enough votes to secure re-election, but opposition leader Bharrat Jagdeo has dis- puted this and has demanded a recount.
Jagdeo and Granger recently struck an agree- ment on the matter, saying that they were willing to accept the results of a recount supervised by the Caribbean Community (Caricom). So far, though, the Guyana Elections Commission (GECOM) has not been able to proceed on this front. Earlier this week, Guyana’s High Court barred GECOM from moving ahead with the review.
The outcome of this dispute over the vote is important, because the two candidates for the presidency have different ideas about how to reap the most benefit from Guyana’s offshore oil deposits. These sites may eventually yield as much as 750,000 barrels per day (bpd), and most of it would be eligible for export, since Guyana’s population is less than 1mn.
“ still working
to determine what sort of government structures it needs to govern the oil industry
In other words, the oilfields have the poten- tial to generate a large amount of income for Guyana. As such, it matters that Granger is generally seen as friendly to foreign investment and willing to grant favourable terms to interna- tional oil companies (IOCs) and that Jagdeo is concerned that Georgetown is not doing enough to ensure that the proceeds of crude sales flow back into the local economy.
Political opposition
Nevertheless, there is a good chance that politi- cal battles over the future of Guyana’s oil indus- try may not abate this year.
Oil prices have dropped by as much as 50% since the beginning of 2020, and this will narrow the margin for profit from Guyanese projects. The narrowing may be minimal if one believes the statements made by an ExxonMobil rep- resentative in February 2017, to the effect that production costs offshore Guyana are so low as to guarantee double-digit returns if oil prices average $40 per barrel.
But it could also be significant. Robin Mills, the CEO of Qamar Energy, gave a much higher figure for production costs in 2018. He wrote in an article published by The National that expenses were closer to $46 per barrel. If so, Guyana’s oilfields might not be able to break even under current conditions. This, in turn, would mean that all of the grand plans for devel- oping the country’s economy would have to be put on hold – or at least, on a much more lei- surely schedule.
This may not be easy news to absorb, given that Guyana’s government and voters have been looking forward to an influx of oil funds. It could lead both sides to fight harder with respect to the recount, the outcome of which will determine which side gets to grab an ever-smaller piece of the pie. If so, the country may have to wait even longer to begin large-scale domestic oil extrac- tion. ™
Guyana is
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