News & Insights
By Peter Murphy
- Guyana’s oil discovery will be transformative and the government is taking the right steps to ensure this benefits the whole country
- Establishing an effective, independent regulator is key to the long term success of production
- A hybrid based regulatory framework will provide the most effective outcomes for worker safety and the environment, and ensure uninterrupted revenue for government
ExxonMobil and its partners have now made three substantial discoveries of hydrocarbons approximately 190 kilometres offshore from Guyana’s coast. The recoverable resource of the first discovery is estimated at over one billion oil-equivalent barrels. This discovery, along with the unquantified finds, will make Guyana a major exporter of oil in the near future.
For the country and its people, it has the potential to be transformative. Guyana is currently ranked 127th out of 188 on the UNDP’s Human Development Index and 169th on a global GDP comparison. Properly utilized, the government revenues that will flow along with the oil will propel Guyana up these rankings. How far it rises will depend on its ability to avoid the resource curse. The pitfalls and considerations in needing to avoid the resource curse are covered in this Noetic Discussion Paper ‘The Resource Curse’. Fortunately, Guyana appears to be looking to take positive steps toward successfully managing this new resource, with, for example, progress towards a sovereign wealth fund.
The ongoing safety and environmental regulation of the resource is one of the many activities that will be required to put in place before ‘first oil’. While there are a host of considerations for the government to decide on in preparation for production, the approach to and settings for the regulatory framework are a high priority. This is because it will provide the framework for the operating company to adhere to from commencement of production. It is difficult and disruptive to change the framework at a later date should it be found lacking. In addition to protecting worker safety and the natural environment, effective regulation is essential to ensuring that there is no disruption to production and government revenue.
In establishing the framework, a key principle is that the regulatory authority must be independent and separate from the agency responsible for managing (and maximising the value) of the oil. Experience shows that where this is not the case, safety and environment often lose out in favour of maximising production. Encouraging production at the expense of safety provides short term benefits, but in the long run compromised safety and poor environmental management can lead to fatal and destructive incidents like the P-36 in Brazil and Bombay High in India.
The regulatory model to be adopted by the agency is an early decision that requires careful consideration. The model can be one of three options:
- a prescriptive approach
- a goal-setting/outcome-based approach, or
- a hybrid of the two.
Of the models, the hybrid is the one that delivers the best overall outcomes for safety and the environment. The main implication of using this model is that it requires a capable regulator with skilled staff. In small countries this can be a challenge. Careful early planning and development can assist in forming a capable regulator and solid regulatory framework.
Guyana’s oil discovery gives it the opportunity to improve the wellbeing and prosperity of the country and its people. Ensuring that the development of the resource is done sustainably, and that workers and the environment are protected, requires a capable and independent regulator. Putting this in place as early as possible is an immediate challenge for the government of Guyana.
Peter Murphy is a Director and co-founder of Noetic Group.