The depletion policy is at Jagdeo’s head
Kaieteur News- Many Guyana political leaders have never run anything. Not even a cake shop. But it would be much better if they had run their own cake shops rather than running the country as a cake shop.
This is not to suggest that people with no experience of running things should not be entrusted with the political job. Even the boring and the ignorant, guided by sound policy making, can deliver results and achieve returns.
Policy-making compensates for the inexperience. However, policy-making cannot remain in anyone’s head. It must be documented in order to act as an operating guide.
Unfortunately, we are confronted with a situation where there is no written national depletion policy for the country’s most valuable resource, its oil. What exists as a policy is in someone’s head. Such a scenario is the worst form of governance in the form of cake shops.
It is tragic not to have a written depletion policy. Last year during the pandemic, demand for petroleum fell so exogenously that oil companies paid countries to buy their oil at one time, rather than the other.
The oil companies, which were operating in Guyana, did not stop pumping even though prices fell below rock bottom. This example, both extreme and rare, highlights the importance of having a depletion policy to regulate production levels during periods of price cascade, pouring down or slowing demand.
Depletion policies are used to control the rate at which oil is extracted. It is one way of ensuring that when prices are high, productivity is maximized and when prices are low that production is limited, all other factors are the same. But there are other purposes to a depletion policy as well.
A depletion policy helps protect and add value to a country’s oil reserves and protects against the risk of inefficient production. An article in the Guyana Chronicle on November 10, 2019 made the following comments: “From the late 1970s to the early 2000s, oil reserves and oil production dropped sharply from a peak of 39 billion barrels to less than 20 billion by 2008. There. whether oil was still in the ground trapped in shale formations and undiscovered fields, but low oil prices and a lack of technology meant that finding and extracting this oil was not cost- was neither effective nor practical and therefore was not regarded as reserves. But since the late 2000s, hydraulic fracturing technology has made this oil easier to access and higher prices have encouraged more development. US oil reserves have jumped back up from less than 20 billion barrels above the all-time high of 39 billion. ”
Exploitation policies also help protect the economy during times of declining terms of trade. With a proper depletion policy in place, any government facing a balance of payments (BOP) problem can adjust production and exports accordingly in response.
As is well known, when the oil crisis struck in the 1970s, it was also treated as a national security crisis, and a national energy crisis. A depletion policy is extremely useful in ensuring that economic conditions do not lead to national security crises.
Guyana has offered generous concessions to the oil companies. Had a national depletion policy been in place, these concessions could have been tagged to the production rate, thereby ensuring an efficient allocation of fiscal resources, including concessions. The absence of a written depletion policy now means that the same concessions will apply whether production is 120,000 barrels per day or 750,000 barrels per day.
National security is often linked to energy security. At one point, when widespread blackouts were happening every day, Guyana was offered a deal to buy energy from the Yuri Dam project in Venezuela. But because of national security considerations, both Burnham and Hoyte were reluctant to tie the country’s energy needs to a country that was damaging a territorial claim against Guyana. It shows how even a country that imports oil needs to have an energy security policy in place.
Guyana is now an oil producing state. It is now a rival to Venezuela, the country with the largest reserves in the world. Its oil production appears to be improving, albeit slowly. A national depletion policy will provide a safety valve against any attempt at external intervention in oil markets to the detriment of Guyana.
A depletion policy is required for the sustainable management of any natural resource. Without a national depletion policy, then future generations will not enjoy Guyana’s oil wealth. It will be exploited as soon as possible and will be depleted in a short time, leaving no reserves for future generations.
Now even cake shop operators don’t think this way. But don’t tell Jagdeo that. It holds the key to Guyana’s National Oil Discount Policy. And it’s all in his head.
(The views expressed in this article are those of the author and do not necessarily reflect the views of this newspaper.)