Guyana’s oil savings fund shows Nigeria’s failure to be future-ready

The small South American oil producer Guyana is working hard not to replicate the mistakes made by Nigeria and other African oil producers who failed to set up rainy day funds in the face of booming oil prices.

The parliament of Guyana voted last week to amend its Natural Resources Fund (NRF) Act that will govern a sovereign wealth fund to create a fund that will manage oil proceeds.

Guyana, where more than 10 billion barrels of oil equivalents have been discovered over the past half-decade, had seen its oil sector dominated by oil major ExxonMobil and other American producers the influx of cash that often blinds countries to sensible reforms.

Guyana has also passed a local content bill that requires foreign oil companies to engage the country’s citizens in their operations, especially in a non-technical capacity.

African countries like Nigeria and Angola have achieved notoriety for squandering their oil proceeds on frivolous spending and rampant corruption. This has given rise to rampant poverty in the midst of stunning wealth.

The Nigerian Extractive Industries Transparency Initiatives (NIETI) has consistently warned that constant oil price volatility exposes oil-dependent countries like Nigeria to regular economic crises.

One way to address this limitation is to set up a rainy day fund. “A healthy minerals savings fund, the size of which should reflect not only the volume of revenues from mineral resources but also the size of the national economy, is usually recommended for resource-rich countries,” said NEITI in a recent policy brief.

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While Nigeria has a fund to save oil windfalls above budgetary benchmarks, NEITI says the funds are mostly inadequately ring-fenced and are too tiny to fully serve the intended purpose. As oil income dwindles and any hope of windfall dims to a flicker, the fund will get increasingly smaller.

During the lockdown in 2020, Nigeria’s three ‘rainy day’ funds – Stabilisation Fund, Excess Crude Account, Nigeria Sovereign Investment Authority (NSIA) – with about $2.25 billion, was able to fund about 7.7 percent of the revised 2020 federal budget.

This compared poorly with Norway, with a sovereign wealth fund worth more than $1 trillion. To assuage the impact of COVID-19 on the government’s earning, Nigeria withdrew $150 million but Norway cashed $37 billion.

The new Petroleum Industry Act has no provision to compel government agencies to deepen funding for these funds or ring-fence them against abuse.

“While the PIA has some commendable provisions, a few issues such as financial savings are not dealt with,” Ayodele Oni, an energy lawyer, told BusinessDay.

NEITI has severally called for the amendment of Section 162 (1) of the 1999 Constitution, which prescribes that government income, apart from personal income tax, should be placed in the Federation Account and shared among the Federal, State, and Local Governments. This has all but removed any incentive to save for the rainy day.

Guyana is keen to avoid that fate. However, the country has made mistakes all-rookie oil producers often made – kowtowing to oil majors in contract design and policy formulation due to scant technical knowledge. American oil major ExxonMobil exerts a domineering influence over the country’s oil.

In 2015, Guyana’s first commercial petroleum discovery was announced by ExxonMobil, the operator of a large offshore bloc. Soon, thereafter, the company began preparations for production with a first oil target of 2020.

It has set up a Sovereign Wealth Fund to effectively manage the economy and the expected revenue windfall ahead of first oil. The country’s wealth fund currently stands at $534 million.

“Guyana is a resource-rich, underdeveloped economy. Oil revenue is a bonus to accelerate Guyana’s economic transformation, modernisation, diversification, and development over the next decade,” according to the Guyana Oil and Gas Energy Chamber, which backed the bill.

Guyana seeks to leverage its oil and gas discoveries over the past half-decade to build up an economy powered by its own energy resources.

The South American nation became a crude oil exporter in early 2020, thanks to Exxon’s huge discoveries offshore Guyana. Over the past two years, the US super-major and Hess Corp, its partner in the prolific Stabroek bloc, have made a dozen more discoveries, while the Liza Phase 1 project is very profitable for the oil corporations and for Guyana.