February 12. 2007

Oil and Troubled Waters

- Guyana could become very rich.  Too bad about that territorial dispute.

Maclean's Magazine by Luiza Ch. Savage

It doesn't get any more rags to riches than this. The small South American nation of Guyana is one of the poorest and most indebted countries in the world. It grows sugar, mines bauxite and dabbles in birdwatching. But if this coastal country one-third the size of Alberta wins a legal battle now in progress in Washington, it could pull off one of the most dramatic economic reversals in modern times. The jungle-covered nation, still remembered as the site of the mass suicide of the Jim Jones cult, wants to reinvent itself as a wealthy oil exporter a sort of democratic Kuwait on the Caribbean. And if lady luck smiles on them, some Canadian investors could do nicely along the way while the Canadian government could face an intriguing opportunity to get a big bang for its foreign assistance buck.

Some 160 km off of the muddy Atlantic shores of Guyana and its neighbour, Suriname, lies what geologists suspect is the world's second-largest untapped oil resource, scattered in more than 100 pools. The U.S. Geological Survey estimates there could potentially be some 15.3 billion barrels, buried deep in the same rock formations that have been a source of petrodollars for neighbouring Venezuela and Brazil. If put into production, Guyana's theoretical reserves could eventually yield a daily output on par with Kuwait's. And a small Toronto-based oil company called CGX Energy Inc. is one of a few companies, including Exxon Mobil Corp. and Spain's Repsol YPF SA, that are licensed by Guyana to drill there.

A bitter boundary dispute, though, has thwarted attempts to explore the most promising sites and keeps the oil dream on hold. The drama started in June 2000, when CGX first set off to drill one of two large targets it had identified as potentially holding half a billion barrels of oil each, some 13,000 feet below sea level. The company named the target Eagle, after the national bird of Guyana . (The other one was named Wishbone, indicative of the fact that we had our fingers crossed, recalls CGX president Kerry Sully, a long-time oil executive.)  As they waited for their rig to cross the ocean from Italy, Sully and his partners plotted its daily progress on the Internet.  A mistake, it turned out Sully says the company was later told that people from Suriname looked at it daily.

The CGX rig had been on site for less than 36 hours when two gunboats from Suriname, a more prosperous country that is already producing oil, approached in the dark. They flashed their floodlights and told the rig operators over radio to either abandon their work or face the consequences. The operators obeyed. Sully, who was in a Vancouver restaurant celebrating, soon watched the price of CGX shares drop from $2 to 50 cents (the stock now trades for a dime more).

It turns out that Eagle and Wishbone are located beneath waters that have been disputed between Guyana and Suriname since colonial times. Recent political efforts to resolve the dispute including attempts by the Caribbean Community and even the personal intervention of the prime minister of Jamaica - have failed. In 2004, Guyana took the matter to international arbitration under a provision of the Law of the Sea Treaty to which both countries are parties. The arbitration was finally heard in December at the headquarters of the Organization of American States in Washington.

The participants are not allowed to discuss what took place, or any details of the case. But the gist of it is this: Guyana wants the boundary line between the two countries' coasts at 34 degrees east of true north, equidistant between the two countries as is the general international practice. Suriname wants it at 10 degrees east of true north, arguing that Guyana had been ready to agree to this boundary in 1936. Guyana says it agreed to that boundary only for three miles off of its coast to allow for the easier navigation of the channel; it never intended for it to extend for its entire 200-nautical mile exclusive economic zone. Regardless of how the panel rules later this year, any kind of decision would bring an end to the legal uncertainty and encourage exploration. Suriname has licensed several companies, including Repsol and Denmark 's Maersk Oil, to drill off its shores.

It's hard to overstate how much is at stake for Guyana. If CGX strikes oil in one of the big targets and produces just a tenth of that oil each year, or 50 million barrels, the annual profits would be around US$2 billion, assuming crude oil prices of US$50 a barrel, according to Sully. Under a profit-sharing agreement, Guyana would get half the profits, providing a fourfold increase in the government's revenues that could go toward paying off debt and investing in health and education. And that's just one target. Of course, the chances of striking oil in any one specific target are low something like 20 percent. Over the years a handful of wells have been drilled off of Guyana's shore, and they came up dry, but with traces of oil that kept hopes alive. Sully notes optimistically that detection technology has vastly improved and, If we find one reservoir, it significantly improves the probability of finding many more.

It's an unusual case for the McGill law professor who helped represent Guyana after urging the country's government to go to arbitration. Payam Akhavan has spent most of his career on cases involving genocide, child soldiers and various human rights issues. He saw the case as a unique opportunity to bring socio-economic development to a country where a majority of college graduates reside abroad and where remittances from expats in Toronto form a significant share of the country's paltry US$3.6 billion GDP.

Yet history teaches that sudden wealth isn't always a panacea. Nigeria, Angola, Equatorial Guinea and Iran the list of resource-rich countries that suffer despite their natural riches is long. A windfall can bring corruption, violence, ethnic strife, inflation, environmental destruction, and lead to the neglect of sectors crucial to the population, such as agriculture. Guyana starts out with the advantages of a democratic government and a president, Bharrat Jagdeo, who is an economist. And Akhavan hopes that Canada will step up and lend a hand to help the country strengthen the institutions necessary for good governance and stewardship. Canada can play an important role in assisting the Guyanese government to prepare for this economic transformation and to help ensure that this newfound wealth contributes optimally to the socio-economic development of the Guyanese people, Akhavan said.

Canada already has strong ties to the English-speaking Caribbean nation. We are its largest trading partner. Many of its ex-patriates lives in Toronto, and many of its bureaucrats were educated here. A co-founder of CGX, Edris Dookie, was a McGill-educated Guyanese. Sully also sees a potential role for retired executives of Canada's oil sector in creating modern regulations and safety standards for Guyana. It's a nice vision. But first there is a legal case to be won and oil to be found two tall orders.